SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 000-26153
HIGH SPEED ACCESS CORP.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 7370 61-1324009
(State or Other Jurisdiction (Primary Standard of Industrial (I.R.S. Employer
Incorporation or Classification Code Identification Organization)
Number) Number)
9900 CORPORATE CAMPUS DRIVE, SUITE 3000
LOUISVILLE, KENTUCKY 40223
502-657-6340
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES |X| NO | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
On June 28, 2002, the last business day of the registrant's most recently
completed second fiscal quarter, the aggregate market value of the Common Stock
beneficially held by non-affiliates of the Company was approximately 41.0
million (For purposes hereof, directors and executive officers have been deemed
affiliates).
On March 4, 2003, there were 40,294,783 outstanding shares of Common Stock.
TABLE OF CONTENTS
PAGE
PART I ............................................................................. 3
ITEM 1. Business .................................................................. 3
ITEM 2. Properties ................................................................ 6
ITEM 3. Legal Proceedings ......................................................... 6
ITEM 4. Submission of Matters to a Vote of Security Holders ....................... 8
PART II ............................................................................ 8
ITEM 5. Market for Registrant's Common Equity and Related Shareholder Matters ..... 8
ITEM 6. Selected Financial Data ................................................... 9
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................... 10
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ................ 20
ITEM 8. Financial Statements and Supplementary Data ............................... 21
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ...................................................... 45
PART III ........................................................................... 45
ITEM 10. Directors and Executive Officers of the Registrant ........................ 45
ITEM 11. Executive Compensation .................................................... 46
ITEM 12. Security Ownership of Certain Beneficial Owners and Management ............ 48
ITEM 13. Certain Relationships and Related Transactions ............................ 49
ITEM 14. Controls and Procedures ................................................... 51
PART IV ............................................................................ 51
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......... 51
ITEM 16 Principal Accountant Fees and Services .................................... 51
SIGNATURES ......................................................................... 52
2
PART I
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended, and is subject to the safe harbors
created by those sections. These forward-looking statements are subject to
significant risks and uncertainties, including those identified in the section
of this Form 10-K entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Risk Factors", which may cause actual
results to differ materially from those discussed in such forward-looking
statements. The forward-looking statements within this Form 10-K are identified
by words such as "believes", "anticipates", "expects", "intends", "may", "will"
and other similar expressions. However, these words are not the exclusive means
of identifying such statements. In addition, any statements that refer to
expectations, projections, or other characterizations of future events or
circumstances are forward-looking statements. We undertake no obligation to
publicly release the results of any revisions to these forward-looking
statements which may be made to reflect events or circumstances occurring
subsequent to the filing of this Form 10-K with the Securities and Exchange
Commission ("SEC"). Readers are urged to carefully review and consider the
various disclosures made by us in this report and in our other reports filed
with the SEC, that attempt to advise interested parties of the risks and factors
that may affect our business.
ITEM 1. BUSINESS
OVERVIEW
High Speed Access Corp. (hereinafter referred to as the Company, we, us or
our) formerly provided high speed Internet access and related services to
residential and commercial customers primarily via cable modems and
international ISP infrastructure services.
On August 13, 2002, our Board concluded that the liquidation of the
Company was the best alternative available for maximizing stockholder value and
adopted a Plan of Liquidation and Dissolution (the "Plan"). The Plan was
approved by the holders of a majority of the Company's outstanding common stock
on November 27, 2002. The Company is now winding up its affairs, selling any
remaining non-cash assets of the Company, paying our creditors and settling any
outstanding obligations, taking such action as may be necessary to preserve the
value of our assets and distributing our assets in accordance with the Plan.
The Company was incorporated under the laws of the State of Delaware.
BACKGROUND AND REASONS FOR THE PLAN
On February 28, 2002, we consummated the sale of substantially all of our
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. As a result of the Asset Sale and other actions, we
do not presently own or manage 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 paid to us on April
30, 2002. The remaining $2.0 million, less any amounts used to secure or satisfy
actual indemnification claims, was 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.
3
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.
On November 2, 2001, we announced that we had not determined what our
strategic direction would be following the consummation of the Asset Sale to
Charter. We disclosed that we were considering at least three (3) alternatives,
namely:
- - Option 1 - Make no distribution, retain all proceeds and reinvent the
business (i.e., pursue select domestic business opportunities as they
arise, including the possible acquisition of an existing business or the
development of one or more new businesses);
- - Option 2 - Make a partial distribution, retain part of the proceeds and
reinvent the business; or
- - Option 3 - Distribute all of the proceeds, wind up the business and
dissolve.
Following the Asset Sale to Charter on February 28, 2002, we embarked on
an effort to terminate our remaining contractual obligations, settle outstanding
claims and litigation against us, terminate the employment of employees whose
services were no longer needed, and otherwise take steps to aggressively reduce
costs and conserve cash, while reviewing alternative business strategies and
acquisition opportunities.
On August 13, 2002, our Board concluded that the liquidation of the
Company was the best alternative available for maximizing stockholder value and
adopted the Plan subject to stockholder approval. In reaching its decision, the
Board considered a number of factors. Among the factors the Board considered
were:
(1) the Company's lack of an operating business;
(2) prevailing economic and business valuation conditions;
(3) the significant risks associated with acquiring an existing or
starting a new business and the significant amount of cash that
would be spent to fund our operations prior to achieving, if at all,
acceptable financial results;
(4) our inability to identify a strategic partner or combination
acceptable to us;
(5) the fact that our net assets exceeded, and for some time prior to
the adoption of the Plan had exceeded, the market value of our
outstanding common stock; and
(6) the Board's belief that the distribution of our assets in accordance
with the Plan will produce more value for our stockholders.
The Plan was approved by the holders of a majority of the Company's
outstanding common stock on November 27, 2002. Following the approval of the
Plan by the stockholders, our activities are limited to:
- - filing a Certificate of Dissolution with the Secretary of State of the
State of Delaware and thereafter remaining in existence as a non-operating
entity for three years;
- - winding up our affairs, including the settlement of any then-outstanding
issues with Charter relating to the Asset Sale, selling any remaining
non-cash assets of the Company, and taking such action as may be necessary
to preserve the value of our assets and distributing our assets in
accordance with the Plan;
- - paying our creditors;
- - terminating any of our remaining commercial agreements, relationships or
outstanding obligations;
- - resolving our outstanding litigation;
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- - establishing a Contingency Reserve for payment of the Company's
contingent, conditional and unmatured claims, expenses and liabilities;
and
- - preparing to make distributions to our stockholders.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (see Item 3, "Legal
Proceedings"), and deferred release of half of the $2.0 million indemnity
holdback. The Company collected $1.0 million of its indemnity holdback plus
accrued interest from Charter, and will seek the release of the $1.0 million
balance plus accrued interest if and at such time as Charter is dismissed as a
defendant in the IPO Litigation or the IPO Litigation is otherwise settled, less
actual defense costs to the extent they exceed $250,000.
We will continue to distribute or liquidate all of our assets in a manner
consistent with the Plan and such manner and upon such terms as the Board
determines to be in the best interests of the stockholders.
LIQUIDATING DISTRIBUTIONS; NATURE; AMOUNT; TIMING
Initial Distribution. The Company previously announced that it intended to
make an initial cash distribution in March 2003. However, it has taken longer
than we anticipated to settle and finally resolve our outstanding litigation. We
will not make the Initial Distribution until the Delaware Class Action Suits
(see Item 3, "Legal Proceedings") are finally settled, which we now expect to
occur on May 16, 2003. While we expect final settlement of those cases to occur
on May 16, 2003, we cannot guarantee that they will. Moreover, we will continue
to evaluate and assess the progress of the IPO Litigation (see Item 3, "Legal
Proceedings") in order to more accurately gauge and reserve for our non-insured
exposure, if any, in those cases.
Although the Board has not established a firm timetable for distributions
to stockholders, subject to the uncertainties and Risk Factors described in this
Form 10-K (see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Risk Factors"), we estimate that we will
make an initial cash distribution in May 2003 of $1.40 per share to our
stockholders (the "Initial Distribution") based on 40,294,783 shares of common
stock outstanding as of March 4, 2003. The actual amount of the Initial
Distribution as determined by our Board may be higher or lower than $1.40 per
share due to various uncertainties described below.
Periodic Additional Distributions. Subsequent to the Initial Distribution,
we expect to distribute any remaining available cash proceeds, minus the amount
of the Contingency Reserve, to the stockholders prior to November 27, 2003. We
expect to make a final liquidating distribution to our stockholders of any
Contingency Reserve not paid out to creditors during the dissolution process
ending on December 4, 2005. We estimate that the total aggregate amount of the
distributions made subsequent to the Initial Distribution will be $0.13 per
share based on 40,294,783 shares of common stock outstanding as of March 4,
2003. Actual payments may be higher or lower than these estimates. Also, these
amounts do not include any benefit that might be realized if some or all of the
Contingency Reserve is not required to pay claims.
The uncertainties affecting the timing and amounts of the estimated
Initial Distribution and any subsequent Periodic Additional Distributions
described above include but are not limited to (See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors"):
- - the exact amount, if any, we will receive upon liquidation of our
remaining tangible assets net of any claims or liabilities;
- - the amount of the remaining $1.0 million Charter indemnity holdback that
we ultimately collect and our ability to dispose of or settle any
additional claims Charter may assert against us under the Asset Purchase
Agreement;
- - the amount of the Contingency Reserve we determine is appropriate to
assure the settlement of our contingent, conditional and unmatured claims
and liabilities, and the amount of such Contingency Reserve that may not
ultimately be used to pay liabilities;
- - the amount of time and money required to assess and resolve outstanding
and potential litigation against us, including a dismissal of Charter from
the IPO Litigation;
- - the total amount of our liquidation transaction and administration costs;
and
5
- - any claims or potential claims that may arise before we are finally
liquidated and dissolved or that management believes are likely to arise
within 10 years of our dissolution.
In connection with the adoption of the Plan and the anticipated
liquidation, the Company adopted the liquidation basis of accounting effective
November 27, 2002, and has valued its assets at their estimated net realizable
cash values and has stated its liabilities, including costs to liquidate, at
their estimated settlement amounts, all of which approximate their estimated
fair values. Uncertainties as to value to be realized from the disposal of the
Company's assets (other than cash), and the ultimate amount paid to settle its
liabilities make it impracticable to predict the aggregate net value that may
ultimately be distributable to stockholders. Claims, liabilities and future
expenses of liquidation (including salaries, payroll and local taxes,
professional fees, and miscellaneous office expenses), although currently
declining in the aggregate, will continue to be incurred with execution of the
Plan. These costs will reduce the amount of assets available for ultimate
distribution to stockholders. Although we do not believe that a precise estimate
of those expenses can currently be made, we believe that available cash will be
adequate to provide for the Company's obligations, liabilities, operating costs
and claims (including contingent liabilities), and to make cash distributions to
stockholders.
The Company filed its Certificate of Dissolution on December 4, 2002 with
the State of Delaware. Pursuant to Delaware law, the Company will continue in
existence until December 4, 2005. During this period, the Company will attempt
to convert its estimated remaining net assets to cash for periodic distribution
to its stockholders. It is not permitted to continue the business of the
Corporation as a going concern. The actual nature, amount, and timing of future
distributions will be determined by the Board in its sole discretion, and will
depend primarily upon the Company's ability to execute the Plan. The Company's
liquidation should be concluded on or before December 4, 2005 with a final
liquidating distribution either directly to the stockholders or to one or more
liquidating trusts. A copy of the Plan is included as Exhibit 10.23 to this Form
10-K. Further details regarding the Plan can be found in the Company's October
25, 2002 Proxy Statement filed with the Securities and Exchange Commission.
EMPLOYEES
We presently have only two (2) full-time employees. We will continue to
pay our employees their regular salary, and, if approved by the Board based on
an evaluation of all relevant factors, any bonus for which our employees are
eligible, for services rendered in connection with the implementation of the
Plan. See "Item 12, "Security Ownership of Certain Beneficial Owners and
Management-Employment contract, termination of employment and change-in-control
arrangements" for a description of the compensation arrangements for our
President and Chief Financial Officer, Mr. George Willett.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements, or other information that we file at the
Commission's public reference room in Washington, D.C. Please call the
Commission at 1-800-SEC-0330 for further information on the public reference
rooms. Our public filings are also available to the public from commercial
document retrieval services and at the Internet World Wide Web site maintained
by the Commission at http://www.sec.gov. Reports, proxy statements, and other
information concerning us also may be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, NW, Washington, D.C.
20006. We no longer maintain a Internet website, so no information about us is
available on our former website www.hsacorp.net (http://www.hsacorp.net).
ITEM 2. PROPERTIES
We currently lease approximately 1,000 square feet of corporate office
space in Louisville, Kentucky. The lease converts to a month-to-month basis in
July 2003.
In addition, we lease approximately 3,000 square feet of space in Hunt
Valley, Maryland. The office space was vacated in connection with our
liquidation plan. The lease expires in May 2003.
ITEM 3. LEGAL PROCEEDINGS
The Delaware Class Action Lawsuits. The Company, our then directors,
certain former directors as well as Charter and Paul Allen were 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 complaints
seek to rescind the transaction and seek unspecified monetary damages.
6
We believe these lawsuits are entirely without merit. Nevertheless,
lawyers for the defendants in these lawsuits 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 then draft Asset
Purchase Agreement. 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 was 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. The claims asserted in the fourth
lawsuit, Krim v. Allen, will be covered by the settlement if it is ultimately
approved by the Court.
Confirmatory discovery now has been completed and final documentation of
the settlement has been negotiated and executed. The settlement, however, is
subject to the approval of the Delaware Chancery Court following notice to class
members. The court has a hearing for April 16, 2003 to consider any objections
to, and whether it should approve, the settlement. In the event the court
approves the settlement and no other objection, motions or appeals are filed,
the court's approval will be deemed final on May 16, 2003.
The IPO Litigation. Also, on November 5, 2001, the Company, our President
and Chief Financial Officer (Mr. George 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. The purported class action alleges violations of Sections 11
and 15 of the Securities Act of 1933 (the "1933 Act") and Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-
promulgated thereunder. The essence of the complaints is that defendants issued
and sold our common stock pursuant to the Registration Statement for the IPO
without disclosing to investors that certain underwriters in the offering had
solicited and received excessive and undisclosed commissions from certain
investors. The complaints also allege that our Registration Statement for the
IPO failed to disclose that the underwriters allocated Company shares in the IPO
to customers in exchange for the customers' promises to purchase additional
shares in the aftermarket at pre-determined prices above the IPO price, thereby
maintaining, distorting and/or inflating the market price for the shares in the
aftermarket. The plaintiff asks to represent the interest of all holders of our
common stock and seeks unspecified monetary damages.
On July 15, 2002, the Company moved to dismiss all claims against it and
Messrs. Willett and Pitcock. 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. On February 19, 2003,
the Court denied the Company's motion to dismiss the alleged violations of
Section 11 and 15 of the 1933 Act. However, the Court granted the Company's
motion to dismiss the alleged violations of Sections 10(b) and 20(a) of the 1934
Act and Rule 10b- promulgated thereunder.
This action is being coordinated with nearly three hundred other nearly
identical actions filed against other companies. Prior to the February 19, 2003
ruling on the Company's motion to dismiss, there were settlement discussions
among the plaintiffs, the company defendants and their insurance carriers, which
if closed would have removed the Company from the litigation without payment of
any funds. However, as a result of the recent ruling, we cannot opine as to
whether or when a settlement might occur.
With respect to the allegations against the Company, we believe this
lawsuit is without merit and intend to continue 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.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (the "Charter IPO Indemnity
Claim"), and deferred release of half of the $2.0 million indemnity holdback
until such time as we obtain the dismissal of Charter as a defendant in the IPO
Litigation or the IPO Litigation is otherwise settled, minus Charter's actual
defense costs if such costs exceed $250,000. On February 28, 2003, we collected
$1.0 million of the indemnity holdback plus accrued interest thereon from
Charter. We do not believe Charter is a "successor in interest" to the Company,
and are attempting to obtain an out-of-court dismissal of Charter from the IPO
Litigation. If we are not
7
successful in this effort, we may either file a motion with the court to obtain
Charter's dismissal or wait on a possible settlement of the IPO Litigation with
respect to the Company.
We do not believe that the results of either of the above-noted legal
proceedings will have a material adverse effect on our net assets in
liquidation. However, the Company's defense of and/or attempts to settle
favorably these proceedings and claims may affect the timing and amount of any
distributions made under the Plan. The Company will not make any liquidation
distributions until the Delaware Class Actions lawsuits are finally settled.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders of the Company was held on November 27,
2002. Matters submitted to, and approved by, stockholders are listed below, as
is a tabulation of voting.
(1) To approve and adopt the Plan of Liquidation of the Company.
FOR AGAINST ABSTAIN NOT VOTED
---------- ------- ------- ----------
22,905,974 164,386 40,367 14,428,409
(2) To elect two directors to Class III of the Company's Board of Directors.
FOR AGAINST ABSTAIN
---------- ------- -------
37,042,488 221,475 104,608
(3) To ratify the appointment of PricewaterhouseCoopers LLP as the Company's
independent auditor for its fiscal year ending December 31, 2002.
FOR AGAINST ABSTAIN
---------- ------- -------
37,293,540 45,640 62,350
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) Our common stock is currently traded on the over-the-counter bulletin
board under the symbol "HSAC". Prior to July 10, 2002, our common stock traded
on the National Market System of the Nasdaq Stock Market, Inc. (the "Nasdaq
National Market") under the symbol "HSAC." The following table sets forth the
range of the high and low sale prices by quarter for 2002 and 2001.
2002 HIGH LOW
---- ---- ---
First Quarter $0.92 $0.53
Second Quarter $1.19 $0.90
Third Quarter $1.25 $1.13
Fourth Quarter $1.32 $1.23
2001 HIGH LOW
---- ---- ---
First Quarter $2.47 $0.84
Second Quarter $2.19 $0.92
Third Quarter $1.21 $0.15
Fourth Quarter $0.72 $0.17
As of March 4, 2003, the number of stockholders of record was 526. We
have not declared or paid any cash dividends on our capital stock since our
inception.
The Company's primary objectives are to liquidate its assets in the
shortest time period possible while realizing the maximum values for such
assets. The actual nature, amount, and timing of all future distributions will
be determined by the Board in its sole discretion, and will depend in part upon
the Company's ability to convert certain remaining assets into cash and settle
certain obligations. Although the liquidation is currently expected to be
concluded on December 4, 2005, the period of time to liquidate the assets and
distribute the proceeds is subject to uncertainties and contingencies, many of
which are beyond the Company's control (see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Risk Factors").
The Company currently intends to make an initial cash distribution of $1.40 per
share to its stockholders in late May 2003 based on 40,294,783 shares of common
stock outstanding as of March 4, 2003, to be followed by a subsequent
liquidating
8
distribution of $0.13 per share on or before November 27, 2003. These amounts do
not include any benefit that might be realized if some or all of the Contingency
Reserve is not required to pay claims.
(b) 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.
(c) On February 28, 2002, the Company purchased 20,222,139 shares of
common stock from Vulcan for an aggregate purchase price of $4,448,870, or $0.22
per share. The consummation of the Asset Sale was a condition precedent to the
purchase of common stock from Vulcan.
(d) In 2002, the Company lifted the restrictions on 1,400,000 shares of
restricted stock in accordance with certain employment agreements as a result of
the termination of our former President and Chief Executive Officer, our former
Chief Operating Officer and our former Chief Operating Officer of HSA
International Inc.
(e) During 2002, we issued an aggregate of 122,087 shares to directors and
former employees upon exercise of options to purchase our common stock, with
prices ranging from $0.16 to $1.18 per share. The issuances of these securities
were deemed exempt from registration under the securities act of 1933 upon Rule
701 promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE, PER SHARE AMOUNTS AND OPERATING DATA)
The following selected consolidated financial data is qualified by
reference, and should be read in conjunction with, the Company's Consolidated
Financial Statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Form 10-K. The statement of operations (going concern basis) data for
the period January 1, 2002 through November 27, 2002 and the years ended
December 31, 2001 and 2000, the net assets in liquidation data at December 31,
2002 and the balance sheet (going concern basis) data at December 31, 2001, have
been derived from the audited consolidated financial statements appearing
elsewhere in this Form 10-K. The statement of operations (going concern basis)
data for the year ended December 31, 1999 and the period from April 3, 1998
(Inception) to December 31, 1998 and the balance sheet (going concern basis)
data at December 31, 2000, 1999 and 1998 has been derived from the Company's
audited consolidated financial statements not appearing herein. Effective
November 27, 2002, the Company adopted the liquidation basis of accounting and
as a result the selected financial data only reflects operating activities
through November 27, 2002.
We prepared the unaudited pro forma financial information (going concern
basis) for the year ended December 31, 1998 by combining the historical results
of the two companies we acquired, High Speed Access Network, Inc. ("HSAN") and
CATV.net, Inc. ("CATV"), with our historical results. We have presented this
information to give you a better picture of what our business might have looked
like if we had acquired both of these companies as of January 1, 1998. Since the
pro forma financial information which follows is based upon the operating
results of CATV and HSAN during the period when they were not under the control
of management of the Company, the information presented may not be indicative of
the results which would have actually been obtained had the acquisitions
occurred on January 1, 1998 nor are they indicative of future operating results.
9
JANUARY 1, APRIL 3,
2002 1998 PRO FORMA
TO FOR THE YEAR ENDED (INCEPTION) COMBINED
NOVEMBER 27, DECEMBER 31, TO YEAR ENDED
------------ ----------------------------------------- DECEMBER 31, DECEMBER 31,
2002 2001 2000 1999 1998 1998
------------ ------------ ------------ ---------- ----------- ----------
General and administrative
operating expenses:
General and administrative $ 4,719 $ 5,309 $ 5,370 $ 3,707 $ 1,912 $ 2,550
Non-cash compensation expense from
restricted stock 1,680 672 33 -- -- --
------------ ------------ ------------ ---------- ----------- ----------
Total general and administrative
operating expense 6,399 5,981 5,403 3,707 1,912 2,550
Gain on sale of fixed assets (41) -- -- -- -- --
------------ ------------ ------------ ---------- ----------- ----------
Loss from continuing operations before
other income (expense), discontinued
operations and extraordinary item (6,358) (5,981) (5,403) (3,707) (1,912) (2,550)
Investment income 1,029 3,335 7,371 6,181 94 95
Interest expense (226) (2,195) (2,158) (519) (54) (54)
------------ ------------ ------------ ---------- ----------- ----------
Loss from continuing operations before
discontinued operations and
extraordinary item (5,555) (4,841) (190) 1,955 (1,872) (2,509)
Discontinued operations:
Loss from discontinued operations, net (4,217) (120,733) (150,220) (62,907) (8,103) (9,414)
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) 28,446 (125,574) (150,410) (60,952) (9,975) (11,923)
Accretion to redemption value of mandatorily
redeemable convertible preferred stock and
mandatorily redeemable convertible
preferred stock dividends -- -- -- (230,270) (120,667) (120,667)
------------ ------------ ------------ ---------- ----------- ----------
Net income (loss) available to common
stockholders $ 28,446 $ (125,574) $ (150,410) $ (291,222) $ (130,642) $ (132,590)
============ ============ ============ ========== =========== ==========
Basic and diluted net income (loss)
available to common stockholders per share:
Loss from continuing operations $ (0.13) $ (0.08) $ 0.00 $ 0.06 $ (0.30) $ (0.41)
Loss from discontinued operations (0.10) (2.06) (2.67) (1.88) (1.31) (1.52)
Gain on sale of operations to Charter 0.94
Loss on early extinguishment of debt
and capital lease obligations (0.05)
Accretion to redemption value
of mandatorily redeemable
convertible preferred stock
and mandatorily redeemable
convertible preferred stock
dividends -- -- -- (6.87) (19.46) (19.46)
Net income (loss) available to common ------------ ------------ ------------ ---------- ----------- ----------
stockholders per share $ 0.66 $ (2.14) $ (2.67) $ (8.69) $ (21.07) $ (21.39)
Weighted average shares used in calculation ============ ============ ============ ========== =========== ==========
of basic and diluted net loss available to
common stockholders per share 43,259,641 58,794,354 56,347,891 33,506,735 6,200,000 6,200,000
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments ... $17,781 $128,076 $178,730 $ 17,888
Working capital ..................................... 6,063 94,802 160,744 14,162
Total assets ........................................ 72,668 219,707 230,426 27,504
Long-term debt and capital lease obligations
less current portion ................... 2,859 13,693 11,609 749
Total stockholders' equity (deficit) ................ 42,233 164,366 196,130 (126,427)
Net assets in liquidation ........................... $63,814
Net assets available for distribution to stockholders 61,814
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
High Speed Access Corp. (hereinafter referred to as the Company, we, us or
our) formerly provided high speed Internet access and related services to
residential and commercial customers primarily via cable modems and
international ISP infrastructure services.
On August 13, 2002, our Board concluded that the liquidation of the
Company was the best alternative available for maximizing stockholder value and
adopted a Plan of Liquidation and Dissolution (the "Plan"). The Plan was
approved by the holders of a majority of the Company's shares on November 27,
2002. The key features of the Plan are (1) filing a Certificate of Dissolution
with the Secretary of State of Delaware and thereafter remaining in existence as
a non-operating entity for three years; (2) winding up our affairs, including
the settlement of any then-outstanding issues with Charter relating to the Asset
Sale, selling any remaining non-cash
10
assets of the Company, and taking such action as may be necessary to preserve
the value of our assets and distributing our assets in accordance with the Plan;
(3) paying our creditors; (4) terminating any of our remaining commercial
agreements, relationships or outstanding obligations; (5) resolving our
outstanding litigation; (6) establishing a Contingency Reserve for payment of
the Company's expenses and liabilities; and (7) preparing to make distributions
to our stockholders.
In connection with the adoption of the Plan and the anticipated
liquidation, the Company adopted the liquidation basis of accounting effective
November 27, 2002, and has valued its assets at their estimated net realizable
cash values and has stated its liabilities, including costs to liquidate, at
their estimated settlement amounts, all of which approximate their estimated
fair values. Uncertainties as to the value to be realized from the disposal of
the Company's assets (other than cash), and the ultimate amount paid to settle
its liabilities make it impracticable to predict the aggregate net value that
may ultimately be distributable to stockholders. Claims, liabilities and future
expenses of liquidation (including salaries, payroll and local taxes,
professional fees, and miscellaneous office expenses), although currently
declining in the aggregate, will continue to be incurred with execution of the
Plan. Although we do not believe that a precise estimate of the Company's net
assets can currently be made, we believe that available cash and cash equivalent
investments and amounts received from the sale of officer furniture will be
adequate to provide for the Company's obligations, liabilities, operating costs
and claims (including contingent liabilities), and to make future cash
distributions to stockholders.
Under Delaware law, the Company will remain in existence as a
non-operating entity until December 4, 2005 and is required to maintain a
certain level of liquid assets and reserves to cover any remaining liabilities
and pay operating costs during the dissolution period. During the dissolution
period, the Company will attempt to covert its remaining assets to cash and
settle its liabilities as expeditiously as possible.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Liquidation Basis of Accounting. As of November 27, 2002, all activities
of the Company are presented under the liquidation basis of accounting. Inherent
in the liquidation basis of accounting are significant management estimates and
judgments. Under the liquidation basis of accounting, assets have been valued at
their estimated net realizable values and liabilities are stated at their
anticipated settlement amounts, all of which approximate their estimated fair
values. The estimated net realizable values of assets and settlement amounts of
liabilities, including costs of liquidation, represent our best estimate of the
recoverable value of the assets and settlement amounts of liabilities. There can
be no assurance, however, that we will be successful in selling the assets or
settle the liabilities at their estimated amounts. The liquidation basis of
accounting requires that we accrue an estimate for all liabilities related to
expenses to be incurred during the wind up period. While we believe our
estimates are reasonable under the circumstances, if the length of our wind up
period were to change or other conditions were to arise, actual results may
differ from these estimates and these differences may be material.
Interest Receivable. At December 31, 2002, interest receivable of $0.4
million represents the Company's estimate of future interest earnings on cash,
cash equivalents and short-term investments over the liquidation period through
December 4, 2005 and accounts for less than 0.5% of the Company's total
estimated assets.
Charter Holdback. At December 31, 2002, the Charter holdback of $2.1
million represents the remaining amount of the Asset Sale purchase price held
back by Charter to secure indemnity claims against the Company under the Asset
Purchase Agreement plus accrued interest.
Furniture and Fixtures. At December 31, 2002, furniture and fixtures of
$0.1 million represents the Company's estimate of cash proceeds to be received
on the sale of office furniture.
Accounts Payable and Accrued Liabilities. At December 31, 2002, accounts
payable and accrued expenses were $2.6 million. Included in this amount are
accrued circuit termination charges of $0.4 million and other known obligations
totaling $1.1 million. The balance of $1.1 million is comprised of the following
items:
- Severance and Other Compensation. Severance and other compensation
in the amount of $0.9 million represents severance payable to our
former President and Chief Executive Officer of $0.7 million, as
well as other healthcare and compensation expenses for current and
former employees.
- Estimated Litigation Settlement Costs. Litigation settlement
costs in the amount of $0.2 million represents the Company's
expected proportional share of fees and expenses related to settling
the Delaware Class Action lawsuits
11
(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).
Estimated Costs to be Incurred During The Liquidation Period. At December
31, 2002, the Company estimates that there are $1.1 million of costs to be
incurred through December 4, 2005, including compensation for liquidation
personnel ($0.5 million), professional fees ($0.5 million) and other
miscellaneous costs ($0.1 million).
Contingency Reserve. In view of the duration of the liquidation period to
December 4, 2005, and provision in Delaware law that the Company maintain
reserves sufficient to allow for the payment of all its liabilities and
obligations, including all contingent, conditional and unmatured claims, the
Company established a Contingency Reserve upon the adoption of liquidation basis
accounting on November 27, 2002. The amount of reserve initially established was
$2.0 million and is unchanged as of December 31, 2002. At December 31, 2002, the
Company has no known material claims against this reserve and will periodically
assess whether maintenance of a lower or higher Contingency Reserve is required.
In the event there are no claims against this reserve, then the amount of
liquidation proceeds that may be paid to stockholders will be increased.
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
The consolidated financial statements for the period January 1, 2002 to
November 27, 2002 and the years ended December 31, 2001 and 2000 were prepared
on the going concern basis of accounting, which contemplates realization of
assets and satisfaction of liabilities in the normal course of business. The
Company adopted the liquidation basis of accounting as of November 27, 2002. In
order to record assets at estimated net realizable value and liabilities at
estimated settlement amounts under liquidation basis of accounting, the Company
recorded the following adjustments to record its assets and liabilities to fair
value as of November 27, 2002 (in thousands):
ADJUST ASSETS AND LIABILITIES TO FAIR VALUE:
Future interest income $ 551
Prepaid expenses (168)
Furniture and fixtures 150
Accounts payable and accrued expenses 123
-------
Total adjustments to fair value 656
-------
ACCRUE ESTIMATED COSTS DURING LIQUIDATION:
Costs to be incurred during the liquidation period (1,110)
-------
Total estimated costs during liquidation (1,110)
-------
Total liquidation adjustments $ (454)
=======
The amount and timing of future liquidating distributions will depend upon
a variety of factors including, but not limited to, the actual proceeds from the
realization of the Company's assets, the ultimate settlement amounts of the
Company's liabilities and obligations, and actual costs incurred in connection
with carrying out the Plan, including salaries, administrative and operating
costs during the liquidation period.
RESULTS OF DISCONTINUED OPERATIONS FOR THE PERIOD JANUARY 1, 2002 TO NOVEMBER
27, 2002 COMPARED WITH THE YEAR ENDED DECEMBER 31, 2001
General And Administrative Expenses. General and administrative expenses
for the period January 1, 2002 to November 27,2002 were $4.7 million compared to
$5.3 million for the year ended December 31, 2001, a decrease of $0.6 million.
The decrease in general and administrative expenses resulted primarily from 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 $2.6 million in severance and severance-related costs
associated with the termination of certain employees, including our former
President and Chief Executive Officer, our former Chief Operating Officer and
our former General Counsel, and $0.2 in legal settlement expenses.
Non-Cash Compensation Expense From Restricted Stock. Non-cash compensation
expense from restricted stock for the period January 1, 2002 to November 27,
2002 was $1.7 million compared to $0.7 million for the year ended December 31,
2001, an increase of $1.0 million. This expense represents the fair market value
of the restricted stock at the time of grant amortized over the vesting period.
The increase in the expense is attributable to the vesting of the restricted
stock upon the termination of our former President and Chief Executive Officer,
our former Chief Operating Officer and our former Chief Operating Officer of HSA
International Inc.
12
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 for
the period January 1, 2002 to November 27, 2002 was $0.8 million compared to
$1.1 million for the year ended December 31, 2001, a decrease of $0.3 million.
The decrease in investment income is the result of lower interest rates during
2002. Offsetting the reduction in investment income was a significant 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, 2002, we had net deferred tax assets of
$97.4 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,
2002, we accumulated federal net operating loss carryforwards of approximately
$280.7 million. Utilization of these net operating losses during the wind-up
period 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
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. The net loss from discontinued
operations for the period January 1, 2002 to November 27, 2002 was $4.2 million
compared to $120.7 million for the year ended December 31, 2001, a decrease of
$116.5 million. The net loss from discontinued operations for the year ended
December 31, 2001 included an asset impairment charge of $29.1 million, lease
termination charges of $3.9 million and severance costs of $3.2 million. The
decreases are primarily the result of two months of operations in 2002, versus
twelve 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:
- exited all of our cable system agreements except for those with
Charter;
- sold the operations of Digital Chainsaw;
- discontinued our efforts to enter the DSL market;
- exited all unnecessary leased space; and
- 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
period January 1, 2002 to November 27, 2002. The components of the gain are as
follows (in millions):
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
=====
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 period January 1, 2002 to
November 27, 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.
RESULTS OF DISCONTINUED OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001 COMPARED
WITH THE YEAR ENDED DECEMBER 31, 2000
General And Administrative Expenses. General and administrative expenses
of $5.3 million for year ended December 31, 2001 were comparable to the $5.4
million of expense for the year ended December 31, 2000.
13
Non-Cash Compensation Expense From Restricted Stock. Non-cash compensation
expense from restricted stock was $0.7 million for the year ended December 31,
2001, an increase of $0.6 million over the non-cash compensation expense of $0.1
million for the year ended December 31, 2000. This expense represents the fair
market value of the restricted stock at the time of grant amortized over the
vesting period. The increase in 2001 resulted from the issuance of 1.3 million
shares of restricted stock to key members of management beginning in the fourth
quarter of 2000.
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 for
the year ended December 31, 2001 was $1.1 million, a decrease of $4.1 million
from net investment income of $5.2 million for the year ended December 31, 2000.
The decrease in investment income for 2001 is the result of lower average
investment balances. Interest expense for both years was $2.2 million.
Loss From Discontinued Operations, Net. The net loss from discontinued
operations for the year ended December 31, 2001 was $120.7 million, a decrease
of $29.5 million from the net loss from discontinued operations of $150.2
million for the year ended December 31, 2000. The decrease is primarily a result
of the series of significant cost reduction measures throughout the second half
of 2001 as previously discussed.
Additionally, in connection with the Asset Purchase Agreement, we entered
in a management agreement with Charter, pursuant to which, effective October
2001, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary objectives are to liquidate its assets in the
shortest time period possible while realizing the maximum values for such
assets. The actual nature, amount, and timing of all future distributions will
be determined by the Board in its sole discretion, and will depend in part upon
the Company's ability to convert certain remaining assets into cash and settle
certain obligations. Although the liquidation is currently expected to be
concluded on December 4, 2005, the period of time to liquidate the assets and
distribute the proceeds is subject to uncertainties and contingencies, many of
which are beyond the Company's control (see Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Risk Factors"). The
Company currently intends to make an initial cash distribution of $1.40 per
share or $56.4 million to its stockholders in late May 2003, to be followed by a
subsequent liquidating distribution of $0.13 per share or $5.2 million on or
before November 27, 2003. The "per share" amounts are based on 40,294,783 shares
of common stock outstanding as of March 4, 2003. These amounts do not include
any benefit that might be realized if some or all of the Contingency Reserve is
not required to pay claims. At December 31, 2002, the Company estimates that
there is $1.1 million of operating costs to be incurred during the remaining
liquidation period through December 4, 2005. The estimated liabilities of the
Company at December 31, 2002 total $3.7 million. In addition, the Company has
established a Contingency Reserve of $2.0 million (see Note 1 of "Notes to
Consolidated Financial Statements"), equivalent to approximately $0.05 per
share.
We invest excess cash in money market accounts with the intent to make
such funds readily available for potential distributions to stockholders. At
December 31, 2002, net assets in liquidation were $63.8 million, and we had cash
and cash equivalents and short-term investments of $63.6 million and $1.2
million, respectively, compared to cash and cash equivalents and short-term
investments of $11.7 million and $6.1 million, respectively, at December 31,
2001.
Cash used in operating activities of continuing operations for the period
January 1, 2002 to November 27, 2002 was $3.8 million, consisting primarily of a
net loss from continuing operations of $5.6 offset by non-cash compensation
expense from restricted stock of $1.7 million.
Cash used in operating activities of discontinued operations for the
period January 1, 2002 to November 27, 2002 was $9.8 million, which consisted
primarily of the following (in millions):
Loss from discontinued operations ............................... $(4.2)
Depreciation and amortization ................................... 2.5
Collection of accounts receivable ............................... 2.1
Payment of liabilities related to discontinued operations ....... (11.2)
Decreases in other assets ....................................... 1.0
-----
Net cash used in operating activities of discontinued operations $(9.8)
=====
14
Cash provided by investing activities of continuing operations for the
period January 1, 2002 to November 27, 2002 was $4.8 million, the result of
sales and maturities of short-term investments of $72.1 million, offset by
purchases of short-term investments of $67.3 million.
Cash provided by investing activities of discontinued operations for the
period January 1, 2002 to November 27, 2002 was $76.2 million, primarily the
result of cash proceeds from the Charter transaction of $76.6 million,
calculated as follows:
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
=====
The net cash proceeds from the sale to Charter consisted of the following
(in millions):
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
=====
Cash used in financing activities of continuing operations for the period
January 1, 2002 to November 27, 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
period January 1, 2002 to November 27, 2002 was $11.0 million, calculated as
follows:
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
=====
RELATED PARTY TRANSACTIONS.
In November 1998, the Company entered into a systems access and investment
agreement with Vulcan and Charter, a programming content agreement with Vulcan
and related network services agreement with Charter. Under the agreements, the
Company agreed to pay Charter 50% of the Company's gross revenues for cable
modem access services provided in Charter cable systems, 15% of gross revenues
for dial up access services and 50% of gross revenues for all other optional
services. In addition, if the Company sold equipment to a subscriber, the
Company paid Charter 50% of the gross profit the Company received from the sale.
The Company paid Charter $1.9 million during the period January 1, 2002 to
November 27, 2002 and $5.2 million and $2.6 million in 2001 and 2000,
respectively, under these agreements.
15
In May 2000, the Company entered into a network services agreement with
Charter, under which the Company provided customer service, network operating,
monitoring and certain other services to certain Charter cable systems. The
Company received payments totaling $7.6 million during the period January 1,
2002 to November 27, 2002 and $9.2 million and $1.0 million in 2001 and 2000,
respectively, under the agreement. With respect to each home passed, launched or
intended to be launched on or before the second anniversary date of the May 2000
network services agreement, the Company paid Charter, at Charter's option, a
launch fee of $3.00 per home passed committed. In 2001 and 2000, the Company
paid $2.9 million and $3.8 million, respectively, in launch fees to Charter. We
paid an additional $5.1 million in launch fees to Charter in 2002 at the closing
of the Asset Sale.
Additionally, the Company recognized revenue of $0.3 million and $0.6
million in 2001 and 2000, respectively, under the agreement, representing
engineering, web services and other network related fees. Also, the Company was
paid $3.2 million and $3.3 million in 2001 and 2000, respectively, by Charter
for reimbursable operating expenses, primarily circuit costs and personnel
expenses. At the closing of the Asset Sale, Charter paid to the Company an
additional $3.0 million for expenses incurred by the Company on Charter's
behalf.
At December 31, 2001, approximately $4.9 million was due from Charter
related to these agreements.
We had an agreement with Gans Multimedia Partnership ("Gans"), an entity
owned by Joseph S. Gans, III, a founder and former director of the Company,
under which Gans granted the Company the exclusive right to provide the
customers of six cable systems owned by Gans with high speed Internet access.
The agreement had an original five-year term and provided that Gans would
receive a share of the gross revenues the Company received under the agreement.
During 2001 and 2000, the Company paid Gans $0.3 million each year under the
agreement. This agreement was terminated in the third quarter of 2001.
We assumed a note payable in the aggregate principal amount of $0.7
million, evidenced by a promissory note and assignment and security agreement,
owing to Gans. The note had an interest rate of 7% per annum. Certain tangible
assets of the Company served as collateral for this note. The loan represented
working capital of High Speed Access Network, Inc. funded by Gans from July 1997
to April 1998. The remaining $0.5 million balance matured and was paid, along
with accrued interest, on April 1, 2001.
On August 9, 2002, John G. Hundley, our Secretary, General Counsel and
Senior Vice President - Development, was terminated by the Company and was paid
his severance pursuant to a Separation Agreement. He is now employed as Counsel
to Frost Brown Todd, LLC, which we have previously engaged to provide legal
services to us in connection with various contract matters and strategic
activities, and which we have retained to advise us with respect to this
liquidation and other matters affecting the wind up of our affairs. We believe
this engagement to be on customary and commercially reasonable terms. At the
request of the Board, Mr. Hundley continues to serve as our Secretary on a
non-employee basis. During 2002, we paid $62,355 to Frost Brown Todd, LLC.
See Note 2 to the Consolidated Financial Statements entitled "Discontinued
Operations" for information regarding the Asset Sale between the Company and
Charter.
LEGAL PROCEEDINGS
The Delaware Class Action Lawsuits. The Company, our then directors,
certain former directors as well as Charter and Paul Allen were 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 complaints
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 had discussions with attorneys
representing the plaintiffs in the first three lawsuits concerning, among other
topics, financial and other changes to the
16
terms of the then draft Asset Purchase Agreement. 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 was 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. The claims
asserted in the fourth lawsuit, Krim v. Allen, will be covered by the settlement
if it is ultimately approved by the Court.
Confirmatory discovery now has been completed and final documentation of
the settlement has been negotiated and executed. The settlement, however, is
subject to the approval of the Delaware Chancery Court following notice to class
members. The court has a hearing for April 16, 2003 to consider any objections
to, and whether it should approve, the settlement. In the event the court
approves the settlement and no other objection, motions or appeals are filed,
the court's approval will be deemed final on May 16, 2003.
The IPO Litigation. Also, on November 5, 2001, the Company, our President
and Chief Financial Officer (Mr. George 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. The purported class action alleges violations of Sections 11
and 15 of the Securities Act of 1933 (the "1933 Act") and Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-
promulgated thereunder. The essence of the complaints is that defendants issued
and sold our common stock pursuant to the Registration Statement for the IPO
without disclosing to investors that certain underwriters in the offering had
solicited and received excessive and undisclosed commissions from certain
investors. The complaints also allege that our Registration Statement for the
IPO failed to disclose that the underwriters allocated Company shares in the IPO
to customers in exchange for the customers' promises to purchase additional
shares in the aftermarket at pre-determined prices above the IPO price, thereby
maintaining, distorting and/or inflating the market price for the shares in the
aftermarket. The plaintiff asks to represent the interest of all holders of our
common stock and seeks unspecified monetary damages.
On July 15, 2002, the Company moved to dismiss all claims against it and
Messrs. Willett and Pitcock. 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. On February 19, 2003,
the Court denied the Company's motion to dismiss the alleged violations of
Section 11 and 15 of the 1933 Act. However, the Court granted the Company's
motion to dismiss the alleged violations of Sections 10(b) and 20(a) of the 1934
Act and Rule 10b- promulgated thereunder.
This action is being coordinated with nearly three hundred other nearly
identical actions filed against other companies. Prior to the February 19, 2003
ruling on the Company's motion to dismiss, there were settlement discussions
among the plaintiffs, the company defendants and their insurance carriers, which
if closed would have removed the Company from the litigation without payment of
any funds. However, as a result of the recent ruling, we cannot opine as to
whether or when a settlement might occur.
With respect to the allegations against the Company, we believe this
lawsuit is without merit and intend to continue 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.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (the "Charter IPO Indemnity
Claim"), and deferred release of half of the $2.0 million indemnity holdback
until such time as we obtain the dismissal of Charter as a defendant in the IPO
Litigation or the IPO Litigation is otherwise settled, minus Charter's actual
defense costs if such costs exceed $250,000. On February 28, 2003, we collected
$1.0 million of the indemnity holdback plus accrued interest thereon from
Charter. We do not believe Charter is a "successor in interest" to the Company,
and are attempting to obtain an out-of-court dismissal of Charter from the IPO
Litigation. If we are not successful in this effort, we may either file a motion
with the court to obtain Charter's dismissal or wait on a possible settlement of
the IPO Litigation with respect to the Company.
17
We do not believe that the results of either of the above-noted legal
proceedings will have a material adverse effect on our net assets in
liquidation. However, the Company's defense of and/or attempts to settle
favorably these proceedings and claims may affect the timing and amount of any
distributions made under the Plan. The Company will not make any liquidation
distributions until the Delaware Class Actions lawsuits are finally settled.
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 not impact the Company due
to its adoption of a liquidation basis of accounting.
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. The losses on early extinguishment of debt and capital lease
obligations 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.
In November 2002, the FASB, issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. Fin
45 requires that upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
FIN 45 requires disclosure about each guarantee even if the likelihood of the
guarantor's having to make any payments under the guarantee is remote. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002 and the disclosure provisions of FIN 45 are effective for our December 31,
2002 financial statements. We do not expect adopting the recognition provisions
of FIN 45 will have an impact on the Company. We have made the disclosures
required by FIN 45 in the notes to our consolidated financial statements (see
Notes to Consolidated Financial Statements, Note 14. "Commitments, Guarantees
and Contingencies").
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an interpretation of ARB 51. The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
right (variable interest entities, or VIEs) and how to determine when and which
business enterprise should consolidate the VIE (the primary beneficiary). The
provisions of FIN 46 are effective immediately for VIEs created after January
31, 2003 and no later than July 1, 2003 for VIEs created before February 1,
2003. In addition, FIN 46 requires that both the primary beneficiary and all
other enterprises with a significant variable interest make additional
disclosure in filings issued after January 31, 2003. The adoption of FIN 46 is
not expected to have an impact on the Company because we do not hold any
interest in an entity qualifying as a VIE.
In January 2003, the FASB issued Statement No. 148 ("SFAS 148"),
Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS 148
amends FASB Statement No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. See Note 1 to our
consolidated financial statements for our stock option accounting policy and
18
required disclosures. As now required by SFAS 148, these disclosures will be
updated each reporting period beginning the first quarter 2003.
RISK FACTORS
You should carefully consider the following factors and other information
in this Form 10-K and other filings we make with the Securities and Exchange
Commission before trading in our common stock. The Company's plan is to wind-up
the Company's affairs and distribute its net assets to the stockholders. The
timing and completion of these objectives are subject to a number of risks and
uncertainties, including those set forth below:
WE MAKE FORWARD-LOOKING STATEMENTS IN THIS FORM 10-K THAT ARE SUBJECT TO RISKS
THAT MAY CHANGE THE LIKELIHOOD OF THOSE STATEMENTS BEING REALIZED.
This Form 10-K, as well as other documents incorporated by reference
herein and to which we refer in this Form 10-K, describes many of the positive
factors and assumed benefits of the Plan. You should also be aware of factors
that could have a negative impact on the Plan and our ability to make
distributions of net assets, including the expected Initial Distribution, to
you. When we use such words as "believes", "expects", "anticipates", or similar
expressions, we are making forward-looking statements. In addition, we have made
in this Form 10-K certain forward looking statements, including statements
concerning the timing and amount of distributions of cash to stockholders and
other statements concerning the value of our net assets and the resultant
liquidation value per share of common. All such forward-looking statements are
necessarily only estimates of future results, and there can be no assurance that
actual results will not materially differ from expectations. These statements
are subject to many risks, including those set forth in each of the following
paragraphs.
YOU WILL NOT KNOW THE EXACT AMOUNT OR TIMING OF THE LIQUIDATION DISTRIBUTIONS.
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
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 Distribution in May 2003, may be delayed from the timing we
have previously announced 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 on May 16, 2003, 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 $1.0
million indemnity holdback due to us from Charter under the Asset
Purchase Agreement. On February 28, 2003, Charter notified the
Company of its assertion of a potential claim for indemnity in
respect of Charter being named as a "successor in interest" to the
Company in the IPO Litigation (see "Legal Proceedings"), and
deferred release of half of the $2.0 million indemnity holdback. The
Company collected $1.0 million of its indemnity holdback plus
accrued interest from Charter, and will seek the release of the $1.0
million balance plus accrued interest if and at such time as Charter
is dismissed as a defendant in the IPO Litigation or the IPO
Litigation is otherwise settled or disposed of, less actual defense
costs to the extent they exceed $250,000. We are presently not aware
of any additional claims that Charter intends to assert against us
under the Asset Purchase Agreement. Nevertheless, many of our
covenants, representations and warranties survived the closing of
the Asset Sale and will continue in effect until August 31, 2003,
and others will not expire until February 28, 2004.
3. Additionally, even though we are not aware of any other pending or
threatened claims, a creditor of HSA or other party with a claim
against HSA might file a new lawsuit or obtain an injunction against
our making the proposed distributions to you under the Plan. In that
event, either our board or a court may decide that the amounts to be
distributed are needed to provide for the payment of such
liabilities and expenses, including unknown or contingent
liabilities that may arise or be put in dispute at a later date.
19
WE MIGHT MISCALCULATE OR FAIL TO ADEQUATELY RESERVE AN AMOUNT SUFFICIENT TO
COVER OUR CONTINGENT LIABILITIES.
On December 4, 2002 we filed a Certificate of Dissolution with the State
of Delaware dissolving HSA. According to Delaware General Corporation Law, HSA
will continue to exist for three years after the dissolution becomes effective
(December 4, 2005) or for a longer period if the Delaware Court of Chancery
requires us to, for the purpose of prosecuting and defending suits against HSA
and enabling us to dispose of our property, discharge our liabilities and
distribute to our stockholders any remaining assets.
Under Delaware law, the Board established 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. As of December 31, 2002, we set aside a
$2.0 million Contingency Reserve. However, we cannot assure you that the
Contingency Reserve we established will be adequate to cover all of our expenses
and liabilities expected to be incurred through completion of our liquidation.
If the Contingency Reserve is insufficient for payment of our expenses and
liabilities, you could be held liable for payment to HSA'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 HSA or a liquidating trust established by HSA.
Accordingly, you could be required to return some or all distributions
previously made to you. In such an event, you could receive nothing from HSA
under the Plan. Moreover, you could incur a net tax cost if you paid taxes on
the amounts received from HSA and then have to repay such amounts back to HSA'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.
YOU MAY NOT BE ABLE TO BUY OR SELL SHARES OF HSA'S COMMON STOCK IF WE CLOSE OUR
STOCK TRANSFER BOOKS.
We may close our stock transfer books at some 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. However, we expect to close our stock transfer books and
discontinue recording transfers of shares of common stock on the earliest to
occur of:
- - the close of business on the date on which the remaining assets of HSA are
transferred to a liquidating trust, which we expect to occur sometime if
and after we make the Initial Distribution and any subsequent
distributions prior to November 27, 2003;
- - the close of business on the record date fixed by the Board of Directors
for the final liquidating distribution; or
- - December 5, 2005, the date on which HSA ceases to exist under Delaware
law, (or later if unresolved claims or litigation is still outstanding).
After the stock transfer books have been closed, certificates representing
shares of common stock will not be assignable or transferable on HSA's books
except by will, intestate succession or operation of law. After the final record
date for the recording of stock transfers, we will not issue any new stock
certificates, other than replacement certificates.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE
At the present time, our stock price is trading at a discount to our net
cash value per share. If we were to announce the timing and amount of a cash
distribution, our stock could fluctuate suddenly and widely depending on the
amount and timing of such distribution and the amount of funds still retained by
the Company. 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. 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 with respect to the
Plan. 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.
ITEM 7A. 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.
20
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
PAGE
Consolidated Financial Statements:
Report of Independent Accountants............................... 22
Consolidated Statement of Net Assets in Liquidation as
of December 31, 2002........................................... 23
Consolidated Statement of Changes in Net Assets in
Liquidation for the period November 27, 2002 to December
31, 2002....................................................... 24
Consolidated Balance Sheet (Going Concern Basis) as of
December 31, 2001.............................................. 25
Consolidated Statements of Operations (Going Concern
Basis) for the period January 1, 2002 to November 27,
2002 and the years ended December 31, 2001 and 2000............ 26
Consolidated Statements of Comprehensive Income (Loss) (Going
Concern Basis) for the period January 1, 2002 to November
27, 2002 and the years ended December 31, 2001 and 2000........ 26
Consolidated Statement of Stockholders' Equity (Deficit)
(Going Concern Basis) for the years ended December 31,
2000 and 2001 and the period January 1, 2002 to November
27, 2002....................................................... 27
Consolidated Statements of Cash Flows (Going Concern
Basis) for the period January 1, 2002 to November 27,
2002 and the years ended December 31, 2001 and 2000 ........... 28
Notes to Consolidated Financial Statements...................... 29
Quarterly Financial Information (unaudited) for the period
January 1, 2002 to November 27, 2002 and the year ended
December 31, 2001.............................................. 44
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
High Speed Access Corp.
We have audited the consolidated statement of net assets in liquidation of High
Speed Access Corp. and its subsidiaries (the "Company") as of December 31, 2002,
and the related consolidated statement of changes in net assets in liquidation
for the period from November 27, 2002 to December 31, 2002. In addition, we have
audited the consolidated balance sheet (going concern basis) of the Company as
of December 31, 2001, and the related consolidated statements of operations
(going concern basis), of comprehensive income (loss) (going concern basis), of
stockholders' equity (deficit) (going concern basis), and of cash flows (going
concern basis) for the period from January 1, 2002 to November 27, 2002 and for
the years ended December 31, 2001 and 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As more fully described in Note 1, the stockholders of the Company approved a
plan of dissolution on November 27, 2002, and the Company commenced liquidation
shortly thereafter. As a result, the Company has changed its basis of accounting
for periods subsequent to November 27, 2002 from the going-concern basis to a
liquidation basis.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated net assets in liquidation of
High Speed Access Corp. and its subsidiaries as of December 31, 2002, the
changes in their consolidated net assets in liquidation for the period from
November 27, 2002 to December 31, 2002, their consolidated financial position as
of December 31, 2001, and the consolidated results of their operations and their
cash flows for the period from January 1, 2002 to November 27, 2002 and the
years ended December 31, 2001 and 2000, in conformity with accounting principles
generally accepted in the United States of America applied on the bases
described in the preceding paragraph.
PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
March 10, 2003
22
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
DECEMBER 31, 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
Cash and cash equivalents $ 63,640
Short-term investments 1,237
Interest receivable 392
Charter holdback 2,092
Furniture and fixtures 113
-----------
Total assets 67,474
-----------
LIABILITIES
Accounts payable and accrued liabilities 2,571
Estimated costs to be incurred during the liquidation period 1,089
-----------
Total liabilities 3,660
-----------
Net assets in liquidation 63,814
Less: Contingency reserve 2,000
-----------
Net assets available for distribution to stockholders $ 61,814
===========
Net assets in liquidation per share $ 1.58
Net assets available for distribution to stockholders per share $ 1.53
Outstanding shares used in computing per share amounts 40,294,783
The accompanying notes are an integral part of these
consolidated financial statements.
23
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
NOVEMBER 27, 2002 TO DECEMBER 31, 2002
(IN THOUSANDS)
Stockholders' equity at November 27, 2002 $ 64,268
Liquidation basis adjustments:
Adjust assets and liabilities to fair value 656
Accrue estimated costs during liquidation (1,110)
--------
Net assets in liquidation at November 27, 2002 63,814
Change in net assets in liquidation --
--------
Net assets in liquidation at December 31, 2002 $ 63,814
========
The accompanying notes are an integral part of these
consolidated financial statements.
24
HIGH SPEED ACCESS CORP.
CONSOLIDATED BALANCE SHEET (GOING CONCERN BASIS)
DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents $ 11,714
Short-term investments 6,067
Restricted cash 1,654
Accounts receivable, net of allowance for doubtful accounts of $584 7,080
Prepaid expenses and other current assets 7,124
---------
Total current assets 33,639
Property, equipment and improvements, net 25,673
Deferred distribution agreement costs, net 8,439
Other non-current assets 4,917
---------
Total assets $ 72,668
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,962
Accrued compensation and related expenses 5,409
Other current liabilities 9,687
Long-term debt, current portion 2,201
Capital lease obligations, current portion 7,317
---------
Total current liabilities 27,576
Long-term debt 100
Capital lease obligations 2,759
---------
Total liabilities 30,435
---------
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 1
Common stock, $.01 par value, 400,000,000 shares authorized,
60,394,835 shares issued and outstanding 604
Additional paid-in capital 742,144
Deferred compensation (1,763)
Accumulated deficit (698,791)
Accumulated other comprehensive income 38
---------
Total stockholders' equity 42,233
---------
Total liabilities and stockholders' equity $ 72,668
=========
The accompanying notes are an integral part of these
consolidated financial statements.
25
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS (GOING CONCERN BASIS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 1, 2002 TO YEAR ENDED DECEMBER 31,
NOVEMBER 27, 2002 2001 2000
------------------ --------------- ------------
General and administrative operating expenses:
General and administrative expenses $ 4,719 $ 5,309 $ 5,370
Non-cash compensation expense from restricted stock 1,680 672 33
------------ ------------ ------------
Total general and administrative operating expenses 6,399 5,981 5,403
Gain on sale of fixed assets (41) -- --
------------ ------------ ------------
Loss from continuing operations before other income
(expense), discontinued operations and extraordinary item (6,358) (5,981) (5,403)
Investment income 1,029 3,335 7,371
Interest expense (226) (2,195) (2,158)
------------ ------------ ------------
Loss from continuing operations before discontinued
operations and extraordinary item (5,555) (4,841) (190)
Discontinued operations:
Loss from discontinued operations, net (4,217) (120,733) (150,220)
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) $ 28,446 $ (125,574) $ (150,410)
============ ============ ============
Basic and diluted net income (loss) per share:
Loss from continuing operations $ (0.13) $ (0.08) $ (0.00)
Loss from discontinued operations (0.10) (2.06) (2.67)
Gain on sale of operations to Charter 0.94 -- --
Loss on early extinguishment of debt and capital lease
obligations (0.05) -- --
------------ ------------ ------------
Net income (loss) per share $ 0.66 $ (2.14) $ (2.67)
============ ============ ============
Weighted average shares used in computation of basic and
diluted net income (loss) per share 43,259,641 58,794,354 56,347,891
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (GOING CONCERN BASIS)
(IN THOUSANDS)
JANUARY 1, 2002
TO
NOVEMBER 27, YEAR ENDED DECEMBER 31,
2002 2001 2000
--------------- --------- ---------
Net income (loss) $ 28,446 $(125,574) $(150,410)
Net unrealized (loss) gain on
investments (38) (455) 634
-------- --------- ---------
Comprehensive income (loss) $ 28,408 $(126,029) $(149,776)
======== ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
26
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) (GOING CONCERN BASIS)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001 AND
FOR THE PERIOD JANUARY 1, 2002 TO NOVEMBER 27, 2002
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- ------------------ PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
------ ------ ------ ------ ------- ------------ -------
Balance at January 1, 2000 -- -- 54,276,130 $ 543 $618,823 $(288) $(422,807)
Deferred compensation from grant of 519 (519)
restricted stock
Amortization of deferred compensation 133
Issuance of preferred stock to Charter and 75,000 $ 1 74,017
Vulcan
Issuance of common stock and common stock
warrants in connection with distribution
agreements 10,123
Issuance of common stock warrants in
connection with lease agreements 128
Issuance of common stock 1,250,000 13 9,987
Issuance of common stock in connection with
acquisition of Digital Chainsaw 2,961,718 30 17,927
Issuance of stock options in connection with
acquisition of Digital Chainsaw 3,654 (39)
Issuance of common stock warrants in
connection with acquisition of
Digital Chainsaw 1,367
Exercise of stock options and warrants 196,204 1 670
Net unrealized gain on investments
Net loss (150,410)
------- ---- ---------- ----- -------- ------ ---------
Balance at December 31, 2000 75,000 1 58,684,052 587 737,215 (713) (573,217)
Deferred compensation from grant of
restricted stock 1,495,000 15 1,838 (1,853)
Amortization of deferred compensation 803
Issuance of common stock and common stock
warrants in connection with distribution
agreements 125,000 1 2,995
Issuance of common stock in connection with
401 (k) Plan employer match 90,783 1 96
Net unrealized loss on investments
Net loss (125,574)
------- ---- ---------- ----- -------- ------ ---------
Balance at December 31, 2001 75,000 1 60,394,835 604 742,144 (1,763) (698,791)
Amortization of deferred compensation 1,704
Exercise of stock options and warrants 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 28,446
------- ---- ---------- ----- -------- ------ ---------
Balance at November 27, 2002 -- $ -- 40,294,783 $ 403 $734,269 $ (59) $(670,345)
======= ==== ========== ===== ======== ====== =========
ACCUMULATED
OTHER
TREASURY STOCK COMPREHEN- TOTAL
------------------ SIVE STOCKHOLDERS'
SHARES AMOUNT INCOME(LOSS) EQUITY(DEFICIT)
------ ------ ------------ ---------------
Balance at January 1, 2000 -- -- $(141) $196,130
Deferred compensation from grant of --
restricted stock
Amortization of deferred compensation 133
Issuance of preferred stock to Charter and 74,018
Vulcan
Issuance of common stock and common stock
warrants in connection with distribution
agreements 10,123
Issuance of common stock warrants in
connection with lease agreements 128
Issuance of common stock 10,000
Issuance of common stock in connection with
acquisition of Digital Chainsaw 17,957
Issuance of stock options in connection with
acquisition of Digital Chainsaw 3,615
Issuance of common stock warrants in
connection with acquisition of Digital Chainsaw 1,367
Exercise of stock options and warrants 671
Net unrealized gain on investments 634 634
Net loss (150,410)
----------- -------- ----- --------
Balance at December 31, 2000 -- -- 493 164,366
Deferred compensation from grant of
restricted stock --
Amortization of deferred compensation 803
Issuance of common stock and common stock
warrants in connection with distribution
agreements 2,996
Issuance of common stock in connection with
401 (k) Plan employer match 97
Net unrealized loss on investments (455) (455)
Net loss (125,574)
----------- -------- ----- --------
Balance at December 31, 2001 -- -- 38 42,233
Amortization of deferred compensation 1,704
Exercise of stock options and warrants 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 28,446
----------- -------- ----- --------
Balance at November 27, 2002 -- $ -- $ -- $ 64,268
=========== ======== ===== ========
The accompanying notes are an integral part of these
consolidated financial statements.
27
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS (GOING CONCERN BASIS)
(IN THOUSANDS)
JANUARY 1, 2002
TO YEAR ENDED DECEMBER 31,
NOVEMBER 27, 2002 2001 2000
----------------- --------- ---------
OPERATING ACTIVITIES
Net income (loss) $ 28,446 $(125,574) $(150,410)
Adjustments to reconcile net income (loss) to cash used in operating
activities of continuing operations:
Loss from discontinued operations, net 4,217 120,733 150,220
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 1,680 672 33
Gain on sale of fixed assets 41 -- --
Changes in operating assets and liabilities excluding
the effect of dispositions:
Prepaid expenses 170 547 320
Accrued compensation and related expenses (88) (267) (144)
-------- --------- ---------
Net cash (used in) provided by operating activities of continuing
operations (3,752) (3,889) 19
Net cash used in operating activities of discontinued operations (9,836) (81,467) (92,176)
-------- --------- ---------
Net cash used in operating activities (13,588) (85,356) (92,157)
-------- --------- ---------
INVESTING ACTIVITIES
Purchases of short-term investments (67,324) (46,054) (99,751)
Sales and maturities of short-term investments 72,120 52,761 212,545
-------- --------- ---------
Net cash provided by investing activities of continuing operations 4,796 6,707 112,794
Net cash provided by (used in) investing activities of discontinued
operations 76,160 (12,644) (37,465)
-------- --------- ---------
Net cash provided by (used in) investing activities 80,956 (5,937) 75,329
-------- --------- ---------
FINANCING ACTIVITIES
Net Proceeds from issuance of common stock -- -- 10,000
Repurchase of common stock (4,449) -- --
Proceeds from exercise of stock options 36 -- 671
-------- --------- ---------
Net cash (used in) provided by financing activities of continuing
operations (4,413) -- 10,671
Net cash (used in) provided by financing activities of discontinued
operations (11,017) (11,840) 67,694
-------- --------- ---------
Net cash (used in) provided by financing activities (15,430) (11,840) 78,365
-------- --------- ---------
Net change in cash and cash equivalents from continuing operations (3,410) 2,818 123,484
Net change in cash and cash equivalents from discontinued operations 55,348 (105,951) (61,947)
-------- --------- ---------
Net change in cash and cash equivalents 51,938 (103,133) 61,537
Cash and cash equivalents, beginning of period 11,714 114,847 53,310
-------- --------- ---------
Cash and cash equivalents, end of period $ 63,652 $ 11,714 $ 114,847
======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 226 $ 2,300 $ 2,139
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Retirement of treasury stock $ 4,449
Equipment acquired under capital leases $ 351 $ 13,763
Property and equipment purchases payable $ 1,219 $ (12)
Warrants issued in connection with acquisitions $ 1,367
Warrants earned in connection with distribution agreements $ 2,621 $ 10,123
Issuance of common stock and employee stock options in connection
with the purchase of Digital Chainsaw $ 21,611
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
The accompanying notes are an integral part of
these consolidated financial statements.
28
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
High Speed Access Corp. (the "Company") formerly provided high speed
Internet access and related services to residential and commercial customers
primarily via cable modems and international ISP infrastructure services.
The Board of Directors unanimously adopted a Plan of Liquidation and
Dissolution (the "Plan") on August 13, 2002. The Plan was approved by the
holders of a majority of the Company's shares on November 27, 2002. The key
features of the Plan are (1) filing a Certificate of Dissolution with the
Secretary of State of Delaware and thereafter remaining in existence as a
non-operating entity for three years; (2) winding up our affairs, including the
settlement of any then-outstanding issues with Charter (see Footnote 2,
"Discontinued Operations") relating to the Asset Sale, selling any remaining
non-cash assets of the Company, and taking such action as may be necessary to
preserve the value of our assets and distributing our assets in accordance with
the Plan; (3) paying our creditors; (4) terminating any of our remaining
commercial agreements, relationships or outstanding obligations; (5) resolving
our outstanding litigation; (6) establishing a Contingency Reserve for payment
of the Company's expenses and liabilities; and (7) preparing to make
distributions to our stockholders.
Under Delaware law, the Company will remain in existence as a
non-operating entity until December 4, 2005 and is required to maintain a
certain level of liquid assets and reserves to cover any remaining liabilities
and pay operating costs during the dissolution period. During the dissolution
period, the Company will attempt to convert its remaining assets to cash and
settle its liabilities as expeditiously as possible.
LIQUIDATION BASIS OF ACCOUNTING
The consolidated financial statements for period January 1, 2002 to
November 27, 2002 and the years ended December 31, 2001 and 2000 were prepared
on the going concern basis of accounting, which contemplates realization of
assets and satisfaction of liabilities in the normal course of business. As a
result of the adoption of the Plan, the Company adopted the liquidation basis of
accounting effective November 27, 2002. Inherent in the liquidation basis of
accounting are significant management estimates and judgments. Under the
liquidation basis of accounting, assets are stated at their estimated net
realizable values and liabilities, including costs of liquidation, are stated at
their anticipated settlement amounts, all of which approximate their estimated
fair values. The estimated net realizable values of assets and settlement
amounts of liabilities represent our best estimate of the recoverable values of
the assets and settlement amounts of liabilities. There can be no assurance,
however, that we will be successful in selling the assets at their estimated net
realizable value or in negotiating the estimated settlement amounts. The
liquidation basis of accounting requires that we accrue an estimate for all
liabilities related to expenses to be incurred during the wind up period. While
we believe our estimates are reasonable under the circumstances, if the length
of our wind up period were to change or other conditions were to arise, actual
results may differ from these estimates and those differences may be material.
In order to record assets at estimated net realizable value and
liabilities at estimated settlement amounts under liquidation basis accounting,
the Company recorded the following adjustments to record its assets and
liabilities to fair value as of November 27, 2002, the date of adoption of
liquidation basis accounting (in thousands):
ADJUST ASSETS AND LIABILITIES TO FAIR VALUE:
Future interest income $ 551
Prepaid expenses (168)
Furniture and fixtures 150
Accounts payable and accrued expenses 123
-------
Total adjustments to fair value 656
-------
ACCRUE ESTIMATED COSTS DURING LIQUIDATION:
Costs to be incurred during the liquidation period (1,110)
-------
Total estimated costs during liquidation (1,110)
-------
Total liquidation adjustments $ (454)
=======
29
The amount and timing of liquidating distributions will depend upon a
variety of factors including, but not limited to, the actual proceeds from the
realization of the Company's assets, the ultimate settlement amounts of the
Company's liabilities and obligations and actual costs incurred in connection
with carrying out the Plan, including salaries, administrative and operating
costs during the liquidation period. A summary of significant estimates and
judgments utilized in preparation of the December 31, 2002 consolidated
financial statements on a liquidation basis follows:
Interest Receivable. At December 31, 2002, interest receivable of $0.4
million represents the Company's estimate of future interest earnings on cash,
cash equivalents and short-term investments over the liquidation period through
December 4, 2005 and accounts for less than 0.5% of the Company's total
estimated assets.
Charter Holdback. At December 31, 2002, the Charter holdback of $2.1
million represents the remaining amount of the Asset Sale purchase price held
back by Charter to secure indemnity claims against the Company under the Asset
Purchase Agreement plus accrued interest.
Furniture and Fixtures. At December 31, 2002, furniture and fixtures of
$0.1 million represents the Company's estimate of cash proceeds to be received
on the sale of office furniture.
Accounts Payable and Accrued Liabilities. At December 31, 2002, accounts
payable and accrued expenses were $2.6 million. Included in this amount are
accrued circuit termination charges of $0.4 million and other known obligations
totaling $1.1 million. The balance of $1.1 million is comprised of the following
items:
- Severance and Other Compensation. Severance and other compensation
in the amount of $0.9 million represents severance payable to our
former President and Chief Executive Officer of $0.7 million, as
well as other healthcare and compensation expenses for current and
former employees.
- Estimated Litigation Settlement Costs. Litigation settlement costs
in the amount of $0.2 million represents the Company's expected
proportional share of fees and expenses related to settling the
Delaware Class Action lawsuits (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).
Estimated Costs to be Incurred During The Liquidation Period. At December
31, 2002, the Company estimates that there are $1.1 million of costs to be
incurred through December 4, 2005, including compensation for liquidation
personnel ($0.5 million), professional fees ($0.5 million), and miscellaneous
other costs ($0.1 million).
Contingency Reserve. In view of the duration of the liquidation period to
December 4, 2005, and provision in Delaware law that the Company maintain
reserves sufficient to allow for the payment of all its liabilities and
obligations, including all contingent, conditional and unmatured claims, the
Company established a Contingency Reserve upon the adoption of liquidation basis
accounting on November 27, 2002. The amount of reserve initially established was
$2.0 million and is unchanged as of December 31, 2002. At December 31, 2002, the
Company has no known material claims against this reserve and will periodically
assess whether maintenance of a lower or higher Contingency Reserve is required.
In the event there are no claims against this reserve, the amount of liquidation
proceeds that may be paid to stockholders will be increased.
SIGNIFICANT ACCOUNTING POLICIES - GOING CONCERN BASIS
Principles Of Consolidation. The consolidated financial statements include
the accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Cash And Cash Equivalents. Cash and cash equivalents include all
short-term, highly-liquid investments with an original maturity of 90 days or
less. Cash equivalents consist principally of interest-bearing money market
accounts with financial institutions and highly-liquid investment-grade debt
securities of the U.S. Government. The Company maintains the majority of its
cash at one financial institution. At most times, such cash is in excess of the
FDIC insurance level. The carrying value of cash equivalents approximates fair
market value due to the short-term maturities of the instruments.
Short-Term Investments. Short-term investments are classified as
available-for-sale and are accounted for at fair value. Prior to November 27,
2002, unrealized holding gains and losses were included as a component of
stockholders' equity until realized. For the purpose of determining gross
realized gains and losses, the cost of securities sold was based upon specific
identification.
Short-term investments at December 31, 2002 consisted of certificates of
deposit of $1.2 million. Short-term investments classified as current assets at
December 31, 2001 consisted of $6.1 million of U.S. Government obligations with
a net unrealized gain of $0.5 million.
30
Long-Lived Assets. Property, equipment and improvements were recorded at
cost less accumulated depreciation and amortization. Depreciation and
amortization were computed using the straight-line method over the estimated
useful lives of the assets. The Company capitalized costs associated with the
design and implementation of internal-use software, including internally and
externally developed software, in accordance with Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". Capitalized external software costs included the actual costs to
purchase existing software from vendors. Capitalized internal software costs
generally included personnel costs incurred in the enhancement and
implementation of purchased software packages.
The Company reviewed for the impairment of long-lived assets whenever
events or changes in circumstances indicated that the carrying amount of an
asset may not have been recoverable. An impairment loss was recognized when
estimated undiscounted future cash flows expected to result from the use of the
asset and its eventual disposition was less than its carrying amount. In
addition, the estimated useful lives of all long-lived assets were periodically
reviewed by management for reasonableness.
Warrants Issued In Connection With Distribution Agreements. As an
inducement to certain cable partners to commit systems, the Company issued
warrants to purchase its common stock in connection with Network Service
agreements and other agreements, collectively referred to as distribution
agreements. The Company valued warrants to purchase its common stock using an
accepted options pricing model based on the value of the stock when the warrants
are earned. The Company recognized an addition to equity for the fair value of
any warrants issued, and recognized the related expense over the term of the
agreement with the respective cable system, generally four to five years, in
accordance with Emerging Issues Task Force Issue ("EITF") No. 96-18, "Accounting
for Equity Instruments that are Issued to Other than Employees for Acquiring or
in Conjunction with Selling, Goods or Services."
Income Taxes. The Company accounted for income taxes under the liability
method. Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and were
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. A valuation allowance is provided against
deferred tax assets if it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
Stock-Based Employee Compensation. The Company accounted for stock-based
awards to employees in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and adopted the disclosure-only
requirements of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123").
The following illustrates the effect on net income (loss) and net income
(loss) per share if the fair value based method of SFAS 123 had been applied to
all outstanding and unvested awards in each period (in thousands).
JANUARY 1, 2002
TO NOVEMBER 27, DECEMBER 31,
2002 2001 2000
-------- --------- ---------
Net income (loss) as reported ............................. $ 28,446 $(125,574) $(150,410)
Add: Stock based employee compensation expense included in
reported net income .................................... 1,704 768 129
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards (12,589) (17,553) (17,150)
-------- --------- ---------
Pro forma net income (loss) ............................... $ 17,561 $(142,359) $(167,431)
======== ========= =========
Basic and diluted net income (loss) per share:
As reported ........................................... $ 0.66 $ (2.14) $ (2.67)
Pro forma ............................................. $ 0.41 $ (2.42) $ (2.97)
Net 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 loss available to common
stockholders per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of shares of common
stock outstanding during the period.
Diluted earnings per share is determined in the same manner as basic
earnings per share, except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and assuming conversion of convertible preferred stock. In addition, income or
loss is adjusted for dividends and other transactions relating to preferred
stock for which conversion is assumed. The calculation of diluted net loss
available to common stockholders per share excludes potential common shares if
the effect is dilutive.
Fair Value Of Financial Instruments. The fair values of short-term
investments at December 31, 2001 were $38,000 greater than cost. The carrying
value of long term-debt approximated fair value.
31
Concentration Of Credit Risk. The Company's customers at December 31, 2001
consisted of residential and commercial customers in the various markets served
by the Company. As such, no single customer accounted for greater than 10% of
revenue or accounts receivable balances for any periods presented. Revenue from
the Company's major Network Services customer, Charter, accounted for 35.9% and
16.4% of net revenue for the years ended December 31, 2001 and 2000,
respectively. Approximately 37.5% and 31.0% of the Company's gross trade
receivables balance at December 31, 2001 and 2000, respectively, was from
Charter.
Effective December 31, 2001, the Company discontinued providing
international ISP infrastructure services to Kabel Nordrhein - Westfalen Gmbh &
Co KG ("KNRW"). This segment has been presented as part of discontinued
operations in the Company's Consolidated Statement of Operations. Had these
services not been classified as a discontinued operation, international ISP
infrastructure services revenue would have comprised 21.9% of the Company's
total net revenue for 2001. The Company did not have revenue from international
ISP infrastructure services for the year ended December 31, 2000. Approximately
28.2% of the Company's gross trade receivables balance at December 31, 2001 was
from KNRW.
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.
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 not impact the Company due
to its adoption of the liquidation basis of accounting.
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. The losses on early extinguishment of debt and capital lease
obligations 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.
In November 2002, the FASB, issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. Fin
45 requires that upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
FIN 45 requires disclosure about each guarantee even if the likelihood of the
guarantor's having to make any payments under the guarantee is remote. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002 and the disclosure provisions of FIN 45 are effective for our December 31,
2002 financial statements. We do not expect adopting the recognition provisions
of FIN 45 will have an impact on the Company. The disclosures required by FIN 45
have been included in Note 14. "Commitments, Guarantees and Contingencies".
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an interpretation of ARB 51. The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
right (variable interest entities, or VIEs) and how to determine when and which
business enterprise should consolidate the VIE (the primary beneficiary). The
provisions of FIN 46 are effective immediately for VIEs created
32
after January 31, 2003 and no later than July 1, 2003 for VIEs created before
February 1, 2003. In addition, FIN 46 requires that both the primary beneficiary
and all other enterprises with a significant variable interest make additional
disclosure in filings issued after January 31, 2003. The adoption of FIN 46 is
not expected to have an impact on the Company because we do not hold any
interest in an entity qualifying as a VIE.
In January 2003, the FASB issued Statement No. 148 ("SFAS 148"),
Accounting for Stock-Based Compensation - Transition and Disclosure. SFAS 148
amends FASB Statement No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. See Note 1 to our
consolidated financial statements for our stock option accounting policy and
required disclosures. As now required by SFAS 148, these disclosures will be
updated each reporting period beginning the first quarter 2003.
2. DISCONTINUED OPERATIONS
HIGH SPEED INTERNET ACCESS AND RELATED SERVICES
On February 28, 2002, we consummated the sale of substantially all of our
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 the Company primarily in the provision of high speed internet
access to residential and commercial customers of Charter via cable modems. The
assets generated approximately 78% and 55% of our total revenue for the years
ended December 31, 2001 and 2000, respectively. Following the completion of our
cost reduction efforts initiated in the second half of 2001, the assets acquired
by Charter generated substantially all of the Company's total revenue.
Accordingly, prior to the Asset Sale, Charter was our largest customer.
Pursuant to the terms of the Asset Purchase Agreement, Charter acquired
certain assets from the Company in consideration for (i) the payment 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 the Company's 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 paid to us
on April 30, 2002 and $1.0 million plus accrued interest was paid to us on
February 28, 2003.
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):
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
=====
Under the Asset Purchase Agreement:
- - We sold substantially all of our revenue-generating fixed assets with a
net book value of $22.8 million at February 28, 2002.
- - We sold all accounts receivable related to Charter systems with a net
value of $4.1 million at February 28, 2002, for which we received a
purchase price adjustment.
- - The Company paid to Charter $5.1 million for outstanding launch fees.
33
- - Charter paid to the Company $2.2 million for expenses incurred by the
Company on Charter's behalf prior to September 28, 2001.
- - Charter assumed certain of the Company's operating and capital lease
obligations with future minimum lease payments of $13.5 million.
- - 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 capital lease
obligations. In connection with these payments, the Company recorded a
loss on the early extinguishment of debt and capital lease obligation of
$2.0 million during the first quarter of 2002.
- - Warrants to purchase 2,650,659 shares of our Company stock earned by
Charter under various distribution agreements were cancelled.
- - All of the Company's 75,000 outstanding shares of Series D Preferred Stock
were cancelled.
- - Charter assumed certain commitments relating to circuits with a national
telecommunications company with future minimum payments of $7.4 million
through 2003.
- - On February 28, 2002, the Company paid an additional $3.4 million of
expenses related to the Asset Sale. The total expenses paid through
February 28, 2002 were $6.4 million.
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):
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
========
Also on February 28, 2002, the Company purchased 20,222,139 shares of
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. 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.
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 FASB Statement No. 144 ("SFAS 144"), "Accounting for
the Impairment or Disposal of Long-Lived Assets" 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 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
34
during the phase-out period, including personnel, travel, and facility costs.
The results of this operation have been classified as discontinued.
3. SUBSEQUENT EVENTS
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (see Note 14, "Commitments,
Guarantees and Contingencies"), and deferred release of half of the $2.0 million
indemnity holdback. The Company collected $1.0 million of its indemnity holdback
plus accrued interest from Charter, and will seek the release of the $1.0
million balance plus accrued interest if and at such time as Charter is
dismissed as a defendant in the IPO Litigation or the IPO Litigation is
otherwise settled, minus Charter's actual defense costs if such costs exceed
$250,000.
On March 3, 2003, the Board of Directors cancelled the Company's stock
option plans and authorized the Company to cancel all of its 2,862,174
outstanding stock options upon receipt of each optionee's agreement to accept
payment from the Company of an amount equivalent to what the optionee would have
received had the optionee exercised their options and sold the underlying
shares. The Company expects each optionee to agree to these terms. Pursuant to
the Plan, the Board of Directors also accelerated the vesting of 149,992
options. Accordingly, the Company has recorded $0.2 million in accounts payable
and accrued liabilities to cover these payments.
Also on March 3, 2003, the Company announced that it currently intends to
make an initial cash distribution of $1.40 per share to its stockholders in late
May 2003, subject to various uncertainties.
4. PROPERTY, EQUIPMENT AND IMPROVEMENTS
The components of property, equipment and improvements at December 31,
2001 are as follows (in thousands):
Equipment ........................................... $43,047
Furniture and fixtures .............................. 432
Capitalized software ................................ 4,661
Leasehold improvements .............................. 3,911
-------
52,051
Less accumulated depreciation and amortization ...... 26,378
-------
$25,673
=======
Equipment includes assets acquired under capital leases, principally
headend equipment, modems, furniture and fixtures, and telephone equipment, with
an original cost of $25.5 million at December 31, 2001. Accumulated depreciation
of these assets was $8.0 million at December 31, 2001.
Depreciation and amortization expense of property, equipment and
improvements, excluding capitalized computer software costs, for the period
January 1, 2002 to November 27, 2002 and the years ended December 31, 2001 and
2000 was $1.8 million, $25.2 million and $19.8 million, respectively.
Amortization of capitalized computer software costs was $0.3 million, $3.4
million and $1.8 million for the period January 1, 2002 to November 27, 2002 and
the years ended December 31, 2001 and 2000, respectively. The unamortized cost
of capitalized internal-use software was $2.4 million at December 31, 2001.
5. ASSET IMPAIRMENT CHARGES
During 2001, the Company recorded an asset impairment charge of $28.8
million for the write-down of non-Charter fixed assets and goodwill. The
impairment charge was attributable to the following items:
- Exit from Non-Charter Cable TV Markets. The Company exited all of
its cable system agreements except for those with Charter. During
2001, the Company recorded an asset impairment charge of $17.7
million for the write-down of the equipment used in these markets,
additional excess inventory used in the cable modem business,
furniture and fixtures and equipment located in the Denver corporate
headquarters and call center and other regional offices. The
remaining net book value of these assets at December 31, 2001, was
$0.7 million. Additionally, the Company wrote off the remaining
goodwill associated with the acquisition of High Speed Access
Network, Inc. ("HSAN") and CATV.net, Inc. of $1.5 million.
35
- Sale of Digital Chainsaw. During 2001, the Company recorded an asset
impairment charge of $0.5 million to write-down the Digital Chainsaw
fixed assets to zero. These assets were disposed of on October 31,
2001. Additionally, the Company wrote off the remaining goodwill
associated with the acquisition of Digital Chainsaw of $1.7 million.
- Abandon DSL Effort. The Company discontinued its efforts to enter
the DSL market. During 2001, the Company recorded an asset
impairment charge to write off the remaining value of the DSL assets
of $3.2 million. In connection with the purchase of certain DSL
assets, the Company entered into a $1.9 million debt financing
agreement with Lucent Technologies Inc. ("Lucent") in July 2001. The
debt obligation was paid in full on September 28, 2001 at a discount
of $250,000. This transaction, along with prior purchases, has
fulfilled our $5.0 million purchase obligation with Lucent.
- Write Off Information Systems Not Used. During 2001, the Company
recorded asset impairment charges of $4.2 million to write off the
remaining value of information systems that were not being acquired
by Charter.
During 2000, the Company reduced the carrying value of the goodwill
related to the purchase of Digital Chainsaw to its estimated fair value
resulting in an asset impairment charge of $22.4 million.
6. DISTRIBUTION AGREEMENTS
VULCAN VENTURES INCORPORATED
In November 1998, the Company entered into a series of agreements with
Vulcan whereby the Company provided Internet access services to customers in
certain cable systems controlled by Vulcan. These agreements included a system
access and investment agreement with Vulcan and its affiliate, Charter, a
programming content agreement with Vulcan, and a related network services
agreement with Charter.
In May 2000, the Company entered into a second Network Services agreement
with Charter. Under this agreement, Charter committed to provide the Company
exclusive right to provide Network Services related to the delivery of Internet
access to homes passed in certain cable systems. We provided Network Services,
including system monitoring and security, as well as call center support.
Charter received the warrants described in the following paragraph as an
incentive to provide the Company additional homes passed, although it was not
obligated to do so. The agreement had an initial term of five years.
In connection with the second Network Services agreement, the Company and
Charter entered into an amended and restated warrant to purchase up to
12,000,000 shares of common stock at an exercise price of $3.23 per share and
terminated two warrants that had been issued to Charter in November 1998. The
new warrant became exercisable at the rate of 1.55 shares for each home passed
committed to us by Charter under the Network Services agreement entered into by
Charter and us in November 1998. The warrant also became exercisable at the rate
of .775 shares for each home passed committed to us by Charter under the Network
Services agreement entered into in May 2000 up to 5,000,000 homes passed, and at
a rate of 1.55 shares for each home passed in excess of 5,000,000.
Charter earned warrants to purchase 599,949 and 1,972,972 shares of common
stock under these agreements during the years ended December 21, 2001 and 2000,
respectively. There were no warrants earned during the period January 1, 2002 to
November 27, 2002. Deferred distribution agreement costs of $2.6 million and
$9.5 million were recorded in conjunction with these warrants during the years
ended December 31, 2001 and 2000, respectively. Amortization of distribution
agreement costs associated with these warrants of $0.4 million, $2.7 million and
$1.5 million was recognized in the statement of operations for the period
January 1, 2002 to November 27, 2002 and the years ended December 31, 2001 and
2000, respectively.
In connection with the Asset Sale to Charter on February 28, 2002, the
Network Services agreements were terminated and the related warrant to purchase
12,000,000 shares of common stock, including 2,650,659 unexercised warrants were
cancelled. The Company wrote off the unamortized balance of warrants during the
first quarter of 2002 in connection with the Asset Sale.
As part of the distribution agreement with Charter, each home passed,
launched or intended to be launched on or before the second anniversary date of
the distribution agreement, the Company paid Charter, at Charter's option, a
launch fee of $3.00 per home passed committed. During the years ended December
31, 2001 and 2000, the Company paid to Charter launch fees of $2.9 million and
$3.8 million, respectively. In these systems where the Company paid a launch fee
to Charter, the Company received increased revenue in years two through five of
the distribution agreement. The launch fees paid were amortized against this
additional revenue received from Charter. During 2002 and 2001, the Company
amortized launch fees of $0.2 million and $0.6 million, respectively, against
the additional revenue received from Charter.
36
In connection with the Asset Sale to Charter on February 28, 2002, the
Company paid to Charter an additional $5.1 million for outstanding launch fees.
This amount, along with the unamortized balance of previously paid launch fees
were written off in the first quarter of 2002 in connection with the Asset Sale.
CLASSIC CABLE
In July 1999, the Company executed a series of agreements with Classic
Cable, Inc. ("Classic"). The Company issued warrants to purchase up to 600,000
shares of the Company's common stock at a purchase price of $13.00 per share.
Classic had earned warrants to purchase 109,894 shares of common stock under
these agreements with a recorded value of $2.4 million. The Company terminated
its distribution agreement with Classic in the third quarter of 2001, and
therefore, the earned warrants to purchase 109,894 shares of common stock were
cancelled.
Amortization of distribution agreement costs associated with these
warrants of $1.8 million and $0.4 million was recognized in the statement of
operations for the years ended December 31, 2001 and 2000 respectively.
CABLE MANAGEMENT ASSOCIATES
In July 1999, the Company executed a series of distribution agreements
with ETAN Industries Inc. d/b/a Cable Management Associates ("CMA"). The Company
issued warrants to purchase up to 200,000 shares of the Company's common stock
at a purchase price of $13.00 per share. CMA earned warrants to purchase 66,161
shares of common stock under these agreements with a recorded value of $1.9
million. The Company terminated its distribution agreement with CMA in the third
quarter of 2001, and therefore, the earned warrants to purchase 66,161 shares of
common stock were cancelled.
Amortization of distribution agreement costs associated with these
warrants of $1.5 million and $0.2 million was recognized in the statement of
operations for the years ended December 31, 2001 and 2000 respectfully.
MICROSOFT CORP.
At the time of the Company's initial public offering, the Company entered
into a non-binding letter of intent with Microsoft Corp. ("Microsoft") covering
a number of potential areas of strategic relationship. Pursuant to the
non-binding letter of intent and subsequent letter agreement entered into in
June 1999, the Company granted Microsoft warrants to purchase 387,500 shares of
common stock at an exercise price of $16.25 per share. These warrants expire on
May 1, 2004.
8. OTHER CURRENT LIABILITIES
The components of other current liabilities at December 31, 2001 as
follows (in thousands):
International operations - rent, salaries and related benefits $ 613
International operations - taxes ............................. 950
Other taxes .................................................. 780
Payable to cable partners .................................... 2,045
Lease and circuit termination expenses ....................... 2,478
Other ........................................................ 2,821
------
$9,687
======
See Note 1 for a description of liquidation basis liabilities as of
December 31, 2002.
7. LEASE OBLIGATIONS AND LONG TERM DEBT
Prior to the discontinuation of its operations, the Company leased certain
office facilities under operating leases. Rent expense was reflected on a
straight-line basis over the term of the leases. Facility rent expense was $0.5
million, $6.5 million and $4.0 million for the period January 1, 2002 to
November 27, 2002 and for the years ended December 31, 2001 and 2000,
respectively. Additionally in 2001, the Company recorded a charge of
approximately $5.0 million relating to vacated office space.
The Company recorded a non-recurring loss on the early extinguishment of
debt and capital lease obligations of $2.0 million during 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.
37
NOTES PAYABLE -- RELATED PARTY
As part of its acquisition of HSAN, the Company assumed a note payable in
the aggregate principal amount of $0.7 million, evidenced by a promissory note
and assignment and security agreement, owing to Gans Multimedia Partnership
("Gans"), an entity owned by Joseph S. Gans, III, a founder and former director
of the Company. The note had an interest rate of 7% per annum. Certain tangible
assets of the Company served as collateral for this note. The loan represented
working capital of HSAN funded by Gans from July 1997 to April 1998. The
remaining $0.5 million balance matured and was paid, along with accrued
interest, on April 1, 2001.
8. INCOME TAXES
As of December 31, 2002 and 2001, the Company had deferred tax assets of
approximately $97.4 million and $131.4 million, respectively, 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. The federal net operating loss carryforwards of
approximately $280.7 million and $286.9 million at December 31, 2002 and 2001,
respectively, expire beginning in year 2018. Utilization of these net operating
losses will be subject to a substantial annual limitation based upon changes in
the Company's ownership as provided in Section 382 of the Internal Revenue Code
of 1986 and similar state provisions. The annual limitation will result in the
expiration of net operating losses before utilization.
The Company's income tax provision (benefit) for the tax period ended
December 31, 2002, 2001 and 2000 differs from the income tax benefit determined
by applying the U.S. federal statutory rate to the net loss as follows (in
thousands):
2002 2001 2000
-------- -------- --------
Tax provision (benefit) at U.S. statutory rate ... $ 9,157 $(42,695) $(51,139)
Net operating losses and temporary differences not
recognized ...................................... (12,312) 41,346 42,729
Amortization and other permanent differences ..... 3,155 1,349 8,410
-------- -------- --------
Total ........................................... $ -- $ -- $ --
======== ======== ========
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes at December 31, 2002 and 2001 are
as follows (in thousands):
2002 2001
--------- ---------
Deferred tax assets (liabilities):
Net operating loss carryforwards ......... $ 97,277 $ 116,574
Long-lived assets and other receivables .. (964) 9,652
Accrued expenses, not currently deductible 1,124 5,208
--------- ---------
Total deferred tax assets ................ 97,437 131,434
Less valuation allowance ................. (97,437) (131,434)
--------- ---------
Net deferred tax assets .................. $ -- $ --
========= =========
9. EMPLOYEE BENEFITS
The Company has a deferred compensation plan established in accordance
with Section 401(k) of the Internal Revenue Code. Under the retirement plan,
participating employees could defer a portion of their pretax earnings up to the
annual contribution limit. During 2001, the Company provided a matching
contribution of 90,783 shares of Company stock valued at $96,457 as of December
31, 2000 for participants' contributions made in 2000. On October 7, 2002, the
Company's Board of Directors adopted a unanimous written consent authorizing the
termination of the plan. Upon termination of the plan, participants became 100%
vested in their accounts.
In 2002, 2001 and 2000, the Company recorded $2.6 million, $4.0 million
and $1.3 million, respectively, of severance and related costs associated with
workforce reductions and the termination of approximately 15, 375 and 64
employees, respectively. At December 31, 2002, approximately $0.9 million
remains unpaid.
10. STOCKHOLDERS' EQUITY
In May 2000, Lucent purchased 1,250,000 shares of the Company's common
stock at fair value for total proceeds to the Company of $10.0 million. In
addition, Lucent and the Company entered into a general agreement whereby Lucent
provided equipment and services to the Company with a purchase commitment by the
Company of $5.0 million. This purchase commitment has been fulfilled by the
Company.
38
In December 2000, the Company completed the sale of 75,000 shares of
Series D convertible preferred stock to Vulcan and Charter Communications
Ventures, LLC, for proceeds of approximately $74.0 million, net of issuance
costs. The preferred stock was convertible at the option of Vulcan and Charter
into common stock of the Company at an initial conversion price of $5.01875 per
share, subject to adjustment for future stock issuances of capital stock and
other customary adjustments for stock splits and dividends. In connection with
the Asset Sale, all of the Company's 75,000 outstanding shares of Series D
Preferred Stock were tendered and subsequently cancelled by the Company.
On February 28, 2002, the Company purchased 20,222,139 shares of common
stock from Vulcan for an aggregate purchase price of $4.4 million, or $0.22 per
share. These shares were subsequently retired.
11. STOCK OPTION PLAN
In April 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan ("1998 Plan"). A total of 1,395,000 shares of common stock were
reserved for issuance under the 1998 Plan. The Company adopted the 1999 Stock
Option Plan ("1999 Plan") and the 1999 Non-Employee Directors Plan ("Directors
Plan") in January 1999. A total of 3,100,000 shares were originally reserved for
issuance under the 1999 Plan. An additional 4,679,500 shares were reserved for
the 1999 Plan in June 2000 and an additional 2,500,000 shares were reserved in
June 2001. A total of 465,000 shares are reserved for issuance under the
Directors Plan.
The exercise price for the options is determined by the Board of
Directors, but generally shall not be less than 100% of the estimated fair
market value of the common stock on the date the option is granted. All options
outstanding under the 1998 Plan are fully vested. Generally, options issued
under the 1999 Plan vest over a four-year period after the date of grant and
expire ten years after the date of grant. Options issued under the Directors
Plan, other than the options granted in January 1999 that are discussed below,
vest ratably over the grantee's remaining term as director. Option holders that
terminate their employment with the Company forfeit all non-vested options.
Options to purchase 46,500 shares were granted under the 1999 Plan with an
exercise price of $3.23 per share. These stock options were considered to be
compensatory; and accordingly, the Company recorded deferred compensation of
$0.4 million. The Company recognized this amount over the four-year vesting
period of these options. During the period January 1, 2002 to November 27, 2002
and each of the years ended December 31, 2001 and 2000, the Company recognized
$24,000, $0.1 million and $0.1 million, respectively, of non-cash compensation
expense related to these options.
The following table summarizes the activity in the 1998, 1999 and
Directors Plans:
SHARES UNDER EXERCISE PRICE WEIGHTED AVERAGE
OPTION PER SHARE EXERCISE PRICE
------------ ---------------- ----------------
Outstanding at December 31, 1999 2,934,011 $0.65 to $ 27.88 $ 15.10
Options Granted 5,442,603 $1.84 to $ 20.75 $ 7.16
Options Cancelled (1,519,215) $0.65 to $ 27.88 $ 15.02
Options Exercised (196,204) $0.65 to $ 13.00 $ 2.68
---------- ----------
Outstanding at December 31, 2000 6,661,195 $0.65 to $ 27.88 $ 9.22
Options Granted 2,398,092 $0.16 to $1.97 $ 1.24
Options Cancelled (3,622,461) $0.50 to $ 27.88 $ 7.26
---------- ----------
Outstanding at December 31, 2001 5,436,826 $0.16 to $ 27.88 $ 6.95
Options Granted 46,500 $0.54 to $.0.54 $ .54
Options Cancelled (2,499,065) $0.31 to $27.88 $ 6.02
Options Exercised (122,087) $0.16 to $1.18 $ .30
---------- ----------
Outstanding at November 27, and December 31, 2002 2,862,174 $0.54 to $26.75 $ 7.93
========== ==========
Prior to the consummation of the Asset Sale on February 28, 2002, we
employed 536 people. Charter hired approximately 500 of these employees after
the Asset Sale was consummated. As of December 31, 2001, employees hired by
Charter had approximately 2,500,000 stock options outstanding of which
approximately 1,200,000 were vested. No additional vesting of stock options
granted to the employees hired by Charter occurred subsequent to February 28,
2002. In addition, employees hired by Charter had 90 days after February 28,
2002 to exercise vested options. None of the options were exercised during 2002.
Accordingly, the options were cancelled in June 2002.
The fair value of options granted for the period from January 1, 2002 to
November 27, 2002 and for the years ended December 31, 2001 and 2000 reported
below has been estimated at the date of grant using the Black-Scholes option
pricing model. The following weighted average assumptions were used in the
pricing models:
39
FOR THE PERIOD DECEMBER 31,
FROM JANUARY 1,2002 -------------------
TO NOVEMBER 27, 2002 2001 2000
-------------------- -------- --------
Expected life of options in years 2 years 5 years 5 years
Risk-free interest rate ......... 3.22% 4.82% 6.15%
Expected dividend yield ......... 0% 0% 0%
Expected volatility ............. 90% 90% 90%
The Black-Scholes option value model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate. Based upon the above assumptions, the weighted
average fair value of the stock options granted during the period from January
1, 2002 to November 27, 2002 and the years ended December 31, 2001 and 2000 was
$0.27, $0.89 and $5.25 per share, respectively.
The following table summarizes information about options outstanding at
December 31, 2002:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
------------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED
RANGE OF REMAINING CONTRACTUAL AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES SHARES LIFE EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ------ --------------------- -------------- --------- ----------------
$ 0.00 to $ 1.34 483,145 4.8 $ 1.17 368,147 $ 1.15
$ 1.35 to $ 2.78 114,929 2.2 $ 1.49 114,804 $ 1.49
$ 2.79 to $ 5.58 962,039 1.0 $ 2.92 961,539 $ 2.92
$ 5.59 to $ 8.36 348,936 1.5 $ 6.96 324,630 $ 6.89
$ 8.37 to $13.93 88,875 3.0 $ 13.00 79,187 $ 13.00
$16.73 to $19.51 796,500 .7 $ 17.68 796,500 $ 17.68
$19.51 to $22.30 66,250 .2 $ 21.84 66,250 $ 21.84
$25.09 to $27.88 1,500 6.8 $ 26.75 1,125 $ 26.75
---------------- --------- --- ------- --------- --------
2,862,174 1.7 $ 7.93 2,712,182 $ 8.19
========= === ======= ========= ========
Also see Note 3 "Subsequent Events" for information regarding the Board's
actions related to outstanding stock options.
12. NET INCOME (LOSS) PER SHARE
Diluted loss available to common stockholders per share equals basic loss
available to common stockholders per share because the assumed exercise of the
Company's stock options and warrants and the assumed conversion of preferred
stock is dilutive. Options and warrants to purchase 2,862,174, 8,761,492 and
9,505,853 shares of common stock, were excluded from the calculation of net
income (loss) available to common stockholders per share for the period January
1, 2002 to November 27, 2002 and for the years ended December 31, 2001 and 2000,
respectively.
13. RELATED PARTY TRANSACTIONS
GENERAL
In November 1998, the Company entered into a systems access and investment
agreement with Vulcan and Charter, a programming content agreement with Vulcan
and related network services agreement with Charter. Under the agreements, the
Company agreed to pay Charter 50% of the Company's gross revenues for cable
modem access services provided in Charter cable systems, 15% of gross revenues
for dial up access services and 50% of gross revenues for all other optional
services. In addition, if the Company sold equipment to a subscriber, the
Company paid Charter 50% of the gross profit the Company received from the sale.
The Company paid Charter $1.9 million during the period January 1, 2002 to
November 27, 2002 and $5.2 million and $2.6 million in 2001 and 2000,
respectively, under these agreements.
In May 2000, the Company entered into a network services agreement with
Charter, under which the Company provided customer service, network operating,
monitoring and certain other services to certain Charter cable systems. The
Company received payments totaling $7.6 million during the period January 1,
2002 to November 27, 2002 and $9.2 million and $1.0 million in 2001 and 2000,
respectively, under the agreement. With respect to each home passed launched or
intended to be launched on or before the second anniversary date of the May 2000
network services agreement, the Company paid Charter, at Charter's option, a
launch fee of $3.00 per home passed committed. In 2001 and 2000, the Company
paid $2.9 million and $3.8 million, respectively, in launch fees to Charter. We
paid an additional $5.1 million in launch fees to Charter in 2002 at the closing
of the Asset Sale.
Additionally, the Company recognized revenue of $0.3 million and $0.6
million in 2001 and 2000, respectively, under the agreement, representing
engineering, web services and other network related fees. In addition, the
Company was paid $3.2 million and
40
$3.3 million in 2001 and 2000, respectively, by Charter for reimbursable
operating expenses, primarily circuit costs and personnel expenses. At the
closing of the Asset Sale, Charter paid to the Company an additional $3.0
million for expenses incurred by the Company on Charter's behalf.
At December 31, 2001, approximately $4.9 million was due from Charter.
The Company had an agreement with Gans under which Gans granted the
Company the exclusive right to provide the customers of six cable systems owned
by Gans with high speed Internet access. The agreement had an original five-year
term and provided that Gans would receive a share of the gross revenues the
Company received under the agreement. During 2001 and 2000, the Company paid
Gans $0.3 million each year under the agreement. This agreement was terminated
in the third quarter of 2001.
On August 9, 2002, John G. Hundley, our Secretary, General Counsel and
Senior Vice President - Development, was terminated by the Company and was paid
his severance pursuant to a Separation Agreement. He is now employed as Counsel
to Frost Brown Todd, LLC, which we have previously engaged to provide legal
services to us in connection with various contract matters and strategic
activities, and which we have retained to advise us with respect to this
liquidation and other matters affecting the wind up of our affairs. We believe
this engagement to be on customary and commercially reasonable terms. At the
request of the Board, Mr. Hundley continues to serve as our Secretary on a
non-employee basis. During 2002, we paid $62,355 to Frost Brown Todd, LLC.
See Note 2- Discontinued Operations for information regarding the Asset
Sale.
14. COMMITMENTS, GUARANTEES AND CONTINGENCIES
The Delaware Class Action Lawsuits. The Company, our then directors,
certain former directors as well as Charter and Paul Allen were 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 complaints
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 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 then draft Asset
Purchase Agreement. 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 was 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. The claims asserted in the fourth
lawsuit, Krim v. Allen, will be covered by the settlement if it is ultimately
approved by the Court.
Confirmatory discovery now has been completed and final documentation of
the settlement has been negotiated and executed. The settlement, however, is
subject to the approval of the Delaware Chancery Court following notice to class
members. The court has a hearing for April 16, 2003 to consider any objections
to, and whether it should approve, the settlement. In the event the court
approves the settlement and no other objection, motions or appeals are filed,
the court's approval will be deemed final on May 16, 2003.
The IPO Litigation. Also, on November 5, 2001, the Company, our President
and Chief Financial Officer (Mr. George 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
41
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. The purported class action alleges violations of Sections 11
and 15 of the Securities Act of 1933 (the "1933 Act") and Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-
promulgated thereunder. The essence of the complaints is that defendants issued
and sold our common stock pursuant to the Registration Statement for the IPO
without disclosing to investors that certain underwriters in the offering had
solicited and received excessive and undisclosed commissions from certain
investors. The complaints also allege that our Registration Statement for the
IPO failed to disclose that the underwriters allocated Company shares in the IPO
to customers in exchange for the customers' promises to purchase additional
shares in the aftermarket at pre-determined prices above the IPO price, thereby
maintaining, distorting and/or inflating the market price for the shares in the
aftermarket. The plaintiff asks to represent the interest of all holders of our
common stock and seeks unspecified monetary damages.
On July 15, 2002, the Company moved to dismiss all claims against it and
Messrs. Willett and Pitcock. 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. On February 19, 2003,
the Court denied the Company's motion to dismiss the alleged violations of
Section 11 and 15 of the 1933 Act. However, the Court granted the Company's
motion to dismiss the alleged violations of Sections 10(b) and 20(a) of the 1934
Act and Rule 10b- promulgated thereunder.
This action is being coordinated with nearly three hundred other nearly
identical actions filed against other companies. Prior to the February 19, 2003
ruling on the Company's motion to dismiss, there were settlement discussions
among the plaintiffs, the company defendants and their insurance carriers, which
if closed would have removed the Company from the litigation without payment of
any funds. However, as a result of the recent ruling, we cannot opine as to
whether or when a settlement might occur.
With respect to the allegations against the Company, we believe this
lawsuit is without merit and intend to continue 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.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (the "Charter IPO Indemnity
Claim"), and deferred release of half of the $2.0 million indemnity holdback
until such time as we obtain the dismissal of Charter as a defendant in the IPO
Litigation or the IPO Litigation is otherwise settled, minus Charter's actual
defense costs if such costs exceed $250,000. On February 28, 2003, we collected
$1.0 million of the indemnity holdback plus accrued interest thereon from
Charter. We do not believe Charter is a "successor in interest" to the Company,
and are attempting to obtain an out-of-court dismissal of Charter from the IPO
Litigation. If we are not successful in this effort, we may either file a motion
with the court to obtain Charter's dismissal or wait on a possible settlement of
the IPO Litigation with respect to the Company.
We do not believe that the results of either of the above-noted legal
proceedings will have a material adverse effect on our net assets in
liquidation. However, the Company's defense of and/or attempts to settle
favorably these proceedings and claims may affect the timing and amount of any
distributions made under the Plan. The Company will not make any liquidation
distributions until the Delaware Class Actions lawsuits are finally settled.
Indemnification of Charter. In connection with the Asset Sale, we agreed
to indemnify Charter against all claims arising from breaches of our
representations, warranties and covenants, various excluded liabilities and the
pre-closing operation of the assets we sold to Charter. The material
representations and warranties related to, among other things: the necessary
stockholder approval required to consummate the Asset Sale; the absence of
defaults under our material agreements; the assets being sold comprising of all
material assets used in the provision of high speed Internet access to Charter's
customers via cable modems; the absence of certain changes or events; compliance
with applicable laws, including environmental laws; the absence of litigation;
the status of our material contracts, capital leases and operating leases; real
property, including leased premises; title to and condition of the assets being
sold; intellectual property rights; taxes; labor matters; employee benefit
plans; our solvency immediately following the closing; and the correctness of
information we provided to Houlihan Lokey and Lehman Brothers in connection with
the issuance of their fairness opinion.
With the exception of certain representations and warranties and covenants
described below, all of the above-noted representations and warranties are in
effect through August 31, 2003, however any claims arising from any breaches of
these representations and warranties can only be asserted against and are
limited to the $2.0 million indemnification holdback that was released to us on
February 28, 2002 (subject to the single $1 million potential claim described
below).
42
The following representations and warranties and covenants extend beyond
August 31, 2003 and are not subject to any limitations:
(i) breaches of representations and warranties related to title to the
acquired assets, certain matters affecting intellectual property,
technology and know-how, will be in effect until the Company is finally
dissolved on December 5, 2005;
(ii) breaches of representations and warranties related to taxes, certain
employee benefit plans and environmental matters will be in effect through
February 28, 2004;
(ii) the excluded liabilities, including the $1 million claim pertaining
to Charter being named as a defendant and "successor in interest" to the
Company in the IPO Litigation;
(iii) our operation of the assets sold to Charter prior to the closing of
the Asset Sale; and
(iv) common law fraud.
The Company has no liability to Charter for claims arising from breaches
of our representations and warranties unless the damages in the aggregate for
such breaches exceed $250,000, in which case Charter is entitled to
reimbursement from the first dollar of such damages. However, Charter is
entitled to reimbursement from the first dollar of damages related to (i)
breaches of post-closing covenants and representations and warranties related to
title, taxes, certain benefit plans and environmental matters, (ii) the excluded
liabilities, (iii) operation of the assets sold to Charter prior to the closing
of the Asset Sale, and (iv) actual common law fraud, and such damages are
unlimited. These indemnification obligations are limited to actual damages. The
Company has no liability to Charter for indirect or consequential damages.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (the "Charter IPO Indemnity
Claim"), and deferred release of half of the $2.0 million indemnity holdback
until such time as we obtain the dismissal of Charter as a defendant in the IPO
Litigation or the IPO Litigation is otherwise settled, minus Charter's actual
defense costs if such costs exceed $250,000. On February 28, 2003, we
collected $1.0 million of the indemnity holdback plus accrued interest thereon
from Charter. We do not believe Charter is a "successor in interest" to the
Company, and are attempting to obtain an out-of-court dismissal of Charter from
the IPO Litigation. If we are not successful in this effort, we may either file
a motion with the court to obtain Charter's dismissal or wait on a possible
settlement of the IPO Litigation with respect to the Company.
Other than the Charter IPO Indemnity Claim described above, we are aware
of no other claims that Charter has or intends to assert against us in
connection with the Asset Sale.
43
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of unaudited quarterly financial information (going concern basis) for
the period January 1, 2002 to November 27, 2002 and the year ended December 31,
2001 follows (in thousands, except per share amounts):
THREE MONTHS THREE MONTHS THREE MONTHS OCTOBER 1, 2002
ENDED ENDED ENDED TO
MARCH 31, JUNE 30, SEPTEMBER 30, NOVEMBER 27,
2002 2002 2002 2002
------------ ------------ ------------ ---------------
Total general and administrative operating expense ................ $ 1,495 $ 4,118 $ 521 $ 265
Gain on sale of fixed assets ...................................... -- -- -- (41)
------------ ------------ ------------ ---------------
Loss from continuing operations before
other income (expense), discontinued
operations and extraordinary item ............................... (1,495) (4,118) (521) (224)
Investment income ................................................. 189 335 328 177
Interest expense .................................................. (224) (2) -- --
Loss from continuing operations before ------------ ------------ ------------ ---------------
discontinued operations and extraordinary item .................. (1,530) (3,785) (193) (47)
Discontinued operations:
Loss from discontinued operations, net .......................... (4,112) (105) -- --
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) ................................................. $ 32,576 $ (3,890) $ (193) $ (47)
============ ============ ============ ===============
Basic and diluted net income (loss) per share:
Loss from continuing operations ................................. $ (.03) $ (.10) $ (.01) $ --
Loss from discontinued operations ............................... (.07) -- -- --
Gain on sale of operations to Charter ........................... .77 -- -- --
Loss on early extinguishment of debt and capital lease obligations (.04) -- -- --
Net income (loss) per share ....................................... $ .63 $ (.10) $ (.01) $ --
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2001 2001 2001 2001
------------ ------------ ------------ ---------------
Total general and administrative operating expense ................ $ 1,608 $ 1,655 $ 1,448 $ 1,270
------------ ------------ ------------ ---------------
Loss from continuing operations before
other income (expense), discontinued
operations and extraordinary item ............................... (1,608) (1,655) (1,448) (1,270)
Investment income ................................................. 1,417 882 536 500
Interest expense .................................................. (649) (578) (551) (417)
------------ ------------ ------------ ---------------
Loss from continuing operations before
discontinued operations and extraordinary item .................. (840) (1,351) (1,463) (1,187)
Discontinued operations:
Loss from discontinued operations, net .......................... (32,550) (32,658) (49,828) (5,697)
------------ ------------ ------------ ---------------
Net income (loss) ................................................. $ (33,390) $ (34,009) $ (51,291) $ (6,884)
============ ============ ============ ===============
Basic and diluted net income (loss) per share:
Loss from continuing operations ................................. $ (.02) $ (.02) $ (.02) $ (.02)
Loss from discontinued operations ............................... (.55) (.56) (.85) (.10)
Net income (loss) per share ....................................... $ (.57) $ (.58) $ (.87) $ (.12)
44
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS OF HIGH SPEED ACCESS CORP.
The following table sets forth certain information concerning our
directors as of March 4, 2003:
DIRECTOR UNTIL ANNUAL
NAME AGE MEETING OF STOCKHOLDERS IN
-------------------- ---- --------------------------
Irving W. Bailey, II 60 2003
Michael E. Gellert 70 2004
Daniel J. O'Brien 43 2004
David A. Jones, Jr. 44 2005
Robert S. Saunders 50 2005
David A. Jones, Jr., has served as Chairman of the Board and a director of
the Company since April 1998. Since 1994, Mr. Jones has been Chairman of
Chrysalis Ventures, a private equity management firm. Mr. Jones also serves as
Vice Chairman and a director of Humana Inc.
Daniel J. O'Brien, 43, the Company's former President and Chief Executive
Officer, has been a director since September 2000. Mr. O'Brien joined the
Company as Chief Operating Officer in October 1999 and was named President in
November 1999 and Chief Executive Officer in February 2000. Mr. O'Brien's
employment with the Company was terminated on April 30, 2002. Since May 2002,
Mr. O'Brien has served as Chief Executive Officer of Brief Original Broadcasts.
From 1995 to October 1999, Mr. O'Brien was President and Chief Operating Officer
of Primestar, Inc. and previously served as President of Time Warner Satellite
Services.
Irving W. Bailey, II, has been a director of the Company since April 1998.
Mr. Bailey currently serves as Managing Director of Chrysalis Ventures, a
private investment company, and has held this position since July 2001. He also
served in various executive capacities with Providian Corporation from 1981 to
1997, including as Chairman and Chief Executive Officer from 1988 to 1997. Mr.
Bailey is also a director of Computer Sciences Corporation.
Michael E. Gellert has been a director of the Company since April 1998.
Since 1967, Mr. Gellert has served as a General Partner of Windcrest Partners, a
private investment company. Mr. Gellert is a director of Devon Energy Corp., Six
Flags, Inc., Humana Inc., Seacor Smit Inc., Smith Barney World Funds, Smith
Barney Worldwide Securities Ltd. and Smith Barney Worldwide Special Fund NV.
Robert S. Saunders, has served as Vice Chairman of the Board and a
director of the Company since April 1998. Mr. Saunders has been Senior Managing
Director of Chrysalis Ventures, a private equity management firm, since 1997.
From 1993 to 1997, Mr. Saunders served as Managing Director and Chief Planning
Officer for Providian Capital Management.
EXECUTIVE OFFICERS OF HIGH SPEED ACCESS CORP.
The following table sets forth certain information concerning our executive
officers. The executive officers serve at the pleasure of the Board of
Directors.
NAME AGE POSITIONS WITH THE COMPANY
----------------- -- -------------------------------------
George E. Willett 41 President and Chief Financial Officer
John G. Hundley 43 Secretary
George E. Willett was appointed as Chief Financial Officer of the Company
in June 1998 and President of the Company effective May 1, 2002. From 1997 to
1998, Mr. Willett served as Chief Financial Officer of American Pathology
Resources, Inc. and, from 1994 to 1997, as Chief Financial Officer of Regent
Communications, Inc., a radio station holding company.
John G. Hundley previously served as Secretary and General Counsel of the
Company from November 2001, and Senior Vice President -- Business Development
and Assistant Secretary of the Company from November 2000. On August 9, 2002,
Mr. Hundley was terminated by the Company and was paid his severance pursuant to
a Separation Agreement. He is now employed as Counsel to Frost Brown Todd, LLC,
which we have previously engaged to provide legal services to us in connection
with various contract matters and strategic activities, and which we have
retained to advise us with respect to this liquidation and other matters
affecting the wind up of our affairs. We believe this engagement to be on
customary and commercially reasonable terms. At the request of the Board of
Directors, Mr. Hundley continues to serve as our Secretary on a non-employee
basis.
45
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers and directors are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms filed. Based solely upon review of copies
of such forms, or written representations that there were no unreported holdings
or transactions, the Company believes that for the fiscal year ended December
31, 2002 all Section 16(a) filing requirements applicable to its executive
officers, directors and ten percent beneficial owners were complied with on a
timely basis.
ITEM 11: EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth for the year ended December 31, 2002 the
compensation received by our Chief Executive Officer and the other four most
highly compensated officers of the Company based on salary and bonus for the
year ended December 31, 2002 (the "Named Officers").
LONG-TERM COMPENSATION
AWARDS
-----------------------------
NAME AND ANNUAL COMPENSATION SECURITIES
- --------------------------------- ----------------------- RESTRICTED UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (1) STOCK AWARD (3) OPTIONS(6) COMPENSATION
- --------------------------------- ---- --------- ---------- --------------- ----------- -------------
Daniel J. O'Brien 2002 $ 165,385 $1,641,378(7)
Former President and Chief 2001 500,000 $ 375,000(2) $1,300,000(4) 100,000 7,464
Executive Officer 2000 412,500 250,000(13) 518,760(4) 850,000 2,265
Gregory G. Hodges 2002 82,691 274,517(8)
Former Chief Operating Officer 2001 250,000 125,000 187,500(4) 150,000 --
2000 107,500 50,000 -- 200,000 --
Richard George 2002 17,692
Former Chief Operating Officer, 2001 214,583 150,000 187,500(4) 29,167 214,862(9)
HSA International, Inc. 2000 150,000 105,537 -- 57,500 --
George E. Willett 2002 167,354 84,000
President and Chief 2001 168,000 125,000 140,625 (5) 150,000 3,400(11)
Financial Officer 2000 135,208 105,000 -- 29,063 --
John G. Hundley 2002 100,781 176,950(10)
Secretary 2001 164,800 175,000 -- 44,000 29,693(12)
2000 135,208 91,678 -- 22,500 --
- ----------
(1) Amount shown for bonuses were earned during the fiscal year noted and paid
in the following fiscal year unless otherwise noted herein.
(2) Amount shown for 2001 includes a $250,000 bonus paid in April 2001 per Mr.
O'Brien's Employment Agreement dated November 10, 2000 plus an additional
$125,000 earned for fiscal year 2001 and paid in fiscal year 2002.
(3) The value of the restricted stock award to the listed recipients is
calculated based on the closing sales price of the Company's common stock
as reported on the Nasdaq National Market on the date of grant. The number
of restricted stock shares awarded during 2001 and the Company's closing
stock price at the time of grant by person were the following; Mr. O'Brien
(1,000,000 at $1.30 per share), Mr. Hodges (100,000 at $1.875), Mr. George
(100,000 at $1.875) and Mr. Willett (75,000 at $1.875). During 2000, Mr.
O'Brien was awarded 200,000 shares of restricted stock. The closing price
stock price at the time of grant was $2.5938.
(4) During 2002, the Company terminated the employment of Mr. O'Brien, Mr.
Hodges and Mr. George. The restricted shares vested upon the employment
termination.
(5) The restricted shares awarded to Mr. Willett vest 100% on February 7, 2004
if Mr. Willett is still employed by the Company on said date. Mr. Willett
will receive any cash distributions made by the Company with respect to
such shares. The restrictions on the stock will lapse if Mr. Willett's
employment is involuntarily or constructively terminated at any time.
46
(6) The amount shown represents the number of securities underlying stock
options granted during the year indicated.
(7) Represents severance related payments of $1,641,378 in accordance with Mr.
O'Brien's employment contract that were accrued in 2002 of which $949,429
was paid in 2002.
(8) Represents severance related payments of $266,624 in accordance with Mr.
Hodge's employment contract that were accrued and paid in 2002. In 2002,
the Company also paid Mr. Hodges consulting fees of $7,893 for
miscellaneous services provided to the Company by Mr. Hodges after his
employment was terminated.
(9) Represents severance related payments of $212,862, in accordance with Mr.
George's employment contract that were accrued in 2001 and paid 2002. In
2001, Mr. George also received a company 401(k) match in the form of
company stock for the year 2000. The contributed stock value at December
31, 2000 was $2,000. Mr. George's employment was terminated on January 31,
2002.
(10) Represents severance related payments in accordance with Mr. Hundley's
employment contract that were accrued and paid in 2002.
(11) In 2001, Mr. Willett received a company 401(k) match in the form of
company stock for the year 2000. The contributed stock value at December
31, 2000 was $3,400.
(12) Represents the outstanding balance of a loan to Mr. Hundley, which the
Company forgave during 2001. In 2001, Mr. Hundley also received a company
401(k) match in the form of company stock for the year 2000. The
contributed stock value at December 31, 2000 was $3,400.
(13) Amount shown for 2000 includes a $250,000 bonus paid in October 2000 per
Mr. O'Brien's Employment Agreement dated November 10, 2000.
OPTION GRANTS IN 2002
No Named Officers received option grants during 2002.
AGGREGATED OPTION EXERCISES IN 2002 AND FISCAL YEAR-END OPTION VALUES
The following table provides information on shares acquired on exercise
of stock options during the year ended December 31, 2002 and on the year-end
values of unexercised options for the Named Officers.
NUMBER OF SECURITIES UNDERLYING
SHARES VALUE UNEXERCISED OPTIONS AT FISCAL VALUE OF UNEXERCISED OPTIONS AT
ACQUIRED ON REALIZED YEAR-END(#) FISCAL YEAR-END ($)(1)
EXERCISE (2) ------------------------------------ ---------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ ----------- ------------- ----------- -------------
Daniel J. O'Brien 100,000 $ 126,000 1,600,000 -- --
Gregory G. Hodges 350,000 -- --
Richard George 37,707 -- --
George E. Willett 180,975 114,338 $ 25,188 --
John G. Hundley 96,500 -- --
(1) Based on the market value of the underlying securities of $1.30 at
December 31, 2002 minus the exercise price of the options.
(2) The " Value Realized" is equal to the fair market value on the date of
exercise less the option exercise price.
DIRECTOR COMPENSATION
Directors do not currently receive cash compensation for service on the
Board or any committee of the Board, but directors may be reimbursed for their
reasonable expenses incurred in connection with attendance at Board and
committee meetings.
In January of each year, directors who are not employees of the Company or
its subsidiaries received automatic grants of stock options under our 1999
Non-Employee Director Stock Option Plan. Under the plan, each non-employee
director received an option to purchase 27,125 shares of Common Stock in January
1999. Such options were granted at fair market value on the date of grant and
vested immediately. In January 2002, 2001, and 2000, each director received an
option to purchase 11,625 shares of Common Stock that vest over the remainder of
the respective director's term effective at the time of the grant. All options
granted to non-employee
47
directors have an exercise price equal to the fair market value of the common
stock on the grant date, and have a term of ten years. The Board canceled the
automatic grant of any options to directors in January 2003. We do not expect to
compensate our Board for any services in 2003 other than reimbursement for their
reasonable expenses incurred in connection with attendance at Board and
committee meetings.
EMPLOYMENT CONTRACT, TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
In July 2001, the Company entered into an employment agreement with George
E. Willett, our President and Chief Financial Officer. Under this agreement, Mr.
Willett is entitled to a base salary of $14,000 per month. He is also eligible
for a bonus of up to 50% of his base salary, and is entitled to participate in
the Company's retirement, medical, dental and welfare plans, life and disability
insurance and other benefit plans afforded to senior executives and employees by
the Company. Mr. Willett's agreement is for a term of one year and automatically
renews for successive one year terms unless the Company elects to terminate the
agreement upon sixty days notice to Mr. Willett prior to the end of the
respective term.
Under the agreement, if Mr. Willett's employment is terminated without
cause or constructively terminated, he is entitled to continued base salary for
twelve months, any bonus previously fixed and declared by the Board of
Directors, continuation of group health benefits for period of not less than
eighteen months and the right to exercise all options previously granted to him
for a period of up to twelve months. The payment of any severance benefits under
the agreement as set forth above is subject to Mr. Willett's compliance with
certain non-compete covenants during the period such benefits are being paid. We
have also granted Mr. Willett 75,000 shares of restricted stock pursuant to a
Restricted Stock Agreement. The restrictions on the stock will lapse if Mr.
Willett's employment is involuntarily or constructively terminated at any time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is composed of four directors who are not
employees of the Company or any of its subsidiaries. The current members of the
Committee are Mr. Bailey, Mr. Gellert, Mr. Jones and Mr. Saunders. No
interlocking relationship exists between the Board of Directors or Compensation
Committee and the board of directors or compensation committee of any other
company, nor has such interlocking relationship existed in the past.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of the Company's Common
Stock beneficially owned as of March 4, 2003, by each person who is known by us
to own beneficially more than 5% of the common stock, each of the directors,
each of the officers named in the Summary Compensation Table, and all directors
and executive officers as a group.
SHARES OF CLASS
BENEFICIALLY OWNED
----------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT(1)
---------------------------------------- --------- ----------
Millenco, L.P. (13) 3,366,462 8.4%
Korsant Partners Limited Partnership(8) 3,000,000 7.4%
Don C. Whitaker (12) 2,320,116 5.8%
Irving W. Bailey, II(2) 1,391,800 3.4%
Michael E. Gellert(3) 600,541 1.5%
David A. Jones, Jr.(4) 975,736 2.4%
Robert S. Saunders(5) 377,523 1.0%
Daniel J. O'Brien(6) 2,800,000 6.7%
Gregory G. Hodges (7) 455,000 1.1%
Richard George(8) 100,000 *
John G. Hundley(9) 161,875 *
George E. Willett(10) 374,363 *
Directors and executive officers
As a group (9 persons)(11) 7,236,838 16.9%
- ----------
* Less than 1%
(1) Based on 40,294,783 shares of common stock issued and outstanding as of
March 4, 2003. Shares which a person has the right to acquire pursuant
to options within sixty days after March 4, 2003, are deemed to be
outstanding for the
48
purposes of computing the percentage for such person but are not deemed
to be outstanding for the purpose of computing the percentage of any
other person.
(2) Includes 4,800 shares held by Mr. Bailey's wife, 19,000 shares held by the
Beauregard Foundation, of which Mr. Bailey is President, and 62,000
shares that Mr. Bailey may acquire upon exercise of options exercisable
within 60 days of March 4, 2003.
(3) Includes 173,515 shares held by Mr. Gellert's wife and 47,663 shares that
Mr. Gellert may acquire upon exercise of options exercisable within 60
days of March 4, 2003.
(4) Includes 164 shares held by CV Holdings, Inc., of which Mr. Jones is the
sole shareholder, 2,115 shares held by Chrysalis Ventures, LLC, a
company controlled by Mr. Jones, 1,540 shares held by Mr. Jones' wife
as custodian under the Uniform Gift to Minors' Act and 62,000 shares
that Mr. Jones may acquire upon exercise of options exercisable within
60 days of March 4, 2003.
(5) Includes 115,526 shares held by Saunders Capital, LLC, of which Mr.
Saunders is president, 91,834 shares held by Saunders Capital Profit
Sharing Plan and 62,000 shares that Mr. Saunders may acquire upon
exercise of options exercisable within 60 days of March 4, 2003.
(6) Includes 1,600,000 shares that Mr. O'Brien may acquire upon exercise of
options exercisable within 60 days of March 4, 2003. Mr. O'Brien's
employment was terminated on April 30, 2002.
(7) Includes 350,000 shares that Mr. Hodges may acquire upon exercise of
options exercisable within 60 days of March 4, 2003. Mr. Hodges'
employment was terminated on April 30, 2002.
(8) Based on information set forth in Schedule 13G filed on February 14, 2003
on behalf of Korsant Partners Limited Partnership, Lusman Investment
Partners, Philip B. Korsant and Joel Lusman.
(9) Includes 1,230 shares held by Mr. Hundley's wife, 765 shares held by Mr.
Hundley as custodian under the Uniform Gift to Minors Act, and 96,500
shares that Mr. Hundley may acquire upon exercise of options
exercisable within 60 days of March 4, 2003.
(10) Includes 75,000 shares of restricted stock subject to forfeiture, 295,313
shares that Mr. Willett may acquire upon exercise of options
exercisable within 60 days of March 4, 2003, and 3,200 shares held in
the Company's 401(k) plan.
(11) Includes shares of restricted stock and shares that the directors and
executive officers may acquire upon exercise of options exercisable
within 60 days of March 4, 2003.
(12) Based on information set forth in Schedule 13D (Amendment No. 1) filed on
July 3, 2002 by Don C. Whitaker. Amount does not include 435,000 shares
held by Don Whitaker, Inc. or 130,000 shares held by Don Whitaker. Jr.
(13) Based on information set forth in Schedule 13G filed on February 10, 2003
by Millenco, L. P.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On February 28, 2002, the Company consummated the Asset Sale to Charter,
immediately after obtaining the required approval of our stockholders. The Asset
Sale was effected pursuant to 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.
Prior to the consummation of the Asset Sale on February 28, 2002, Mr. Paul
G. Allen, the sole stockholder of Vulcan and the Chairman of Charter
Communications Ventures, LLC, beneficially owned approximately 48.5% of the
Company's common stock (including conversion rights) and 100% of the Company's
Series D Preferred Stock. Additionally, Vulcan beneficially owned approximately
36.9% of the Company's Common Stock (including conversion rights) and 50.7% of
the Company's Series D Preferred Stock. As a result, prior to the consummation
of the Asset Sale, each of Mr. Allen, Charter and Vulcan was an affiliate of
ours.
49
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. The assets
generated approximately 78% and 55% of our total net revenue for the years ended
December 31, 2001 and 2000, respectively. Following the completion of our cost
reduction efforts initiated in the second half of 2001, the assets acquired by
Charter generated substantially all of our total revenue.
Pursuant to the terms of the Asset Purchase Agreement, Charter acquired
certain assets from us in consideration for (i) the payment 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 paid to us on April 30, 2002 and
$1.0 million plus accrued interest was paid on 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.
In connection with the Asset Purchase Agreement, we entered into a
management agreement dated September 28, 2001. Charter agreed to perform certain
services previously performed by us under the Network Services agreements. We
also granted to Charter the right to manage certain aspects of the business
related to the purchased assets prior to the Asset Sale. Services paid for by
Charter under the agreement included installation costs, including the purchase
of modems, and marketing costs.
Also on February 28, 2002, we purchased 20,222,139 shares of Common Stock
from Vulcan for an aggregate purchase price of $4,448,870, or $0.22 per share.
The consummation of the Asset Sale was a condition precedent to the purchase of
Common Stock from Vulcan. 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, we
are no longer affiliated with Vulcan, Charter or any of their respective
affiliates.
In November 1998, the Company entered into a systems access and investment
agreement with Vulcan and Charter, a programming content agreement with Vulcan
and related network services agreement with Charter. Under the agreements, the
Company agreed to pay Charter 50% of the Company's gross revenues for cable
modem access services provided in Charter cable systems, 15% of gross revenues
for dial up access services and 50% of gross revenues for all other optional
services. In addition, if the Company sold equipment to a subscriber, the
Company paid Charter 50% of the gross profit the Company received from the sale.
The Company paid Charter $1.9 million during the period January 1, 2002 to
November 27, 2002 under these agreements.
In May 2000, the Company entered into a network services agreement with
Charter, under which the Company provided customer service, network operating,
monitoring and certain other services to Charter cable systems containing not
less than 5,000,000 homes passed. The agreement is for a five-year term
renewable for additional five-year terms at Charter's option. The Company
received payments totaling $7.6 million during the period January 1, 2002 to
November 27, 2002 under the Agreement. With respect to each home passed launched
or intended to be launched on or before the second anniversary date of the May
2000 network services agreement, the Company paid Charter, at Charter's option,
a launch fee of $3.00 per home passed committed. We paid an additional $5.1
million in launch fees to Charter in 2002 at the closing of the Asset Sale.
In connection with the May 2000 network services agreement, the Company
and Charter entered into an amended and restated warrant under which Charter may
purchase up to 12,000,000 shares of the Company's common stock at an exercise
price of $3.23 per share and which terminated two warrants that had been issued
to Charter in November 1998.
At the closing of the Asset Sale, Charter paid to the Company an
additional $3.0 million for expenses incurred by the Company on Charter's behalf
prior to September 28, 2001.
As a result of the Asset Sale and repurchase of our Common Stock from
Vulcan, the foregoing network services agreements, amended and restated warrant,
and programming content agreement were cancelled. As of February 28, 2002,
neither Charter or Vulcan or any of their affiliates have any ownership interest
in the Company or any contractual claims with the Company (except as provided in
the Asset Purchase Agreement).
On August 9, 2002, John G. Hundley, our Secretary, General Counsel and
Senior Vice President - Development, was terminated by the Company and was paid
his severance pursuant to a Separation Agreement. He is now employed as Counsel
to Frost Brown Todd, LLC, which we have previously engaged to provide legal
services to us in connection with various contract matters and strategic
activities, and which we have retained to advise us with respect to this
liquidation and other matters affecting the wind up of our affairs. We believe
this engagement to be on customary and commercially reasonable terms. At the
request of the Board, Mr. Hundley continues to serve as our Secretary on a
non-employee basis. During 2002, we paid $62,355 to Frost Brown Todd, LLC.
50
See Note 2- Discontinued Operations for information regarding the Asset
Sale to Charter.
ITEM 14. 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 IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report
The Financial Statements filed as part of this report are listed on the
Index to Financial Statements on page 21.
(b) Reports on Form 8-K
NONE
(c) Exhibits
See Exhibit Index on Page 54.
ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate fees paid for professional services rendered for the Company by
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") for the years ended
December 31, 2002 and 2001 were $127,319 and $561,656, respectively.
The Audit fees for the years ended December 31, 2002 and 2001 were
$101,165 and $253,113, respectively, for professional services rendered for the
audits of the consolidated financial statements of the Company, reviews of
interim quarterly financial statements, consents, and assistance with review of
documents filed with the SEC.
The Audit Related fees for the years ended December 31, 2002 and 2001 were
$16,300 and $52,950, respectively, for assurance and related services related to
the audit of the Company's employee benefit plan, the audit of the Digital
Chainsaw subsidiary financial statements during 2001 as required by the merger
agreement, and agreed upon procedures related to a Kentucky tax incentive
program.
Tax fees for the years ended December 31, 2002 and 2001, respectively,
were $9,854 and $255,593. Fees for were for services related to preparation of
tax returns and tax consultation regarding restricted stock and warrants. Fees
for 2001 were for services rendered for consultation regarding Sec. 382
limitations, research and consultation regarding tax issues regarding doing
business in Germany and preparation of individual tax returns related to
operations in Germany.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Company's Audit Committee has not yet adopted/enacted pre-approval
policies and procedures for audit and non-audit services. Therefore, the proxy
disclosure does not include pre-approval policies and procedures and related
information. The Company is early-adopting components of the proxy fee
disclosure requirements; the requirement does not become effective until
periodic annual filings for the first fiscal year ending after December 15,
2003.
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on March
19, 2003.
HIGH SPEED ACCESS CORP.
By: /s/ GEORGE E. WILLETT
--------------------------------------------
George E. Willett
President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the dates indicated:
SIGNATURE TITLE DATE
--------- ----- ----
By: /s/ GEORGE E. WILLETT President and Chief March 19, 2003
------------------------- Financial Officer
George E. Willett
By: /s/ DAVID A. JONES, JR Director, Chairman March 19, 2003
-------------------------
David A. Jones, Jr.
By: /s/ ROBERT S. SAUNDERS Director, Vice March 19, 2003
------------------------- Chairman
Robert S. Saunders
By: /s/ IRVING W. BAILEY, II Director March 19, 2003
--------------------------
Irving W. Bailey, II
By: /s/ MICHAEL E. GELLERT Director March 19, 2003
-------------------------
Michael E. Gellert
By: /s/ DANIEL J. O'BRIEN Director March 19, 2003
-------------------------
Daniel J. O'Brien
52
I, George E. Willett, President and Chief Financial Officer of High Speed Access
Corp., certify that:
(1) I have reviewed this Annual Report on Form 10-K of High Speed Access
Corp. (the "Company");
(2) Based on my knowledge, this Annual 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 Annual Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this Annual 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 Annual 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 Annual 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 Annual Report (the "Evaluation Date");
and
(c) presented in this Annual 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 Annual 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: March 19, 2003 By /s/ George E. Willett
--------------- ----------------------------------
George E. Willett
President and Chief Financial Officer
53
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to Registrant's Registration Statement on
Form S-1 (File No. 333-74667)).
3.2 Certificate of Designation of Series D Senior Convertible Preferred
Stock (incorporated by reference to Exhibit 2 to Exhibit 99.1 to
Registrant's Current Report on Form 8-K dated October 23, 2000).
3.3 Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 to Registrant's Registration Statement on Form S-1 (File No.
333-74667)).
4.1 Specimen Common Stock certificate (incorporated by reference to
Exhibit 4.1 to Registrant's Registration Statement on Form S-1 (File
No. 333-74667)).
4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions defining the rights of
holders of capital stock of the Registrant.
10.1 1998 High Speed Access Corp. Stock Option Plan (incorporated by
reference to Exhibit 10.30 to Registrant's Registration Statement on
Form S-1 (File No. 333-74667)).
10.2 1999 High Speed Access Corp. Stock Option Plan (incorporated by
reference to Exhibit 99.1 to Registrant's Registration Statement on
Form S-8 (File No. 333-46654)).
10.3 High Speed Access Corp. Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.32 to Registrant's
Registration Statement on Form S-1 (File No. 333-74667)).
10.4 Form of Indemnity Agreement between High Speed Access Corp. and each
of the directors and certain executive officers of High Speed Access
Corp. (incorporated by reference to Exhibit 10.33 to Registrant's
Registration Statement on Form S-1 (File No. 333-74667)).
10.5 Securities Purchase Warrant between High Speed Access Corp. and
Microsoft Corporation dated April 30, 1999 (incorporated by
reference to Exhibit 10.34 to Registrant's Registration Statement on
Form S-1 (File No. 333-74667)).
10.6 Letter Agreement between High Speed Access Corp. and Microsoft
Corporation dated April 30, 1999 (incorporated by reference to
Exhibit 10.35 to Registrant's Registration Statement on Form S-1
(File No. 333-74667)).
10.7 Securities Purchase Warrant between Microsoft Corp. and High Speed
Access Corp. dated June 15, 1999 (incorporated by reference to
Exhibit 10.4 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999).
10.8 Restricted Stock Agreement by and between High Speed Access Corp.
and Daniel J. O'Brien dated October 1, 2000 (incorporated by
reference to Exhibit 10.43 to Registrant's Annual Report on Form
10-K for the year ended December 31, 2000).
10.9 Amended and Restated Stock Option Agreement between High Speed
Access Corp. and Daniel J. O'Brien dated October 1, 2000
(incorporated by reference to Exhibit 10.44 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000).
10.10 Restricted Stock Agreement by and between High Speed Access Corp.
and George Willett dated February 2, 2001 (incorporated by reference
to. Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001).
10.11 Restricted Stock Agreement by and between High Speed Access Corp.
and Gregory G. Hodges dated February 14, 2001 (incorporated by
reference to Exhibit 10.2 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2001).
10.12 Restricted Stock Agreement by and between High Speed Access Corp.
and Richard George dated February 14, 2001 (incorporated by
reference to Exhibit 10.3 to Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 2001).
10.13 Restricted Stock Agreement by and between High Speed Access Corp.
and Charles E. Richardson III dated February 14, 2001 (incorporated
by reference to Exhibit 10.4 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001).
54
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.14 Employment Agreement by and between High Speed Access Corp. and
George E. Willett dated June 4, 2001 (incorporated by reference to
Exhibit 10.6 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2001).
10.15 Amended and Restated Employment Agreement by and between High Speed
Access Corp. and Daniel J. O'Brien dated June 22, 2001 (incorporated
by reference to Exhibit 10.8 to Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001).
10.16 Restricted Stock Agreement by and between High Speed Access Corp.
and Daniel J. O'Brien dated June 22, 2001 (incorporated by reference
to Exhibit 10.9 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001).
10.17 Asset Purchase Agreement, dated September 28, 2001, between High
Speed Access Corp. and Charter Communications Holding Company, LLC
(incorporated by reference to Exhibit 99.3 to Registrant's Current
Report on Form 8-K, filed with the Securities and Exchange
Commission on October 1, 2001).
10.18 Voting Agreement, dated September 28, 2001, among High Speed Access
Corp., Charter Communications Ventures, LLC, Vulcan Ventures
Incorporated and certain other stockholders of High Speed Access
Corp. (incorporated by reference to Exhibit 99.4 to Registrant's
Current Report on Form 8-K, filed with the Securities and Exchange
Commission on October 1, 2001).
10.19 Services and Management Agreement, dated September 28, 2001, between
High speed Access Corp and Charter Communications, Inc.
(incorporated by reference to Exhibit 99.5 to Registrant's Current
Report on Form 8-K, filed with the Securities and Exchange
Commission on October 1, 2001).
10.20 License Agreement, dated September 28, 2001, among High Speed Access
Corp., HSA International, Inc. and Charter Communications Holding
Company, LLC (incorporated by reference to Exhibit 99.6 to
Registrant's Current Report on Form 8-K, filed with the Securities
and Exchange Commission on October 1, 2001).
10.21 Stock Purchase Agreement, dated as of November 1, 2001, between High
Speed Access Corp. and Vulcan Ventures Incorporated (incorporated by
reference to Exhibit 10.5 to Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 2001).
10.22 Letter Agreement between High Speed Access Corp., Charter
Communications Holding Company, LLC and CC Systems, LLC dated
February 28, 2002 (incorporated by reference to Exhibit 2.2 to
Registrant's Current Report on Form 8-K, filed with the Securities
and Exchange Commission on March 11, 2002)
10.23 Plan Of Liquidation and Dissolution of High Speed Access Corp dated
as of August 13, 2002 as approved by the Company's shareholders on
November 27, 2002.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002
55