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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended June 30, 1999.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______________ to
_______________.
COMMISSION FILE NUMBER 000-26153
HIGH SPEED ACCESS CORP.
(Exact name of Registrant as specified in its charter)
DELAWARE 61-1324009
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4100 East Mississippi Avenue
Denver, Colorado 80246
(Address of principal executive offices, including zip code)
303/256-2000
(Registrant's telephone number, including area code)
FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT:
NOT APPLICABLE
- - - - - - -
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ ] NO [X]
Number of shares of Common Stock outstanding as of August 9, 1999..........................54,137,952
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Index
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
(Unaudited) and December 31, 1998
Condensed Consolidated Statements of Operations for the
three-months ended June 30, 1999 (Unaudited), the period April
3, 1998 (Inception) through June 30, 1998 (Unaudited) and the
six-months ended June 30, 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the
six-months ended June 30, 1999 (Unaudited) and the period
April 3, 1998 (Inception) through June 30, 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 3 - Defaults upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
Signatures
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 218,200 $ 17,888
Accounts receivable, net of allowance for doubtful accounts of $58
and $13 as of June 30, 1999 and December 31, 1998, respectively 463 83
Prepaid expenses and other current assets 1,414 123
--------- ---------
Total current assets 220,077 18,094
Property, equipment and improvements, net 18,694 5,807
Intangible assets, net 3,629 3,603
Deferred distribution agreement costs, net 614 --
Other assets 656 --
--------- ---------
Total assets $ 243,670 $ 27,504
========= =========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 7,222 $ 2,741
Accrued compensation and related expenses 1,140 744
Other current liabilities 1,934 395
Long-term debt, current portion 447 8
Capital lease obligations, current portion 704 44
--------- ---------
Total current liabilities 11,447 3,932
Long-term debt 1,669 530
Capital lease obligations 1,266 219
--------- ---------
Total liabilities 14,382 4,681
--------- ---------
Commitments and Contingencies
Mandatorily redeemable convertible preferred stock:
Series A, $.01 par value, 0 and 5,000,000 shares designated, issued and
outstanding at June 30, 1999 (unaudited) and December 31, 1998, respectively -- 47,050
Series B, $.01 par value, 0 and 10,000,000 shares designated, issued and
outstanding at June 30, 1999 (unaudited) and December 31, 1998, respectively -- 102,200
Series C, $.01 par value, 5,000,000 shares designated, no shares issued
and outstanding (unaudited) -- --
--------- ---------
Total mandatorily redeemable convertible preferred stock -- 149,250
--------- ---------
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 20,000,000 shares authorized, none
issued and outstanding -- --
Common stock, $.01 par value, 400,000,000 shares authorized, 54,117,802
issued and outstanding (unaudited) - June 30, 1999; 6,200,000 shares
authorized, issued and outstanding - December 31, 1998 541 62
Class A common stock, 100,000,000 shares authorized (unaudited) -
June 30, 1999; none issued and outstanding -- --
Additional paid-in-capital 614,194 4,237
Deferred compensation (324) (84)
Accumulated deficit (385,123) (130,642)
--------- ---------
Total stockholders' equity (deficit) 229,288 (126,427)
--------- ---------
Total liabilities, mandatorily redeemable convertible preferred
stock and stockholders' equity (deficit) $ 243,670 $ 27,504
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED APRIL 3, 1998 ENDED
JUNE 30, (INCEPTION) TO JUNE 30,
1999 JUNE 30, 1998 1999
------------ ------------ ------------
Net Revenue $ 641 $ 91 $ 940
Costs and expenses:
Operating 4,027 261 6,150
Engineering 2,071 398 3,556
Sales and Marketing 3,619 657 5,657
General and Administrative 2,361 564 3,647
Non-cash compensation expense from stock options 1,157 -- 2,680
Amortization of distribution agreement costs 3,305 -- 3,305
------------ ------------ ------------
Total costs and expenses 16,540 1,880 24,995
------------ ------------ ------------
Loss from operations (15,899) (1,789) (24,055)
Interest income (expense), net 647 (4) 766
------------ ------------ ------------
Net loss (15,252) (1,793) (23,289)
Mandatorily redeemable convertible preferred stock dividends (604) (24) (1,122)
Accretion of redemption value of mandatorily redeemable convertible
Preferred stock (123,916) -- (229,148)
------------ ------------ ------------
Net loss available to common stockholders $ (139,772) $ (1,817) $ (253,559)
============ ============ ============
Basic and diluted net loss available to common stockholders per
share $ (7.47) $ (0.29) $ (20.30)
============ ============ ============
Weighted average shares used in computation of basic and diluted net
loss available to common stockholders per share 18,711,305 6,200,000 12,490,214
Pro forma basic and diluted net loss per share $ (0.38) $ (0.67)
============ ============
Weighted average shares used in computation of pro forma basic and
diluted net loss per share 39,719,003 34,612,869
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS APRIL 3, 1998
ENDED (INCEPTION) TO
JUNE 30, 1999 JUNE 30, 1998
------------- --------------
OPERATING ACTIVITIES
Net loss $ (23,289) $ (1,793)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 2,237 298
Non-cash compensation expense from stock options 2,680 --
Amortization of distribution agreement costs 3,305
Changes in operating assets and liabilities excluding the effects of acquisitions:
Accounts receivable (380) (38)
Prepaid expenses and other current assets (1,328) (319)
Other assets (656) --
Accounts payable 2,904 224
Accrued compensation and related expenses 396 (54)
Other current liabilities 1,539 259
--------- ---------
Net cash used in operating activities (12,592) (1,423)
--------- ---------
INVESTING ACTIVITIES
Purchase of property, equipment and improvements, net of leases (11,612) (686)
Cash acquired in the purchase of CATV and HSAN -- 907
Purchase of customer base (290) --
--------- ---------
Net cash used in investing activities (11,902) 221
--------- ---------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 197,754 --
Net proceeds from issuance of mandatorily redeemable convertible preferred
stock 24,987 1,500
Payments on capital lease obligations (73) --
Proceeds from long-term debt 1,682 --
Payments on long-term debt (104) (75)
Other 560 --
--------- ---------
Net cash provided by financing activities 224,806 1,425
--------- ---------
Net change in cash and cash equivalents 200,312 223
Cash and cash equivalents, beginning of period 17,888 --
--------- ---------
Cash and cash equivalents, end of period $ 218,200 $ 223
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock and employee stock options in connection with the
purchase of CATV and HSAN $ -- $ 3,215
Equipment acquired under capital leases $ 1,780 $ --
Issuance of note payable as consideration for advance from related party $ -- $ 650
Property and equipment purchases payable $ 3,006 $ 366
Distribution of Darwin Networks, Inc. subsidiary to shareholders $ 923 $ --
Warrants issued in connection with acquisitions $ 208 $ --
Warrants issued in connection with Microsoft Corp. agreements $ 3,235 $ --
Warrants earned in connection with distribution agreements $ 684 $ --
The accompanying notes are an integral part of these
condensed consolidated financial statements.
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ITEM 1 - NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included
herein reflect all adjustments, consisting only of normal recurring adjustments,
which in the opinion of management are necessary to fairly present High Speed
Access Corp.'s (hereinafter referred to as the Company, we, us, or our)
financial position, results of operations and cash flows for the periods
presented. Certain information and footnote disclosures normally included in
audited financial information prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission's rules and regulations. The results of operations for
the periods ended June 30, 1999 are not necessarily indicative of the results to
be expected for any subsequent quarter or for the entire fiscal year ending
December 31, 1999. These financial statements should be read in conjunction with
the financial statements and notes thereto for the year ended December 31, 1998,
which are included in the Company's Registration Statement on Form S-1 (File No.
333-74667) which was declared effective by the Securities and Exchange
Commission on June 3, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
NOTE 2 - STOCKHOLDERS' EQUITY
Series C Preferred Stock
In April 1999, the Company received $25 million in cash proceeds from
the sale of 5,000,000 shares of Series C mandatorily redeemable convertible
preferred stock to Vulcan Ventures Incorporated ("Vulcan").
Recapitalization
In May 1999, the Company completed a 1.55 for 1 split of its common
stock. This stock split resulted in a corresponding change in the conversion
rate for all shares of the Company's Series A, B and C mandatorily redeemable
convertible preferred stock ("Preferred Stock") such that each share of
Preferred Stock was convertible into 1.55 shares of common stock after the
split. In addition, certain outstanding warrants, if earned, may be exercised to
acquire 1.55 shares of stock after the split. The accompanying financial
statements have been restated for all periods presented to reflect the effects
of the stock split.
Also, the Board of Directors of the Company authorized 100 million
shares of Class A common stock and increased the number of shares of the
Company's $.01 par value common stock authorized to 400 million shares.
Initial Public Offering and Conversion of Preferred Stock
In June 1999, the Company sold 14,950,000 shares of its common stock in
an initial public offering (the "Offering"), including the underwriters'
over-allotment option, which generated proceeds of $179.3 million, net of the
underwriters' discount and other offering costs. Concurrently with the Offering,
the Company registered and sold 618,557 shares, 82,474 shares, and 824,742
shares of common
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stock to Cisco Systems, Inc. ("Cisco"), Com21, Inc. ("Com21") and Microsoft
Corp. ("Microsoft"), respectively, under stock purchase agreements which
generated $18.5 million.
Upon the closing of the Offering, all 20,000,000 shares of the
Preferred Stock outstanding at the time of the Offering were converted into an
aggregate of 31,000,000 shares of common stock. In addition, unpaid accumulated
dividends on the Preferred Stock of $1.5 million were paid by the issuance of
115,887 shares of common stock. Prior to the conversion of the Preferred Stock,
the Company had charged accumulated deficit to increase the carrying value of
the shares of each series of Preferred Stock to its estimated redemption value
at the time of the Offering of $13 per share. During the three-month and
six-month periods ended June 30, 1999, the Company recorded $123.9 million and
$229.1 million, respectively, related to this charge. In addition, the Company
accrued dividends on the Preferred Stock of $604,000 and $24,000 for the
three-month periods ended June 30, 1999 and 1998, respectively, and $1.1 million
for the six-month period ended June 30, 1999.
Distribution to Stockholders of Darwin Networks, Inc.
In March 1999, the Company transferred to Darwin Networks, Inc., a
newly created Delaware corporation, all of the assets used in the Company's
digital subscriber line service, which had a net book value of approximately
$330,000, in exchange for 100% of the outstanding Darwin common stock. These
assets consisted primarily of computer equipment and furniture and fixtures. In
March 1999, the Company distributed all of the outstanding Darwin common stock
to the Company's common and preferred stockholders. This distribution has been
recorded as a net reduction of stockholders equity in the accompanying condensed
consolidated financial statements. In connection with the asset transfer, the
Company entered into a services agreement with Darwin pursuant to which it will
provide various financial, accounting and other professional staff services to
Darwin and will be compensated for its costs at fair market value. The services
agreement is for an initial six month term. The Company also agreed to loan
Darwin up to $500,000 for working capital pursuant to a six month
uncollateralized revolving credit note bearing interest at the prime rate of
which Darwin has drawn $494,000 as of June 30, 1999. In connection with the
note, Darwin issued to the Company a warrant to purchase 1,000,000 shares of
Darwin common stock at an exercise price of $5.00 per share, which the Company
has valued at $7,000. Subsequently, Darwin executed a stock split under which
the warrant split to 5,000,000 shares at $1.00 per share. Expenses related to
the Darwin service line approximated $175,000 in 1998 and $302,000 for the three
months ended March 31, 1999. No revenue was realized in 1998 or 1999 associated
with Darwin.
NOTE 3 - NET LOSS PER SHARE
The Company computes net loss per share under the provisions of SFAS
No. 128 "Earnings per Share" (SFAS 128) and SEC Staff Accounting Bulletin No. 98
(SAB 98). Under the provisions of SFAS 128 and SAB 98, basic and diluted net
loss per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of shares of common
stock outstanding during the period.
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and assuming conversion of the Company's Preferred Stock. In addition, income or
loss is adjusted for dividends and other transactions relating to preferred
shares for which conversion is assumed. The diluted earnings per share amount
equals basic earnings per share because the Company has a net loss and the
impact of the assumed exercise of the stock options and the assumed preferred
stock conversion is not dilutive. Options and warrants to purchase 2,213,690
shares of common stock at June 30, 1999 (unaudited), were excluded from the
calculation above because they are antidilutive.
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The pro forma net loss per share assumes the conversion of the
Preferred Stock to Common Stock as if it had been converted at the date of
issuance, even though the result is antidilutive.
The following table presents the unaudited calculation of basic and
diluted and pro forma net loss per share (dollars in thousands, except per share
amounts):
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Three Months Ended June 30, 1999 Six Months Ended June 30, 1999
(Unaudited) (Unaudited)
---------------------------------------- -----------------------------------------
Denominator Denominator
Numerator (weighted Numerator (weighted
(Net Loss) average shares) Per Share (Net Loss) average shares) Per Share
------------ --------------- --------- ------------ --------------- ---------
Basic and diluted net loss
available to common
stockholders ................. $ (139,772) 18,711,305 $(7.47) $ (253,559) 12,490,214 $(20.30)
Mandatorily redeemable
convertible preferred stock
dividends .................... 604 1,122
Accretion of redemption value
of mandatorily redeemable
convertible preferred stock .. 123,916 229,148
Assumed conversion of shares
of mandatorily redeemable
convertible preferred stock
into shares of common stock
at April 3, 1998 or issuance
(if later) ................... 21,007,698 22,122,655
------------ ------------ ------ ------------ ------------ ------
Pro forma basic and diluted net
loss per common share ........ $ (15,252) 39,719,003 $(0.38) $ (23,289) 34,612,869 $(0.67)
============ ============ ====== ============ ============ ======
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In addition, there is a potential to issue additional warrants pursuant
to the agreements set forth in Notes 4 and 8. These potential warrants have been
excluded from the calculation above because they are not currently measurable
and would be antidilutive. In the future, we also may issue additional stock or
warrants to purchase our common stock in connection with our efforts to expand
the distribution of our services. Stockholders could face additional dilution
from these possible future transactions.
NOTE 4 - DISTRIBUTION AGREEMENTS
Vulcan Ventures Incorporated
In November 1998, the Company entered into a series of agreements with
Vulcan, a related party, in which the Company issued shares of Preferred Stock
to Vulcan and entered into agreements under which it will provide Internet
access services to customers in certain cable systems controlled by Vulcan.
These agreements included a systems access and investment agreement
with Vulcan and its affiliate Charter Communications ("Charter"), a programming
content agreement with Vulcan, and a related network services agreement with
Charter. Under these agreements, Charter committed to provide the Company
exclusive access to at least 750,000 homes passed. Charter has an equity
incentive to provide us additional homes passed, although it is not obligated to
do so. Under the agreements, we agreed to pay Charter 50% of our gross revenues
for cable modem access services, 15% of our gross revenues for dial up access
services, and 50% of our gross revenues for all other optional services. In
addition, if we sell equipment to a subscriber, we agreed to pay Charter 50% of
the gross profit we receive from the sale. If Charter sells equipment to a
subscriber, Charter keeps 100% of the gross revenues from the sale. We also
agreed that Charter's share of gross revenues will not be less than that paid to
other cable operators to whom we provide services. Charter can terminate the
agreement, remove a particular agreement or terminate exclusivity rights, on a
system-by-system basis, if the Company fails to meet performance benchmarks or
otherwise breaches our agreement, including our agreement to provide content
designated by Vulcan. The performance benchmarks include requiring us to achieve
minimum penetration rates, to add equipment or bandwidth capacity when Internet
data traffic on a system reaches set levels, to maintain a designated response
rate at our call center and resolve a designated percentage of all non-cable
plant related trouble calls within specific time frames, and to provide monthly
reports to Charter tracking our compliance with these requirements. Charter can
also terminate this agreement, for any reason, as long as it purchases the
associated cable headend equipment and modems at book value and pays the Company
a termination fee based on the net present value of revenues the Company
otherwise would earn for the remaining term of the agreement from end users
subscribing to the Company's services as of the termination date. During the
term of the agreements, the Company has agreed not to compete with Charter in
any market in which it owns or operates a cable system and will not deploy
Worldgate, Web TV(R) or various other digital TV products in the market areas of
any committed system or in areas in which Charter operates a cable system. The
agreements will continue until the Company ceases to provide services to an end
user residing in a home passed in a committed system.
As an inducement to Vulcan to cause Charter to commit additional
systems to the Company, we granted Vulcan warrants to purchase up to 7,750,000
shares of the Company's common stock at a purchase price of $3.23 per share.
Vulcan subsequently assigned the warrants to Charter. The warrants are
exercisable by Charter at the rate of 1.55 shares of common stock for each home
passed committed to the Company by Charter in excess of 750,000. 3,875,000
warrants may be earned by Charter on or before
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July 31, 2001 and must be exercised on or before July 31, 2002 or these warrants
will expire. 3,875,000 warrants may be earned by Charter on or before July 31,
2003 and must be exercised on or before July 31, 2004 or these warrants will
expire. The warrants may be forfeited in certain circumstances, generally if the
number of homes passed in a committed system is reduced.
In May 1999, Charter and the Company entered into a limited service
agreement which reduced the number of warrants issued per home passed in
exchange for a reduction in the revenue share and a more beneficial cost sharing
arrangement for the Company in certain specified cable systems. Under the terms
of this limited service agreement, Charter will earn only 1 warrant per every
three homes passed if it commits systems totaling less than 1 million homes
passed, and 1 warrant for every 2 homes passed if the systems total 1 million or
more homes passed.
As of June 30, 1999, Charter has earned warrants to purchase 69,587
shares of common stock under these agreements. The Company recognizes an
addition to equity for the fair value of any warrants issued, and recognizes the
related expense over the term of the service agreement with the cable system to
which the warrants relate, generally four to five years, in accordance with
Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments
that are Issued to other than Employees for Acquiring or in Conjunction with
Selling, Goods or Services. Deferred distribution agreement costs of $684,000
was recorded in conjunction with the warrants during the quarter ended June 30,
1999. Amortization of distribution agreement costs of $69,800 was recognized in
the statement of operations for the same period. Additional deferred
distribution agreement costs may be recorded and amortized in future periods
should Charter earn the right to purchase additional common shares based on the
number of homes committed to the Company.
Microsoft Corp.
Microsoft purchased $10.0 million of the Company's common stock
concurrently with the Offering at the offering price net of the underwriting
discount. At the time of the Offering, the Company also had a non-binding letter
of intent with 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. Under the terms of these agreements, Microsoft has agreed, among other
things, to introduce the benefits of the Company's services to Comcast Corp., a
multiple system cable operator. The warrants also provide Microsoft the right to
purchase one share of common stock at an exercise price of $16.25 per share, for
each 10 homes passed over 2,500,000 that are committed by Comcast Corp. to the
Company by May 1, 2002.
The Company recorded charges to earnings of $3.2 million during the
quarter ended June 30, 1999 related to the issuance of these warrants based on
the fair value of the shares at the time of grant. Additional expense may also
be recognized in future periods should Microsoft earn the right to purchase
additional common shares based on the number of homes committed to the Company
by Comcast Corp.
NOTE 5 - LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
In April 1999, the Company entered into a $3.0 million loan facility of
which $1.7 million has been drawn down at June 30, 1999. The terms of the master
loan agreement provide for interest at the rate of the 3-year U.S. Treasury Note
yield plus 9.76%, 36 equal monthly payments and a balloon payment of 12.5% of
the original loan balance in the 37th month and collateral of the headend, data
center
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and other field equipment of the Company. These terms are effective on the date
of, and applied separately to, each draw on the total loan facility.
In May 1999, the Company entered into a $3.0 million capital lease
facility to provide operating equipment. Financing of approximately $1.8 million
had been obtained under this agreement at June 30, 1999. The minimum lease
payments for outstanding obligations at June 30, 1999 are $289,000, $651,000,
$651,000 and $362,000 for the periods ended December 31, 1999, 2000, 2001 and
2002, respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
The Company is not a party to any material legal proceedings. In the
opinion of management, the amount of ultimate liability with respect to any
known actions will not materially affect the financial position of the Company.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivatives and
Hedging Activities (SFAS 133), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. SFAS 133, as amended by SFAS 137, is effective for the
Company's year ending December 31, 2001. As the Company does not currently
engage in or plan to engage in derivatives, or hedging transactions there will
be no impact on the Company's results of operations, financial position or cash
flows upon the adoption of SFAS 133.
NOTE 8 - SUBSEQUENT EVENTS
Road Runner Agreement
In July 1999, the Company entered into an agreement with ServiceCo LLC,
the entity that provides Road Runner's cable Internet access and content
aggregation services. The agreement establishes general terms and conditions
under which Road Runner may, if it wishes, engage the Company as a
subcontractor to provide all or some of the Company's network integration
services to cable operators who contract with Road Runner to deploy Road
Runner-branded Internet content and access services. The agreement also grants
ServiceCo LLC a warrant to purchase one share of common stock at a price of $5
per share for each home passed, up to a maximum of 5 million homes, for each
home passed in those systems where ServiceCo LLC engages the Company to serve
as a subcontractor of services.
Classic Cable and Cable Management Associates
In July 1999, the Company entered into service and warrant agreements
to provide its turnkey services to Classic Cable (Classic) and Etan Industries,
Inc. d/b/a Cable Management Associates (CMA). Under the agreements, the Company
expects to deploy its services to 45,000 Classic homes passed and 112,000 CMA
homes passed over the next two years, subject to various clustering
requirements. The agreements also provide for the issue of warrants to purchase
one share of the Company's common stock at a price of $13 per share for each
home passed committed by Classic and CMA to the Company for deployment of
services, up to 600,000 and 200,000 homes passed, respectively.
Loan Facility
The Company entered into a commitment for a $5.0 million loan facility
in July 1999. The terms of the loan facility provide for interest at the rate of
the 3-year U.S. Treasury Note yield plus 7.77%, 36 equal monthly payments and a
balloon payment of 5.0% of the original loan balance in the 37th month and
collateral of the headend, data center and other field equipment of the Company.
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions, involve risks
and uncertainties, and actual events or results may differ materially from the
results discussed in the forward-looking statements. Factors and Risk Factors
that could cause or contribute to such differences include those discussed below
as well as those discussed in other filings made by the Company with the
Securities and Exchange Commission, including the Company's registration
statement on Form S-1 declared effective on June 3, 1999 and form of final
prospectus under Rule 424(e) filed on June 7, 1999.
OVERVIEW
High Speed Access Corp. (hereinafter referred to as the Company, we, or
our) is a leading provider of high speed Internet access via cable modem to
residential and commercial end users in exurban areas. We generate revenue
primarily from the monthly fees we receive from end users for our cable
modem-based Internet access service and for the traditional dial-up services we
offer as part of our end user acquisition strategy. We report these revenues net
of the percentage split we pay to our cable partners. For promotional purposes,
we often provide new end users with 30 days of free Internet access when they
subscribe to our services. As a result, our revenue does not reflect new end
users until the end of the promotional period. We also receive revenues from
renting cable modems to end users. Although we also earn revenues from the
one-time fees we charge for the installation of the cable modem at the end
user's home or business, we frequently waive this fee.
Our revenue from dial up services currently is a significant part of
our total revenue. However, we expect this business mix to shift over time as
our dial-up end users migrate to high speed Internet access and as end users
generally become aware of the benefits of high speed Internet access. Moreover,
although we expect cable modem rentals to be a significant part of our revenue
during the next two years, we expect our cable modem rental income to decline as
cable modems become commercially available at lower costs through retail stores
and as they become standard features of personal computers. However, we will
save the cost of purchasing and installing cable modems for end users. In the
future we expect to earn revenues from the local content we provide and, subject
to our agreement with Vulcan Ventures Incorporated ("Vulcan"), from additional
services such as Internet telephony.
Our expenses consist of the following:
o Operating costs, which consist primarily of salaries for help desk and
network operations center employees; telecommunications expenses,
including charges for Internet backbone and telecommunications
circuitry; allocated cost of facilities; costs of installing cable
modems for our end users; and depreciation and maintenance of
equipment. In one-way cable systems, we must support the telephone
return path from the local telephone company's central office to the
cable headend. Accordingly, we incur greater telecommunications costs
in a one-way system than we incur in a two-way system. Consequently,
the rate at which our cable partners upgrade their systems to two-way
capability will affect our operating margins. We expect our operating
costs to grow significantly as we roll out services in new systems.
Many of our operating costs are relatively fixed in the short term.
However, as we add new end users we will be able to spread these costs
over a larger revenue base, and, accordingly, decrease our costs per
subscriber and improve our operating margins.
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o Engineering expenses, which consist primarily of salaries and related
costs for network design and installation of the telecommunications and
data network hardware and software; system testing and project
management expenses; allocated cost of facilities; and depreciation and
maintenance on the equipment used in our engineering processes. We
expect our engineering expenses to grow significantly as we introduce
our services in new markets and expand our network.
o Sales and marketing expenses, which consist primarily of salaries,
commissions and related personnel expenses and costs associated with
the development of sales and marketing materials, database market
analytics, direct mail and telemarketing. We expect that our sales and
marketing expenses will increase significantly as we pursue our growth
strategy.
o General and administrative expenses, which consist primarily of
salaries for our executive, administrative, finance and human resource
personnel; amortization of goodwill; and fees for professional
services. We expect to hire additional support personnel and to incur
other additional expenses associated with being a public company,
including costs of directors' and officers' insurance and increased
legal and accounting fees.
o Non-cash compensation expense from stock options, which equals the
excess of the fair market value of our stock at the time of grant over
the exercise price of the stock options granted to employees and
directors amortized over the vesting period.
o Amortization of distribution agreement costs, which relates to warrants
issued to cable and strategic partners in connection with network
services and other distribution related agreements, collectively
referred to as distribution agreements. We measure the cost of warrants
issued to cable and strategic partners based on the fair values of the
warrants when earned by those partners. Because the fair value of the
warrant is dependent to a large extent on the price of our common
stock, the cost of warrants earned in the future may vary
significantly. Costs of warrants granted in connection with
distribution agreements are amortized over the term of the underlying
agreement. Warrants not directly associated with long-term distribution
agreements are expensed as earned.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999
(UNAUDITED), THE PERIOD APRIL 3, 1998 (INCEPTION) TO JUNE 30, 1998 (UNAUDITED)
AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
On April 3, 1998, we acquired CATV.net, Inc. and High Speed Access
Network, Inc. in a transaction recorded under the purchase method of accounting.
We had no operations prior to these acquisitions. Accordingly, the following
discussion reflects our results of operations since April 3, 1998.
Our operating results have varied on a quarterly basis during our short
operating history and may fluctuate significantly in the future due to a variety
of factors, many of which are outside our control. In addition, the results of
any quarter do not indicate the results to be expected for a full fiscal year.
As a result of the foregoing factors, our annual or quarterly results of
operations may be below the expectations of public market analysts or investors,
in which case the market price of the common stock could be materially and
adversely affected. Finally, the results of operations for the six months ended
June 30, 1999 are not directly comparable to the period April 3, 1998
(Inception) to June 30, 1998 ("Inception Period"). Therefore, no attempt to
compare these periods is included in this discussion.
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Revenues. Net revenue consists primarily of net monthly subscription
fees for cable modem-based and traditional dial-up Internet services, cable
modem rental income, and installation fees and other up front fees. Total net
revenue for the three months ended June 30, 1999 was $641,000, an increase of
$550,000 over net revenues of $91,000 for the Inception Period. For the second
quarter and first half of 1999, cable modem based subscription fees contributed
approximately 33% and 38% of our net revenue, traditional dial up service fees
contributed 47% and 43%, cable modem rental fees contributed 16% and 15%, and
installation and other up front fees contributed 4% and 4%, respectively. For
the Inception Period, cable modem based subscription fees contributed
approximately 35% of the net revenue; traditional dial up service fees
contributed 33% and cable modem rental fees, installation fees and other up
front fees contributed approximately 32%. Total net revenue for the six months
ended June 30, 1999 was $940,000.
Costs and Expenses
Operating. Operating costs for the three months ended June 30, 1999
were $4.0 million, an increase of $3.7 million over operating costs of $0.3
million for the Inception Period. The increase in operating costs resulted
primarily from an increase in personnel and personnel related costs for
additional staff in our network operations centers, help desk and field
technical support department, an increase in telecommunications expense from the
rollout of our service to new markets and larger subscriber base and
depreciation of capital equipment from the expansion of our network and the
installation of cable modems for a growing subscriber base. Operating costs were
$6.2 million for the six months ended June 30, 1999.
Engineering. Engineering expenses for the three months ended June 30,
1999 were $2.1 million, an increase of $1.7 million over engineering expenses of
$0.4 million for the Inception Period. The increase in engineering expenses
resulted from personnel and personnel related costs for additional technical
staff to support the installation of cable headend hardware and software in our
cable partners' systems, continued network design, system testing, and project
management as we evaluated new equipment and possible new product offerings.
Engineering costs were $3.6 million for the six months ended June 30, 1999.
Sales and Marketing. Sales and marketing expenses for the three months
ended June 30, 1999 were $3.6 million, an increase of $2.9 million over sales
and marketing expenses of $0.7 million for the Inception Period. The increase in
sales and marketing expenses resulted primarily from an increase in personnel
and personnel related cost to expand our residential and commercial end user
sales force, new cable partner sales force and telemarketing sales force, as
well as an increase in direct marketing and advertising expenses. For the six
months ended June 30, 1999, sales and marketing expenses were $5.7 million.
General and Administrative. General and administrative expenses were
$2.4 million for the three months ended June 30, 1999, an increase of $1.8
million over general and administrative expenses of $0.6 million for the
Inception Period. The increase in general and administrative expenses resulted
from additional personnel costs as we hired personnel to implement procedures
and controls to support our planned expansion and to administer finance, legal
and human resource functions. General and administrative expenses also included
amortization of intangible assets of $252,000 for the three months ended June
30, 1999 and $216,000 for the Inception Period resulting from our acquisitions
of CATV.net, Inc. and High Speed Access Network, Inc. General and administrative
expenses were $3.6 million for the six months ended June 30, 1999 including
amortization of intangible assets of $472,000 related to the acquisitions
mentioned above.
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Non-cash Compensation Expense from Stock Options. Non-cash compensation
expense from stock options for the three months ended June 30, 1999 was $1.2
million. There was no expense of this nature during the Inception Period.
Non-cash compensation expense represents the excess of the fair market value of
our common stock over the exercise price of the stock options granted. This
expense is principally related to 227,695 options issued under the 1998 stock
option plan that vested upon execution of the initial public offering ("the
Offering"). Non-cash compensation expense from stock options was $2.7 million
for the six months ended June 30, 1999. The remaining amount of deferred
compensation expense will be recognized over the vesting period of the options.
Amortization of Distribution Agreement Costs. Amortization of
distribution agreement costs for the three months ended June 30, 1999 was $3.3
million. There were no expenses of this nature during the Inception Period.
These costs represent the stock warrants issued to cable and strategic partners.
The increase in this account is primarily due to charges totaling $3.2 million
related to 387,500 warrants issued under the terms of a non-binding letter of
intent and subsequent letter agreement with Microsoft Corp. ("Microsoft"). The
remainder relates to amortization of distribution agreement costs resulting from
69,587 warrants earned by Charter Communications ("Charter"). We could incur
additional material non-cash charges related to further issuance of stock
warrants to our cable and strategic partners in the future. The Company will
recognize an addition to equity for the fair value of any warrants issued, and
recognize the related expense over the term of the service agreement with the
cable or strategic partner to which the warrants relate. The amount of any such
charges is not determinable until such warrants are earned. The use of warrants
in these and similar transactions may increase the volatility of our earnings in
the future. Amortization of distribution agreement costs for the six months
ended June 30, 1999 was $3.3 million.
Net Interest Income (Expense). Net interest income was $647,000 for the
three months ended June 30, 1999, an increase of $651,000 over net interest
expense of $4,000 for the Inception Period. The primary reason for the increase
in interest income relates to returns on investment of the net proceeds of the
Offering. Net interest income represents interest earned by the Company on cash
and cash equivalents, less interest expense on capital lease obligations and
long-term debt. Net interest income for the six months ended June 30, 1999 was
$766,000.
Income Taxes. At June 30, 1999, we had accumulated net operating loss
carryforwards for federal and state tax purposes of approximately $31.4 million,
which will expire at various times through 2019. At June 30, 1999, we had a net
deferred tax asset of $9.8 million relating principally to our accumulated net
operating losses. Our ability to realize the value of our deferred tax asset
depends on our future earnings, if any, the timing and amount of which are
uncertain. We have recorded a valuation allowance for the entire net deferred
tax asset as a result of those uncertainties. Accordingly, we did not record any
income tax benefit for net losses incurred for the three months ended June 30,
1999, the Inception Period, or the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, we had cash and cash equivalents of $218.2 million
compared to $17.9 million at December 31, 1998. We had significant negative cash
flows from operating activities for the six months ended June 30, 1999. Cash
used in operating activities was $12.6 million for the six months ended June 30,
1999 caused primarily by a net loss of $23.3 million and an increase in current
and non-current assets of $2.4 million, substantially offset by non-cash
expenses of $8.2 million and increases in accounts payable, accrued expenses and
other current liabilities of $4.9 million.
Cash used in investing activities was $11.9 million for the six months
ended June 30, 1999, the result of capital expenditures of $11.6 million. The
principal capital expenditures incurred during this
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period were for the purchase of headend data network hardware and software,
cable modems and equipment necessary for monitoring our network, reflecting our
expansion into new markets.
Cash provided by financing activities for the six months ended June 30,
1999 was $224.8 million comprised primarily of $179.3 million in net proceeds
from the Offering, $18.5 million in proceeds from the concurrent offering to
Cisco, Com21 and Microsoft, $25.0 million in net proceeds from the issuance of
mandatorily redeemable convertible preferred stock, and $1.7 million in proceeds
from long-term debt.
We expect to experience substantial negative cash flow from operating
activities and negative cash flow from investing activities for at least the
next several years due to continued deployment of our services into new markets
and the enhancement of our network and operations. Our future cash requirements
will depend on a number of factors including:
o The pace of the rollout of our service to our cable partners,
including the impact of substantial capital expenditures and
related operating expenses;
o The rate at which we enter into contracts with cable operators for
additional systems;
o The rate at which end users subscribe to our services;
o Changes in revenue splits with our cable partners;
o Price competition in the Internet and cable industries;
o Capital expenditures and costs related to infrastructure
expansion;
o The rate at which our cable partners convert their systems from
one-way to two-way systems;
o End user turnover rates;
o Our ability to protect our systems from telecommunications
failures, power loss and software-related system failures;
o Changes in our operating expenses including, in particular,
personnel expenses;
o The introduction of new products or services by us or our
competitors;
o Our ability to enter into strategic alliances with content
providers; and
o Economic conditions specific to the Internet and cable industries,
as well as general economic and market conditions.
We expect to incur approximately $16.0 million of additional capital
expenditures for the remainder of 1999 principally related to the installation
of headend data network hardware and software, cable modems, central network
hardware and software for e-mail, network monitoring and web hosting and a
billing and customer care system. Actual capital expenditures will be
significantly affected by the rate at which end users subscribe for our cable
modem Internet access services, which requires us to purchase a cable modem for
each new end user, as well as by the pace of the roll out of our systems, which
requires us to purchase headend data network hardware and software.
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We believe our current cash and cash equivalents, together with the
proceeds from a $3.0 million loan facility entered into in April 1999, and a
$3.0 million capital lease facility entered into in May 1999, as well as
additional loan and lease facilities will be sufficient to meet our working
capital requirements, including operating losses, and capital expenditure
requirements for the next 18 months, assuming we achieve our business plan.
There can be no assurance that we will be able to raise additional capital,
should that become necessary, on terms acceptable to us or at all. The sale of
additional equity or convertible debt securities may result in additional
dilution to our stockholders. If financing is not available at terms acceptable
to us, management has the intent and the ability to reduce expenditures so as to
delay the need for additional financing.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivatives and
Hedging Activities (SFAS 133), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities. SFAS 133, as amended by SFAS 137, is effective for the
Company's year ending December 31, 2001. As the Company does not currently
engage or plan to engage in derivatives, or hedging transactions there will be
no impact on the Company's results of operations, financial position or cash
flows upon the adoption of SFAS 133.
YEAR 2000 COMPLIANCE
We have exposure and risk if the systems upon which we are dependent to
conduct our operations are not Year 2000 compliant. Should any of our "date
dependent" equipment, circuits or software fail as a result, our services could
be severely affected. Our potential areas of exposure include information
technology, including computers and software that we purchase or licenses from
third parties, and non-information technology, such as telephone systems and
other equipment that we acquire and use internally. Other potential areas of
exposure include the systems of business partners upon whom our services are
dependent, including our cable partners and their RF-cable TV plants, and
Internet backbone providers and telephone companies.
We have engaged a third party consultant to perform a Year 2000
assessment study. The planning, inventory, and business impact analysis portions
of our Year 2000 assessment project are complete.
o We have tested our internal PC-based and other local area computer
networks. We have identified only minor issues that we will
remediate by routine upgrades, patches and replacements by the end
of September 1999.
o We are continuing to seek verification from our cable affiliates
that the cable plants over which our service operates are Year
2000 compliant. Our major cable partner, Charter Communications,
Inc., has indicated that it expects to be fully Year 2000
compliant by August 31, 1999. Our other cable partners are in
various states of Year 2000 readiness and testing, but we believe
the risk posed to our services by our cable partners' headend
equipment to be slight. To the extent our cable partners are not
presently compliant, we are asking them to provide us with a
description of their plans to become so. To the extent that our
cable affiliates fail to provide certification that they are Year
2000 compliant by August 31, 1999, we will reassess the possible
impact on our business and the nature of our electronic
interdependencies at that time, and take appropriate remediation
action to the extent possible, including developing contingency
plans.
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o We are also verifying that the equipment, systems and services of
our other vendors and suppliers provide to us are Year 2000
compliant. To date, virtually all of the non-software vendors and
suppliers that we consider vital to our operations have certified
Year 2000 compliant status to us, or have indicated that they will
do so. To the extent that vendors fail to provide certification
that they are Year 2000 compliant by August 31, 1999, we expect to
terminate and replace those relationships.
We expect to resolve our Year 2000 compliance issues primarily through
normal upgrades of hardware and software, or, when necessary, through
replacement of existing software with Year 2000 compliant applications. We have
spent $270,000 to date of our estimated $500,000 total cost to develop and
implement our Year 2000 compliance. We do not expect to capitalize any of this
cost. The remainder of these costs will be funded from cash on hand.
We believe that our current Year 2000 compliance plan is sufficient to
eliminate any material impact on operations. There are, however, dependencies on
third party vendors and cable operators completing their commitments. To reduce
the impact of failure, we have initiated contingency plans to deal with the
worst-case scenario that might occur if technologies we are dependent upon are
not Year 2000 compliant and fail to operate effectively. We expect to have those
plans in place by the end of the third quarter of 1999. Nonetheless, if our
present efforts to address our potential Year 2000 compliance issues are not
successful, or if our cable partners, vendors, and other third parties with
which we conduct business do not successfully address these issues, or if our
contingency plans are not effective, our business and financial results could be
materially and adversely affected.
RISK FACTORS
You should carefully consider the following factors and other
information in this Form 10-Q and other filings made by the Company with the
Securities and Exchange Commission before trading in our common stock. If any of
the following risks actually occur, our business and financial results could be
materially and adversely affected. In that case, the trading price of our common
stock could decline and you could lose all or part of your investment.
RISKS RELATED TO OUR OPERATIONS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY.
Our predecessor companies began offering services to cable operators in
October 1997. We have recognized limited revenues since our inception. In
addition, our senior management team and other employees have worked together at
our company for only a short period of time. Consequently, we have a limited
operating history upon which our business can be evaluated.
WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES.
Since our founding, we have not been profitable. We have incurred
substantial costs to create and introduce our broadband Internet access
services, to operate these services, and to grow our business. We incurred net
losses of approximately $31.4 million from April 3, 1998 (Inception) through
June 30, 1999. Our limited operating history and our ambitious growth plans make
predicting our operating results, including operating expenses, difficult.
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We expect to incur substantial losses and experience substantial
negative cash flows from operations for at least the next several years as we
expand our business. The principal costs of expanding our business will include:
o Substantial direct and indirect selling, marketing and promotional
costs;
o System operational expenses, including the lease of our Internet
backbone, which has a traffic capacity in excess of our current
needs;
o Costs incurred in connection with higher staffing levels to meet
our growth;
o The acquisition and installation of the equipment, software and
telecommunications circuits necessary to enable our cable partners
to offer our services; and
o Costs in connection with acquisitions, divestitures, business
alliances or changing technologies.
If any of these costs or expenses is not accompanied by an increase in
revenues, then our business and financial results could be materially and
adversely affected.
WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR BUSINESS MODEL IS UNPROVEN.
Our success depends on continued growth in the use of the Internet and
high speed access services. Although Internet usage and popularity have grown
rapidly, we cannot be certain that this growth will continue in its present
form, or at all. Critical issues concerning the increased use of the
Internet--including security, reliability, cost, ease of access and quality of
service--remain unresolved and are likely to affect the development of the
market for our services. Relatively few companies currently offer cable-based
Internet access, and we do not believe any of those has been profitable.
Moreover, many industry analysts believe that Internet access providers will
become increasingly reliant upon revenues from content due to competitive
pressures to provide low cost or even free Internet access.
The success of our business ultimately will depend upon the acceptance
of our services by end users, who will purchase or rent a cable modem from us
and pay both installation fees and monthly access charges for our services. We
have launched full operations in only 51 cable systems and we have approximately
5,195 residential cable modem end users. Additionally, although our primary
service offering is high bandwidth Internet access, we currently derive a
substantial portion of our revenues from standard dial-up Internet access, which
we offer as a feeder for our high speed offerings. We cannot predict whether
demand for our high speed Internet access services will develop, particularly at
the volume or prices we need to become profitable.
OUR ABILITY TO ATTRACT AND RETAIN END USERS DEPENDS ON MANY FACTORS WE CANNOT
CONTROL.
Our ability to increase the number of our end users, and our ability to
retain end users, will depend on a number of factors, many of which are beyond
our control. These factors include:
o Our ability to enter into and retain agreements with cable
operators;
o The speed at which we are able to deploy our services,
particularly if we cannot obtain on a timely basis the
telecommunications circuitry necessary to connect our cable
headend equipment to our Internet backbone;
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o Our success in marketing our service to new and existing end
users;
o Competition, including new entrants advertising free or lower
priced Internet access and/or alternative access technologies;
o Whether our cable partners maintain their cable systems or upgrade
their systems from one-way to two-way service;
o The quality of the customer and technical support we provide; and
o The quality of the content we offer.
In addition, our service is currently priced at a premium to many other
online services and many end users may not be willing to pay a premium for our
service. Because of these factors, our actual revenues or the rate at which we
will add new end users may differ from past increases, the forecasts of industry
analysts, or a level that meets the expectations of investors.
OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY BE
BELOW THE EXPECTATIONS OF ANALYSTS AND INVESTORS.
Our revenues and expenses, and in particular our quarterly revenues,
expenses and operating results have varied in the past and may fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. These factors include:
o The pace of the rollout of our service to our cable partners,
including the impact of substantial capital expenditures and
related operating expenses;
o The rate at which we enter into contracts with cable operators for
additional systems;
o The rate at which end users subscribe to our services;
o Changes in revenue splits with our cable partners;
o Price competition in the Internet and cable industries;
o Capital expenditures and costs related to infrastructure
expansion;
o The rate at which our cable partners convert their systems from
one-way to two-way systems;
o End user turnover rates;
o Our ability to protect our systems from telecommunications
failures, power loss and software-related system failures;
o Changes in our operating expenses including, in particular,
personnel expenses;
o The introduction of new products or services by us or our
competitors;
o Our ability to enter into strategic alliances with content
providers; and
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o Economic conditions specific to the Internet and cable industries,
as well as general economic and market conditions.
In addition, our operating expenses are based on our expectations of
the future demand for our services and are relatively fixed in the short term.
We may be unable to adjust spending quickly enough to offset any unexpected
demand shortfall. A shortfall in revenues in relation to our expenses could have
a material and adverse effect on our business and financial results.
The quarter-to-quarter comparisons of our results of operations should
not be relied upon as an indication of future performance. It is possible that
in some future periods our results of operations may be below the expectations
of public market analysts and investors. In that event, the price of our common
stock is likely to fall.
WE MAY NOT BE ABLE TO ESTABLISH OR MAINTAIN ACCEPTABLE RELATIONSHIPS WITH CABLE
OPERATORS.
Our success depends, in part, on our ability to gain access to cable
customers. We gain that access through agreements with our cable partners. There
can be no assurance that we will be able to establish or maintain relationships
with cable operators. Even if we are able to establish and maintain those
relationships, there can be no assurance that we will be able to do so on terms
favorable to us or in the quantities we need to become profitable. In addition,
our failure to form partnerships with a large number of cable operators as
quickly as possible permits other cable-based broadband service providers to
enter into exclusive agreements and effectively exclude us from the systems
covered by those agreements. Furthermore, in order to rapidly deploy our
services within a market, we typically begin installation of our equipment and
related telecommunications circuits prior to the execution of final
documentation. If we are unable to finalize our contractual relationship with a
cable operator, if the exclusive relationship between us and our cable partners,
or between our cable partners and their cable customers, is impaired, or if we
do not become affiliated with a sufficient number of cable operators, our
business and financial results could be materially and adversely affected.
OUR LARGEST CABLE PARTNER CAN TERMINATE ITS CONTRACT WITH US.
Our largest cable partner is Charter Communications. Charter is an
affiliate of Vulcan, which owns 37.4% of our outstanding common stock as of June
30, 1999. Charter has provided us exclusive access to at least 750,000 homes
passed. Charter has equity incentives to provide us additional homes passed,
although it is not obligated to do so. Under our network service agreement,
Charter can terminate our exclusivity rights, on a system-by-system basis, if we
fail to meet performance benchmarks or otherwise breach our agreement, including
our commitment to provide content designated by Vulcan. Moreover, Charter can
terminate our agreement, for any reason, as long as it purchases the associated
cable headend equipment and modems at book value and pays us a termination fee
based on the net present value of the revenues we otherwise would earn for the
remaining term of the agreement from those end users subscribing to our services
as of the date of termination. There can be no assurances we will meet the
benchmarks related to our customer penetration rates or that Charter will not
decide to terminate our agreement for any other reason. If Charter were to
terminate this agreement, in whole or for any material system, our business and
financial results would be materially and adversely affected.
OUR AGREEMENTS WITH VULCAN VENTURES COULD CONSTRAIN OUR ABILITY TO GENERATE
REVENUES FROM PROVIDING CONTENT AND FUTURE SERVICES OUR END USERS MAY DEMAND.
Under our programming content agreement with Vulcan, Vulcan has the
right to require us to carry, on an exclusive basis in all cable systems we
serve, content it designates. Vulcan content may
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include start-up and related web pages, electronic programming guides, other
multimedia information and telephony services. We will not share in any revenues
Vulcan may earn through the content or telephony services it provides. We must
provide all equipment necessary for the delivery of Vulcan content, although
Vulcan will reimburse us for any costs we incur in excess of $3,000 per cable
headend. Vulcan cannot charge us for any Vulcan content through November 25,
2008; after that date we will be obligated to pay Vulcan for this content at the
lowest fee charged to any Internet service provider who subscribes to Vulcan
content.
Vulcan has the right to prohibit us from providing content or telephony
services that compete with Vulcan content in Vulcan's discretion and can require
us to remove competing content. Many industry analysts believe that Internet
access will become increasingly reliant upon revenues from content due to
competitive pressures to provide low cost or even free Internet access. If
Vulcan were to require us to remove our content or substitute its telephony
services for any we might provide, we could lose a source of additional revenues
and might not recover all related costs of providing our content or telephony
services. Vulcan's ability to prohibit us from providing content and telephony
services means that Vulcan's interests are not necessarily aligned with those of
our other stockholders.
OUR AGREEMENT WITH ROAD RUNNER MAY NOT BENEFIT US.
We recently entered into an agreement with ServiceCo LLC, the entity
that provides Road Runner's cable Internet access and content aggregation
services. Under the agreement, we will provide our services as a Road Runner
subcontractor to cable operators that we and Road Runner jointly designate to
receive our services. We can offer no assurances that this agreement will be of
material benefit to us. In addition, we may not be able to meet the system
deployment schedule proposed by Road Runner. Moreover, while we expect that only
a portion of the homes under the agreement will be deployed on a partial turnkey
basis, Road Runner could ask us to deploy more partial turnkey homes than we
anticipate. In a partial turnkey solution, we will deliver fewer services and
possibly incur lower costs than in a full turnkey solution, but will also earn a
smaller percentage of the subscription revenue. Since the agreement provides
that Road Runner will earn one warrant per home passed in cable systems
designated to receive service regardless of whether we deploy a partial or full
turnkey solution, our stockholders could suffer dilution in exchange for
potentially less profitable homes.
INVESTORS MAY SUFFER SUBSTANTIAL DILUTION FROM OTHER TRANSACTIONS.
As an inducement to cause Charter Communications to commit additional
systems to us, we have granted Charter warrants to purchase up to 7,750,000
shares of our common stock at an exercise price of $3.23 per share. These
warrants become exercisable at the rate of 1.55 shares for each home passed
committed to us by Charter in excess of 750,000. To the extent that Charter
becomes eligible to exercise all or a significant portion of these warrants, our
stockholders will experience substantial dilution. In addition, we have granted
Microsoft a warrant to purchase 387,500 shares of our common stock at an
exercise price of $16.25, with additional warrants issuable for homes passed
above 2,500,000 homes committed to us by Comcast. Our agreement with ServiceCo
LLC provides for granting of warrants to purchase one share of our common stock
at a price of $5 per share up to a maximum of 5 million shares. In the future,
we also may issue additional stock or warrants to purchase our common stock in
connection with our efforts to expand the distribution of our services.
Stockholders could face additional dilution from these possible future
transactions.
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DARWIN, OUR FORMER DIGITAL SUBSCRIBER LINE TECHNOLOGY DIVISION, AND OUR
PRINCIPAL STOCKHOLDERS ARE NOT RESTRICTED FROM PROVIDING COMPETING HIGH SPEED
INTERNET ACCESS SERVICES.
In March 1999, we transferred all of the assets used in our digital
subscriber line technology division to Darwin Networks, Inc., a newly-formed
subsidiary, and distributed all of the Darwin common stock to our current
stockholders. Darwin's digital subscriber line technology is an alternative
method of providing high speed Internet access to end users using the telephone
infrastructure. Although Darwin is at an early stage of its development, if
Darwin were to deploy this technology successfully in future partnerships with
wireline telephone providers in markets where we provide our high speed Internet
access, Darwin could become one of our competitors. Neither Darwin nor our
principal stockholders, including Vulcan, will be restricted from providing
competing high speed digital subscriber line Internet access.
ONE-WAY CABLE SYSTEMS INCREASE OUR OPERATING COSTS AND MAY NOT PROVIDE THE
QUALITY NECESSARY TO ATTRACT CUSTOMERS.
Although our service can operate in one-way cable systems, where data
can be transmitted at high speeds from the cable headend to the end user, the
end user in a one-way system can only transmit data back to the cable headend
via a standard phone line. Because we must support the telephone return
component of the system, we incur higher operating costs in one-way systems.
Presently only one-third of the systems where we are or will soon operate our
services are two-way systems. Over time, however, we expect most, if not all, of
our cable partners to upgrade and or rebuild their plants to provide increased
bandwidth and two-way capabilities. We believe faster uploads and the
elimination of phone line return costs make our service more valuable and may
lead to higher customer penetration rates, which in turn benefits the cable
operator through higher revenue. However, upgrading a cable system can be
expensive and time-consuming for the cable operator. Moreover, we do not require
our cable partners to make these upgrades and they have no legal obligation to
do so. Consequently, if our cable partners do not upgrade to two-way capability
at the rate we anticipate, our financial results may be negatively affected.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH PLANS.
To manage our anticipated growth, we must continue to implement and
improve our operational, financial and management information systems; hire,
train and retain additional qualified personnel; continue to expand and upgrade
core technologies; and effectively manage our relationships with our end users,
suppliers and other third parties. Our expansion could place a significant
strain on our services and support operations, sales and administrative
personnel, and other resources. In fact, our predecessor companies had
inadequate accounting controls and procedures in place. While we believe that we
generally have adequate controls and procedures in place for our current
operations, our billing software is not adequate to meet our growth plans. We
are in the process of replacing our billing software with an integrated billing
and customer care software system that we believe is capable of meeting our
planned future needs. We could also experience difficulties meeting demand for
our products and services. Additionally, if we are unable to provide training
and support for our products, the implementation process will be longer and
customer satisfaction may be lower. Our growth plan may include acquisitions. If
we acquire a company, we could have difficulty assimilating its operations, or
assimilating and retaining its key personnel. In addition if the demand for our
service exceeds our ability to provide our services on a timely basis, we may
lose customers. There can be no assurance that our systems, procedures or
controls will be adequate to support our operations or that our management will
be capable of exploiting fully the market for our products and services. The
failure to manage our growth effectively could have a material adverse effect on
our business and financial results.
THE MARKET FOR INTERNET SERVICES IS HIGHLY COMPETITIVE.
We face competition from many competitors with significantly greater
financial, sales and marketing resources, larger customer bases, longer
operating histories, greater name recognition and more
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established relationships with advertisers, content and application providers
and/or other strategic partners than we have. We expect the level of this
competition to intensify in the future. We face competition from other cable
modem service providers for partnerships with cable operators and from providers
of other types of data and Internet services for end users. Due to this intense
competition, there may be a time-limited market opportunity for our cable-based
high speed access services. There can be no assurance that we will be successful
in achieving widespread acceptance of our services before competitors offer
services similar to our current offerings, which might preclude or delay
purchasing decisions by potential customers.
Our competitors in the cable-based Internet access market are those
companies that have developed their own cable-based services and market those
services to cable system operators. Other competitors in the cable-based
Internet access market are those companies seeking to establish distribution
arrangements with cable system operators in exurban markets and/or provide
one-way system capability. In addition, other cable system operators have
launched their own cable-based Internet services that could limit the market for
our services. Widespread commercial acceptance of any of these competitors'
products could significantly reduce the potential customer base for our
services, which could have a material adverse effect on our business and
financial results.
We also compete with traditional Internet service providers and other
competing broadband technologies including ISDNs, DSLs, wireless and satellite
data services. Moreover, competitors include long distance inter-exchange
carriers, regional Bell operating companies and other local exchange carriers.
Many of these carriers are offering diversified packages of telecommunications
services, including Internet access, and could bundle these services together,
putting us a competitive disadvantage. Widespread commercial acceptance of any
of these competing technologies or competitors' products could significantly
reduce the potential customer base for our services, which could have a material
adverse effect on our business and financial results.
OUR ABILITY TO INCREASE THE CAPACITY AND MAINTAIN THE SPEED OF OUR NETWORK IS
UNPROVEN.
We face risks related to our ability to increase the transmission
capacity of our network to meet expected end user levels while maintaining
superior performance. While peak downstream data transmission speeds across the
cable infrastructure approach 10 Mbps in each 6 megahertz (Mhz) channel, actual
downstream data transmission speeds are likely to be significantly slower,
depending on a variety of factors, including bandwidth capacity constraints
between the cable headend and the Internet backbone, the type and location of
content, Internet traffic, the number of active end users on a given cable
network node, the number of 6 Mhz channels allocated to us by our cable partner,
the capabilities of the cable modems used and the service quality of the cable
partners' facilities. The actual data delivery speed that an end user realizes
also will depend on the end user's hardware, operating system and software
configurations. There can be no assurance that we will be able to achieve or
maintain a speed of data transmission sufficiently high to enable us to attract
and retain our planned number of end users, especially as the number of the end
users grows. Because end users will share the available capacity on a cable
network node, we may underestimate the capacity we need to provide in order to
maintain peak transmission speeds. A perceived or actual failure to achieve or
maintain sufficiently high speed data transmission could significantly reduce
end user demand for our services or increase costs associated with customer
complaints and have a material adverse effect on our business and financial
results.
OUR NETWORK MAY BE VULNERABLE TO SECURITY RISKS.
Despite our implementation of industry-standard security measures, our
or our cable partners' networks may be vulnerable to unauthorized access,
computer viruses and other disruptive problems. Internet and online service
providers in the past have experienced, and in the future may experience,
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interruptions in service as a result of the accidental or intentional actions of
Internet users. Because the cable infrastructure is a shared medium, it is
inherently more vulnerable to security risks than dedicated telephony
technologies such as digital subscriber lines. Moreover, we have no control over
the security measures that our cable partners and end users adopt. Unauthorized
access could also potentially jeopardize the security of confidential
information stored in the computer systems maintained by us and our end users.
These events may result in liability to us or harm to our end users. Eliminating
computer viruses and alleviating other security problems may require
interruptions, delays or cessation of service to our end users, which could have
a material adverse effect on our business and financial results. In addition,
the threat of these and other security risks may deter potential end users from
purchasing our services, which could have a material adverse effect on our
business and financial results.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND IT MAY NOT BE AVAILABLE ON
ACCEPTABLE TERMS.
The development of our business may require significant additional
capital in the future to fund our operations, to finance the substantial
investments in equipment and corporate infrastructure needed for our planned
expansion, to enhance and expand the range of services we offer and to respond
to competitive pressures and perceived opportunities, such as investment,
acquisition and international expansion activities. To date, our cash flow from
operations has been insufficient to cover our expenses and capital needs. We
believe our current cash and cash equivalents, together with the proceeds from a
$3.0 million loan facility entered into in April 1999, and $3.0 million capital
lease financing facility entered into in July 1999, as well as additional loan
and lease financing facilities will be sufficient to meet our working capital
requirements, including operating losses, and capital expenditure requirements
for the next 18 months, assuming we achieve our business plan. There can be no
assurance that additional financing will be available on terms favorable to us,
or at all. Moreover, Charter can require any lender with liens on our equipment
placed in Charter head ends to deliver to Charter a non-disturbance agreement as
a condition to such financings. We can offer no assurance that we will be able
to obtain secured equipment financing for Charter systems subject to such a
condition or that a potential lender will be able to negotiate acceptable terms
of non-disturbance with Charter. If adequate funds are not available on
acceptable terms, we may be forced to curtail or cease our operations. Moreover,
even if we are able to continue our operations, the failure to obtain additional
financing could have a material and adverse effect on our business and financial
results and may need to delay the deployment of our services. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
WE FACE RISKS FROM POTENTIAL YEAR 2000 PROBLEMS.
We engaged a third-party consultant to complete a Year 2000 assessment
study. The third-party consultant identified only minor issues that we will
remediate by routine upgrades, patches and replacements by the end of the third
quarter of 1999. We are continuing to seek verification from our cable partners,
vendors and suppliers that they are Year 2000 compliant. To the extent that our
cable affiliates fail to provide certification that they are Year 2000 compliant
by August 1999, we will reassess the possible impact on our business and the
nature of our interdependencies at that time, and take appropriate remediation
action to the extent possible, including developing contingency plans. Our
inability to correct a significant Year 2000 problem, if one exists, could
result in an interruption in, or a failure of, certain of our normal business
activities and operations. In addition, a significant Year 2000 problem
concerning our high speed access services could cause our users to consider
seeking alternate providers of Internet access. Any significant Year 2000
problem could require us to incur significant unanticipated expenses to remedy
the problem and could divert management's time and attention, either of which
could have a material adverse effect on our business, results of operation and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations
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- -- Year 2000 Compliance" for information on our state of readiness, potential
risks and contingency plans regarding the Year 2000 issue.
WE MAY BECOME SUBJECT TO RISKS OF INTERNATIONAL OPERATIONS.
We are currently at the early stages of evaluating international
expansion opportunities. If we expand internationally, we would become subject
to the risks of conducting business internationally, including:
o Foreign currency fluctuations, which could result in reduced
revenues or increased operating expenses;
o Inability to locate qualified local partners and suppliers;
o The burdens of complying with a variety of foreign laws and trade
standards;
o Tariffs and trade barriers;
o Difficulty in accounts receivable collection;
o Potentially longer payment cycles;
o Foreign taxes;
o Unexpected changes in regulatory requirements including the
regulation of Internet access; and
o Uncertainty regarding liability for information retrieved and
replicated in foreign countries.
If we expand internationally, we will also be subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships. There can be no assurance that the risks
associated with our proposed international operations will not materially and
adversely affect our business and financial results.
RISKS RELATED TO THE MARKET FOR HIGH SPEED INTERNET ACCESS
OUR CABLE PARTNERS COULD SELL THEIR SYSTEMS OR BE ACQUIRED.
In recent years, the cable television industry has undergone
substantial consolidation. If one of our cable partners is acquired by a cable
operator that already has a relationship with one of our competitors or that
does not enter into a contract with us, we could lose the ability to offer our
cable modem access services in the systems formerly served by our cable partner,
which could have a material and adverse effect on our business and financial
results. Many of the cable operators with whom we have contracts operate
multiple systems, thus increasing the risk to us if they are acquired. Moreover,
it is common in the cable industry for operators to swap systems, which could
cause us to lose our contract for a swapped system. Even though many of our
contracts obligate our cable partners to pay us a termination fee if they sell
their system to another operator who does not assume our contract, the potential
termination fee may not be adequate to ensure that the successor operator
assumes our contract, or to compensate us fully for the loss of future business
in that system.
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OUR CABLE PARTNERS COULD LOSE THEIR FRANCHISES.
Cable television companies operate under franchises granted by local or
state authorities that are subject to renewal and renegotiation from time to
time. A franchise is generally granted for a fixed term ranging from five to 15
years, although in many cases the franchise is terminable if the franchisee
fails to comply with the material provisions of its franchise agreement. No
assurance can be given that the cable operators that have contracts with us will
be able to retain or renew their franchises. The non-renewal or termination of
any of these franchises would result in the termination of our contract with the
applicable cable operator.
OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND OUR SERVICES COULD
BECOME OBSOLETE OR FAIL TO GAIN MARKET ACCEPTANCE.
The market for our services is characterized by rapid technological
advances, evolving industry standards, changes in end user requirements and
frequent new service introductions and enhancements. For example, the North
American cable industry has adopted a set of interface specifications, known as
"DOCSIS," for hardware and software to support cable-based data delivery using
cable modems. Our ability to adapt to rapidly changing technology and industry
standards, such as DOCSIS, and to develop and introduce new and enhanced
products and service offerings will be significant factors in maintaining or
improving our competitive position and our prospects for growth. If technologies
or standards applicable to our services become obsolete or fail to gain
widespread consumer acceptance, then our business and financial results will be
materially and adversely affected.
We currently anticipate that we will use a significant portion of our
working capital to acquire headend, cable modem and other related capital
equipment. The technology underlying that equipment is continuing to evolve. It
is possible that the equipment we acquire could become obsolete prior to the
time we would otherwise intend to replace it, which could have a material
adverse effect on our business and financial results.
WE DEPEND ON A DATA TRANSMISSION INFRASTRUCTURE LARGELY MAINTAINED BY THIRD
PARTIES OR SUBJECT TO DISRUPTION BY EVENTS OUTSIDE OUR CONTROL.
Our success will depend upon the capacity, reliability and security of
the infrastructure used to carry data between our end users and the Internet. A
significant portion of that infrastructure is owned by third parties.
Accordingly, we have no control over its quality and maintenance. For example,
we rely on our cable partners to maintain their cable infrastructures. We also
rely on other third parties to provide a connection from the cable
infrastructure to the Internet. Currently, we have transit agreements with
UUNet, a division of MCI WorldCom, and others to support the exchange of traffic
between our data servers, the cable infrastructure and the Internet. Our
operations also depend on our ability to avoid damages from fires, earthquakes,
floods, power losses, telecommunications failures, network software flaws,
transmission cable cuts, Year 2000 problems and similar events. The occurrence
of any of these events could interrupt our services. The failure of the Internet
backbone, our servers, or any other link in the delivery chain, whether from
operational disruption, natural disaster or otherwise, resulting in an
interruption in our operations could have a material adverse effect on our
business and financial results.
WE MAY BE HELD LIABLE FOR DEFAMATORY OR INDECENT CONTENT, AS WELL AS INFORMATION
RETRIEVED OR REPLICATED.
In part, our business involves supplying information and entertainment
to customers over the cable systems of our cable system partners. Accordingly we
face the same types of risks that apply to all businesses that publish or
distribute information, such as potential liability for defamation, libel,
invasion
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of privacy and similar claims, as well as copyright or trademark infringement
and similar claims. A number of third parties have claimed that they hold
patents covering various forms of online transactions or online technologies. In
addition, our errors and omissions and liability insurance may not cover
potential patent or copyright infringement claims and may not adequately
indemnify us for any liability that may be imposed.
The law relating to the liability of Internet and online service
providers for information carried or disseminated through their networks is
unsettled. There are some federal laws regarding the distribution of obscene or
indecent material over the Internet under which we are subject to potential
liability. These risks are mitigated by two federal laws. One, passed in 1996,
immunizes Internet service providers from liability for defamation and similar
claims for materials the Internet service provider did not create, but merely
distributed. The other, passed in 1998, creates a "safe harbor" from copyright
infringement liability for Internet service providers who comply with its
requirements, which we intend to do. These laws apply only in the United States;
if we expand our operations to other countries, our potential liability under
the laws of those countries could be greater.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION.
The part of our business that involves installing and maintaining the
equipment used by cable systems to transmit high-speed data in a
computer-accessible format is not regulated, but cable businesses are. Changes
in cable regulations, as they relate to our service, could negatively affect our
business in several ways. First, cable operators usually classify our service as
a "cable service." If our service is not considered a cable service, some cable
franchising authorities, in most cases usually cities or counties, might claim
that our cable partners need a separate franchise to offer it. This franchise
may not be obtainable on reasonable terms, or at all. In the alternative, even
if the service is treated as cable service, local franchising authorities may
seek to impose "non-discrimination" or "open access" obligations on our cable
partners as a condition of franchise transfer or renewal. Also, even if our
service is not considered a cable service, it might be treated as a
"telecommunications service," which could subject our cable partners, and
possibly us, to federal and state regulation as "telecommunications carriers."
This could negatively affect our business in various ways. For example, if we or
our cable partners were either classified as telecommunications common carriers,
or otherwise subject to common carrier-like access and non-discrimination
requirements in the provision of our Internet over cable service, we or they
could potentially be subject to government-regulated terms, conditions and
prices for Internet connection services, as well as become obligated to make
contributions to the universal service support fund. We may also provide
Internet telephony services over cable plant, and this service may be regulated
in the future as a common carrier telecommunications service. Moreover, we or
our cable partners might then have to get a "telecommunications franchise" from
some localities, which might not be available on reasonable terms, or at all. In
addition, our contracts with our cable partners make us the exclusive supplier
of high-speed data on the cable systems where our service is offered. Firms such
as America Online and large telephone companies are seeking to have regulators
ban such exclusive arrangements. If such arrangements are banned, we could face
additional competition from other Internet access providers using the cable
system to connect to their customers, which could have a material adverse effect
on our business and financial results. Finally, any future regulatory decisions
that make DSL technology services easier for competing telephone companies to
deploy over normal telephone lines, and less expensive for customers to buy,
could negatively affect our business.
WE DEPEND ON OUR KEY PERSONNEL AND MAY HAVE DIFFICULTY ATTRACTING AND RETAINING
THE SKILLED EMPLOYEES WE NEED TO EXECUTE OUR GROWTH PLAN.
Our future success depends on the continued service of our key
personnel, especially our President, Chief Operating Officer and Chief
Technology Officer. We do not carry key person life
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insurance on most of our personnel. Given our early stage and plans for rapid
expansion, the loss of the services of any of our executive officers or the loss
of the services of other key employees could have a material adverse effect on
our business and financial results. Our future success also depends on our
ability to attract, retain and motivate highly skilled employees, particularly
engineering and technical personnel. Competition for employees in our industry
is intense. We may not be able to retain our key employees or attract,
assimilate or retain other highly qualified employees in the future. From time
to time we have experienced, and we expect to continue to experience in the
future, difficulty in hiring and retaining highly skilled employees.
RISK RELATED TO TRADING IN THE COMPANY'S STOCK
BECAUSE OF OUR RELATIONSHIP WITH VULCAN VENTURES, NEW INVESTORS WILL HAVE LITTLE
INFLUENCE OVER MANAGEMENT DECISIONS.
Vulcan owns 37.4% of our outstanding stock. Vulcan's affiliate, Charter
Communications, also has warrants to purchase up to an additional 7.75 million
shares of our common stock, which become exercisable at the rate of 1.55 shares
per home passed committed to us by Charter, in excess of 750,000. Accordingly,
Vulcan will be able to significantly influence and possibly exercise control
over most matters requiring approval by our stockholders, including the election
of directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control. In addition, conflicts of interest may arise as a consequence
of Vulcan's control relationship with us, including:
o Conflicts between Vulcan, as our controlling stockholder, and our
other stockholders, whose interests may differ with respect to,
among other things, our strategic direction or significant
corporate transactions,
o conflicts related to corporate opportunities that could be pursued
by us, on the one hand, or by Vulcan, on the other hand, or
o conflicts related to existing or new contractual relationships
between us, on the one hand, and Vulcan and its other affiliates,
on the other hand.
In particular, Vulcan is the owner of Charter, currently our largest cable
partner. Additionally, Vulcan has the exclusive right to provide or designate
the first page our end users see when they log on to our service and, if it
provides that first page, will be entitled to all of the related revenues.
Moreover, Vulcan can prohibit us from providing content that competes with
content it chooses to provide, and can prohibit us from providing telephony
service if it chooses to provide those services. See "Certain Transactions."
THE FUTURE SALE OF SHARES MAY HURT OUR MARKET PRICE.
A substantial number of shares of our common stock are available for
resale. If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity securities in the future at
times and prices that we deem appropriate.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK; OUR STOCK PRICE IS LIKELY
TO BE HIGHLY VOLATILE.
Prior to our initial public offering in June 1999, there was no public
market for our common stock. We cannot predict the extent to which investor
interest in us will lead to the development of an
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active trading market in our stock or how liquid that market might become. The
stock market has experienced extreme price and volume fluctuations. In
particular, the market prices of the securities of Internet-related companies
have been especially volatile. In the past, companies that have experienced
volatility in the market price of their stock have been the object of securities
class action litigation. If we were the object of securities class action
litigation, it could result in substantial costs and a diversion of our
management's attention and resources.
WE HAVE ANTI-TAKEOVER PROVISIONS.
Certain provisions of our certificate of incorporation, our bylaws and
Delaware law, in addition to the concentration of ownership in Vulcan, could
make it difficult for a third party to acquire us, even if doing so might be
beneficial to our other stockholders.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings.
None.
Item 2 - Changes in Securities and Use of Proceeds.
On June 4, 1999, the Company consummated its initial public offering
(the "Offering") of its common stock, par value $.01 per share (the "Common
Stock"). The registration statement relating to this Offering (File No.
333-74667) was declared effective on June 3, 1999. Lehman Brothers, Inc., J. P.
Morgan Securities, Inc., Banc of America Securities LLC and CIBC World Markets
Corp. were the managing underwriters of the Offering. The Offering terminated
upon the consummation of the sale of all of the shares subject to the
underwriters' over-allotment option. The number of shares registered, the
aggregate price of the Offering amount registered, the amount sold and the
aggregate offering price of the amount sold by the Company in the Offering were
as follows:
Shares Aggregate Price Amount Aggregate Price
Registered of Amount Registered Sold of Amount Sold
---------- -------------------- ------------ ---------------
The Company 14,950,000 $194,350,000 14,950,000 * $ 194,350,000 *
Microsoft, Cisco and Com21 1,525,773 $ 18,500,000 1,525,773 $ 18,500,000
The Company incurred the following expenses with respect to the
Offering, none of which were direct or indirect payments to directors, officers,
general partners of the Company or their associates or to persons owning 10% or
more of any class of equity securities of the Company or to affiliates of the
Company:
Underwriting Discounts Underwriters' Other Estimated Total
and Commissions Finders' Fees Expenses Expenses Expenses
- ---------------------- ------------- ------------- --------------- ---------------
$ 11,375,000 $ - $ - $ 2,015,211 $ 13,390,211
The estimated net Offering proceeds to the Company after deducting the
foregoing discounts, commissions, fees and expenses were $179,253,541, of which
$23,643,750 relates to the exercise of the underwriters' over-allotment option.
Concurrent with the initial public offering, the Company sold 618,557 shares,
82,474 shares, and 824,742 shares of common stock to Cisco Systems, Com21 and
Microsoft, respectively, under stock purchase agreements which generated
$18,500,000. None of the proceeds have been used as of June 30, 1999. The
proceeds are invested in short-term money market instruments as of June 30,
1999. None of such payments were direct or indirect payments to directors,
officers, general partners of the Company or their associates or to persons
owning 10% or more of any class of equity securities of the Company or to
affiliates of the Company. At the time of the initial public offering,
31,000,000 shares of the Company's Series A, B and C preferred stock were
converted to common stock and accrued dividends on preferred stock were paid
through issuance of 115,887 shares of common stock. The Company expects to use
the net proceeds from the initial public offering to fund capital expenditures
to be incurred in the deployment of services in new and existing cable systems,
to fund operating losses, and for working capital and other general corporate
purposes. The Company may also use a portion of the proceeds for acquisitions or
other investments.
* Amounts reflect exercise of the underwriters' over-allotment option. The
underwriters' over-allotment option included 1,950,000 shares on behalf of the
Company for an aggregate price of $23,643,750.
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Underwriting discounts and commissions pertaining to the Company's portion of
the over-allotment option were $1,706,250.
Item 3 - Defaults upon Senior Securities.
None.
Item 4 - Submission of Matters to a Vote of Security Holders.
None.
Item 5 - Other Information.
None.
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
See attached exhibit index incorporated by reference herein.
(b) Reports on Form 8-K
No such reports were filed during the quarter ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
HIGH SPEED ACCESS CORP.
Date 8/13/99 By /s/ RON S. PITCOCK
------------ -----------------------
Title President
Date 8/13/99 By /s/ GEORGE E. WILLETT
------------ -----------------------
Title Chief Financial Officer
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Exhibit Index
Exhibit Number Exhibit Title
-------------- -------------
10.1 Master Agreement dated July 22, 1999 between High
Speed Access Corp. and ServiceCo LLC.
10.2 Securities Purchase Warrant dated July 22, 1999
between High Speed Access Corp. and ServiceCo LLC.
10.3 Letter Agreement dated June 15, 1999 between
Microsoft Corp. and High Speed Access Corp.
10.4 Securities Purchase Warrant dated June 15, 1999
between Microsoft Corp. and High Speed Access Corp.
10.5 Master Agreement to Lease Equipment dated May 18,
1999 between Cisco Systems Capital Corporation and
High Speed Access Corp.
10.6 Form of Securities Purchase Warrant entered into
between High Speed Access Corp. and cable partners.
10.7 Additional System Notice and Partial HSAC Services
Supplement dated as of April 28, 1999 between Charter
Communications, Inc. and High Speed Access Corp.
10.8 Letter Agreement dated as of May 26, 1999 between
Vulcan Ventures, Incorporated, Marcus Cable Operating
Company, LLC, Charter Communications, Inc. and
HighSpeed Access Corp.
27. Financial Data Schedule
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