SCHEDULE 14A
(RULE 14A-101) INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
HIGH SPEED ACCESS CORP.
------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11(c)(2).
(1) Title of each class of securities to which transaction applies:
Not Applicable
(2) Aggregate number of securities to which transaction applies:
Not Applicable
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
The filing fee has been calculated in accordance with Rule 0-11
under the Exchange Act and is equal to 1/50 of one percent of the
aggregate value of the consideration to be received by the
registrant, which consists of a cash payment of $81,100,000 and
the transfer of 75,000 shares of the registrant's Series D
Convertible Preferred Stock, valued at an aggregate of
$15,789,473.68 (or approximately $210.53 per share). The
valuation of the shares of Series D Convertible Preferred Stock
is based on the per share price to be paid by Charter
Communications Holding Company LLC to acquire 38,000 such shares
from Vulcan Ventures Incorporated in a transaction to occur
immediately prior to the transaction described herein.
(4) Proposed maximum aggregate value of transaction: $96,889,473.68
(5) Total fee paid: $19,377.89
[ ] Fee paid previously with preliminary materials: Not Applicable
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
HIGH SPEED ACCESS CORP.
10901 WEST TOLLER DRIVE
LITTLETON, CO 80127
November [__], 2001
Dear Stockholders:
You are cordially invited to attend the Special Meeting of Stockholders
of High Speed Access Corp. to be held on December [__], 2001 at 10:00 a.m.,
mountain time, at the offices of High Speed Access Corp. at 10901 West Toller
Drive, Littleton, Colorado 80127. At the Special Meeting, you will be asked to
consider and vote on several proposals, including proposals (i) to approve the
sale of substantially all of our assets to Charter Communications Holding
Company, LLC ("Charter"), an affiliate of Charter Communications, Inc. ("CCI")
and Charter Communications Ventures, LLC, ("Charter Ventures") and (ii) to
transact such other matters as may properly come before such Special Meeting or
any adjournment or postponement thereof.
YOUR BOARD OF DIRECTORS, WHICH CONSISTS ENTIRELY OF DIRECTORS NOT
AFFILIATED WITH CHARTER OR ITS AFFILIATE VULCAN VENTURES INCORPORATED, CAREFULLY
REVIEWED AND CONSIDERED THE TERMS AND CONDITIONS OF THE ASSET PURCHASE AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED BY THE ASSET PURCHASE AGREEMENT AS WELL AS
OTHER ALTERNATIVES AVAILABLE TO US. BASED ON ITS REVIEW, YOUR BOARD HAS
DETERMINED THAT THE SALE OF SUBSTANTIALLY ALL OF OUR ASSETS AS CONTEMPLATED BY
THE ASSET PURCHASE AGREEMENT IS FAIR TO, AND IN THE BEST INTERESTS OF, THE
COMPANY AND OUR STOCKHOLDERS (OTHER THAN CHARTER VENTURES AND VULCAN).
The enclosed proxy statement contains, among other things, a discussion
of the proposed asset sale. The board recommends that you consider the enclosed
materials carefully.
Your vote is extremely important. It is a condition to our agreement
with Charter that a majority of the votes actually cast at the Special Meeting
by holders of our common stock, other than Charter, Vulcan, their respective
affiliates and certain of our executive officers, vote to approve the asset
sale. ACCORDINGLY, IF A MAJORITY OF THE VOTES CAST BY HOLDERS OF OUR COMMON
STOCK (OTHER THAN CHARTER VENTURES, VULCAN AND CERTAIN OF OUR EXECUTIVE
OFFICERS) ARE CAST AGAINST THE PROPOSAL, THE ASSET SALE WILL NOT BE CONSUMMATED,
WE WILL NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS AND IT IS LIKELY WE
WILL FILE FOR BANKRUPTCY. Charter Ventures, Vulcan and our directors have agreed
to vote all of their shares in favor of the asset sale. This assures that we
will obtain the vote required under Delaware law and our organizational
documents, however it will not fulfill the condition set forth in our agreement
with Charter.
Your board has unanimously approved the proposed asset sale and
recommends that stockholders vote for the proposed transaction by marking the
enclosed proxy card "FOR" each of the proposals and returning the proxy card in
the accompanying postage-paid envelope. Your early response will be greatly
appreciated. Of course, you are also welcome to attend the Special Meeting and
vote your shares in person.
Sincerely,
/s/ DAVID A. JONES, JR.
David A. Jones Jr.
Chairman of the Board of Directors
--------------------------------------------------------------------------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF THIS TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
--------------------------------------------------------------------------------
This proxy statement is first being mailed to stockholders on or about
November [_], 2001.
HIGH SPEED ACCESS CORP.
10901 WEST TOLLER DRIVE
LITTLETON, CO 80127
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER [__], 2001
------------------------
To the Stockholders of
High Speed Access Corp.:
Notice is hereby given that a Special Meeting of stockholders of High
Speed Access Corp. will be held at the offices of High Speed Access Corp., 10901
West Toller Drive, Littleton, Colorado 80127 on December [__], 2001 at 10:00
a.m. mountain time, for the following purposes:
1. To consider and act upon a proposal to approve the asset
purchase agreement, dated as of September 28, 2001, between
High Speed Access Corp. and Charter Communications Holding
Company, LLC, as more fully described in the accompanying
proxy statement and in Annex A to the proxy statement, and the
transactions contemplated thereby.
2. To transact any other business as may properly come before the
meeting or any adjournment or postponement thereof.
By resolution of the board of directors, the close of business on
November [ ], 2001 has been fixed as the record date for the determination of
stockholders entitled to notice of, and to vote at, the Special Meeting and any
adjournment and postponement thereof. A list of stockholders of record as of the
close of business on the record date will be available at the Special Meeting
for examination by any stockholder, his agent or his attorney.
By order of the Board of Directors,
/s/ CHARLES E. RICHARDSON
Charles E. Richardson
Secretary
Littleton, Colorado
November [__], 2001
IMPORTANT: PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY
AS POSSIBLE IN THE ENCLOSED, POSTAGE-PAID ENVELOPE TO ENSURE THAT YOUR SHARES
ARE REPRESENTED AT THE MEETING. IF YOU DO ATTEND THE MEETING, YOU MAY REVOKE
YOUR PROXY AND VOTE IN PERSON.
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
SUMMARY TERM SHEET........................................................................1
QUESTIONS AND ANSWERS RELATING TO THE PROPOSAL............................................5
GENERAL INFORMATION......................................................................14
Date, Time, Place and Purpose of the Special Meeting.....................................14
Record Date and Shares Entitled to Vote..................................................14
Quorum and Voting Rights.................................................................14
Solicitation of Proxies..................................................................14
Revocation of Proxies....................................................................15
PROPOSAL: THE SALE OF SUBSTANTIALLY ALL OF OUR ASSETS...................................16
Recommendation of the Board..............................................................16
Vote Required............................................................................16
Summary of Our Agreements with Charter and Its Affiliates................................17
Nasdaq Listing...........................................................................30
Government Approvals.....................................................................31
Appraisal Rights.........................................................................31
Transaction Expenses.....................................................................31
SPECIAL FACTORS..........................................................................32
Background of the Company's Decision to Sell Substantially All of Its Assets.............32
Recommendations of the Board of Directors; Reasons for the Sale of Substantially
All of the Company's Assets ........................................................40
Position of the Company as to the Fairness to Stockholders Unaffiliated with Charter
and Vulcan of the Sale of Substantially All of the Assets...........................44
Charter's Reasons for the Purchase of Substantially All of the Company's Assets..........48
Position of Charter as to the Fairness to Stockholders Unaffiliated with Charter
and Vulcan of the Sale of Substantially All of the Company's Assets.................50
Opinions of Financial Advisors...........................................................52
Effects of the Asset Sale................................................................62
Plans after the Sale of Substantially All of Our Assets..................................64
Distributions............................................................................65
Interests in the Sale of Assets that Differ from Your Interests..........................66
SELECTED FINANCIAL DATA..................................................................71
INFORMATION ABOUT HIGH SPEED ACCESS CORP.................................................73
</Table>
i
TABLE OF CONTENTS
(CONTINUED)
<Table>
<Caption>
PAGE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .........................................................................86
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK................................98
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...........................99
INFORMATION ABOUT CCI, CHARTER, CHARTER VENTURES AND VULCAN AND THE COMPANY'S
RELATIONSHIP WITH CCI, CHARTER.....................................................102
STOCKHOLDER PROPOSALS...................................................................118
INDEPENDENT ACCOUNTANTS.................................................................119
OTHER MATTERS...........................................................................119
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.......................................119
WHERE YOU CAN FIND MORE INFORMATION.....................................................119
INDEX TO FINANCIAL STATEMENTS...........................................................F-1
ANNEX A: ASSET PURCHASE AGREEMENT ......................................................A-1
ANNEX B: OPINION OF LEHMAN BROTHERS ....................................................B-1
ANNEX C: OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC. .............C-1
ANNEX D: OPINION OF MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED .................D-1
</Table>
ii
SUMMARY TERM SHEET
This summary term sheet is intended to give you a summary description
of the material aspects of the proposed sale of substantially all of our assets,
as described in this proxy statement. You should review the proxy statement and
the appendices to it so that you can gain a more complete understanding of the
proposed transaction.
In this proxy statement, "HSA," the "company," "we," "us" and "our"
refer to High Speed Access Corp. and its subsidiaries and predecessors.
Also in this proxy statement, "CCI" refers to Charter Communications,
Inc.; "Charter" refers to Charter Communications Holding Company LLC; and
"Charter Ventures" refers to Charter Communications Ventures, LLC. CCI holds
approximately 46.4% of the equity interest in, and 100% of the voting power of
Charter. Charter Ventures is an indirect wholly owned subsidiary of Charter.
PROPOSED TRANSACTION WITH CHARTER. (See page 17.) We have entered into
an asset purchase agreement with Charter. Under the asset purchase agreement:
o We will sell substantially all of our assets (including most of our
revenue generating assets) to Charter.
o Charter will pay us $81.1 million in cash (adjusted as described
below) and assume certain of our liabilities.
o The cash component of the purchase price will be reduced by (i) the
capital lease liabilities assumed by Charter, (ii) the current
liabilities assumed by Charter and (iii) any penalties relating to
our failure, if any, to commence training of certain customer
service representatives.
o The cash component of the purchase price will be increased by the
amount of the accounts receivable, security deposits and
prepayments acquired by Charter.
o Charter will hold back $750,000 of the cash portion of the purchase
price to secure $750,000 of any claims it may have with respect to
the purchase price adjustments. This amount will not accrue
interest and, assuming there are no disputes with respect to the
purchase price adjustments, will be paid within 65 days of the
closing date.
o 75,000 shares of our Series D Senior Convertible preferred stock
currently held by Charter Ventures and by Charter's affiliate,
Vulcan Ventures Incorporated (having an aggregate liquidation
preference of $75.0 million) will be cancelled.
o All warrants currently held by Charter to purchase shares of our
common stock will be cancelled.
o We will indemnify Charter for breaches of our representations,
warranties and covenants contained in the asset purchase agreement.
o Charter will hold back $4.0 million of the cash portion of the
purchase price to secure any such indemnity claims. This amount
will accrue interest. Of this amount, $2.0
million (less the amount of any claims) will be released to us 12
months after the closing of the asset sale and any remaining
amounts not subject to any claims will be released to us 18
months after the closing of the asset sale.
o The closing is subject to various conditions, including approval by
a majority of the votes cast at the Special Meeting by holders of
our common stock other than Charter, Vulcan, their respective
affiliates and certain of our executive officers.
o We may consider unsolicited acquisition proposals that the board
determines in good faith could lead to a superior proposal.
o If we terminate the asset purchase agreement upon entering into a
definitive agreement for an alternative superior transaction, we
must pay Charter its reasonable out-of-pocket expenses incurred
prior to the date of termination.
o Charter Ventures has the ability to block the consummation of any
alternative superior transaction by voting its preferred stock
against the proposed transaction.
EFFECT OF NOT CLOSING: We believe that if the asset sale to Charter is
not completed, it is likely that we will file for bankruptcy.
FAIRNESS OPINIONS (See page 52.) Lehman Brothers Inc. has provided the
board of directors with its opinion dated September 21, 2001 to the effect, as
of that date, and based upon the assumptions made, matters considered and limits
of review set forth in its opinion, that, from a financial point of view, the
consideration to be received by the company in the proposed transaction is fair
to the company.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. has provided the
board of directors with its opinion dated September 21, 2001 to the effect,
as of that date, and based upon the assumptions made, matters considered and
limits of review set forth in its opinion, that the payment of $81.1 million
cash consideration, which is subject to certain adjustments and the assumption
of certain liabilities by Charter, constitutes fair consideration and reasonably
equivalent value for the assets Charter will acquire.
PLANS AFTER THE ASSET SALE; DISTRIBUTIONS. (See page 64.) We have not
yet determined what our strategic direction will be following the consummation
of the asset sale and are currently considering at least three possible
alternatives.
o Option 1 - Make No Distribution; Retain the Proceeds and Reinvent
the Business. We may elect to:
(i) make no distribution to stockholders;
(ii) proceed, as expeditiously and prudently as possible, with
the sale of all of our remaining assets except those
related to our international operations or new strategic
initiatives; and
(iii) use all of the proceeds from the asset sale to fulfill our
existing contractual obligations with respect to our
international business and pursue select domestic business
opportunities as they arise, including the possible
2
acquisition of an existing business or the development of
one or more new businesses.
o Option 2 - Make a Partial Distribution; Retain Part of the
Proceeds and Reinvent the Business. We may elect to:
(i) make a portion of the proceeds from the asset sale
available to our stockholders through a direct
distribution, a stock redemption or stock repurchase
program;
(ii) proceed, as expeditiously and prudently as possible, with
the sale of all of our remaining assets except those
related to our international operations or new strategic
initiatives; and
(iii) use the remaining proceeds from the asset sale to fulfill
our existing contractual obligations with respect to our
international business and pursue select domestic business
opportunities as they arise, including the possible
acquisition of an existing business or the development of
one or more new businesses.
o Option 3 - Distribute All of the Proceeds; Wind Down the Business
and Dissolve. We may decide to cease all of our operations and
seek stockholder approval of a plan of liquidation and
dissolution so that we may liquidate all of our remaining assets,
pay our known liabilities, distribute all of our remaining cash
on hand (subject to the set aside of adequate reserves to cover
known, unknown and contingent liabilities that we reasonably
expect to be incurred) and dissolve.
At this time, we cannot predict which option we will pursue. We
currently do not know whether we will make any distributions, or, if we do, the
number, amount or timing of such distributions. Furthermore, we cannot assure
you that we will continue to operate our international business beyond mid-2002.
Additionally, we may not be successful in identifying, developing and executing
a new business strategy and could eventually use all, or a substantial portion,
of our remaining cash on hand in connection with any such new business efforts.
For additional details about our business after the asset sale, see page 77.
VOTING AGREEMENT. (See page 29.) We have entered into a voting
agreement with Charter Ventures, Vulcan and our directors, pursuant to which
they have agreed to vote all of their shares in favor of the asset sale. This
assures that we will obtain a vote in favor of the asset sale, as required under
Delaware law and our organizational documents. However, to assure that our
stockholders other than Charter Ventures and Vulcan have the opportunity to
approve the asset sale, the asset purchase agreement requires the approval of a
majority of the votes actually cast at the Special Meeting by holders of our
common stock other than Charter Ventures, Vulcan and certain of our executive
officers. The votes required by the voting agreement will not satisfy this
condition. For additional details about the vote required to complete the asset
sale, see page 16.
MANAGEMENT AGREEMENT. (See page 25.) We have entered into a management
agreement with CCI, pursuant to which CCI is responsible during the pre-closing
period for the purchase and installation of cable modems and related equipment
while sharing responsibility for product marketing. In addition, CCI has the
option to undertake additional management responsibilities with respect to the
assets to be purchased under the asset purchase agreement.
3
LICENSE AGREEMENT (See page 28.) We have entered into a License
Agreement with Charter pursuant to which Charter has granted to us the right to
use in the conduct of our retained businesses certain intellectual property to
be sold by us to Charter under the asset purchase agreement. The license
agreement will become effective upon the closing under the asset purchase
agreement.
PURCHASE OF COMMON STOCK HELD BY VULCAN (See page 116.) In addition to
the asset sale to Charter described above, we recently entered into an agreement
with Vulcan to purchase 20,222,139 shares of our common stock from Vulcan for an
aggregate purchase price of $4,448,870, or $.22 per share. This purchase price
represents a discount of 26% to our common stock's 20-day trailing average
closing price as of October 26, 2001. This purchase is conditioned on, and will
close concurrently with, the consummation of the asset sale. The shares of
common stock subject to this agreement represent all of the shares of our common
stock held by Vulcan.
STOCK EXCHANGES AND SYMBOLS; POSSIBLE DE-LISTING (See page 30.) Our
common stock currently trades on the Nasdaq Stock Market under the trading
symbol "HSAC." On September 10, 2001, we received a formal notice from the
Nasdaq Stock Market that we were not in compliance with the requirements for
continued listing on the Nasdaq stock market because the market price of our
common stock was below $1.00 per share. Following the terrorist attacks on
September 11, 2001, however, Nasdaq announced a moratorium on delisting issuers
for failure to satisfy these requirements. Nevertheless, we believe we will not
be in compliance with these requirements when the moratorium is lifted and may
be de-listed in 2002.
CCI's Class A common stock trades on the Nasdaq National Market under
the symbol "CHTR." None of our stockholders will receive any CCI stock or any
interest of any affiliate of CCI in connection with this transaction.
4
QUESTIONS AND ANSWERS RELATING TO THE PROPOSAL
Q: What is Charter's relationship to the company?
A: Charter is our affiliate. Charter Ventures is a direct wholly
owned subsidiary of Charter. Charter Ventures and its
affiliate, Vulcan Ventures Incorporated, are our largest
stockholders. Mr. Paul G. Allen is the sole stockholder of
Vulcan and the chairman of CCI and Charter. Moreover, Charter
is our largest customer.
From January 1999 until July 30, 2001 when they resigned, one
of our directors was employed by and a director of CCI,
Charter and Charter Ventures, and one was employed by CCI,
Charter and Charter Ventures. During the same period, a third
member of our board was employed by and was a director of
Vulcan, CCI and Charter. For a description of these directors
and their relationship to Charter and Vulcan, see page 66 and
102.
In addition, Charter Ventures and Vulcan together hold 100% of
our outstanding preferred stock and Vulcan holds 20,221,139
shares of our common stock, giving Charter Ventures and Vulcan
the collective power to vote 46.7% of the votes entitled to be
cast in the combined class of our common stock and our
preferred stock. Neither CCI nor Charter currently holds any
shares of our common stock. Because our organizational
documents require the approval of holders of two-thirds of our
preferred stock, any sale of the company or sale of
substantially all of our assets, whether to Charter Ventures
or to a third party, would require the approval of Charter
Ventures and Vulcan.
Q: What steps did the board of directors take to ensure that the
sale of assets is fair to the company and our stockholders?
A: On May 1, 2001, a special committee of our board of directors
was formed and charged, among other things, with identifying
and evaluating strategic options for the company. These
options included the possible solicitation of an offer from,
and negotiating the terms of, a sale of substantially all of
our assets to, or merger with, CCI or one of its subsidiaries.
The Special Committee, which was chaired by Mr. Robert
Saunders, consisted entirely of directors not affiliated with
CCI, Charter or Vulcan. On July 27, 2001, prior to our
receiving a written offer from CCI, we were informed that all
three of our directors who were affiliated with CCI, Charter
and Vulcan would be resigning as directors. After the
resignations of these directors, the members of the Special
Committee constituted all of the members of our board. For a
description of the events leading to the execution of the
asset purchase agreement, see page 32.
The Special Committee retained an independent financial
advisor, Lehman Brothers Inc., to advise it generally with
respect to a strategic transaction, such as an asset sale, and
to render its opinion, based upon the assumptions made,
matters considered and limits of review set forth in its
opinion, that, from a financial point of view, the
consideration to be received by the company in the proposed
transaction is fair to the company. For a more detailed
description of the opinion of Lehman Brothers, see page 52.
5
In addition, as a condition to the transaction, we retained
Houlihan Lokey Howard & Zukin Financial Advisors, Inc. to
provide its opinion based upon the assumptions made, matters
considered and limits of review set forth in its opinion,
that, the payment of $81.1 million cash consideration, which
is subject to adjustments, and the assumption of liabilities
by Charter, constitutes fair consideration and reasonably
equivalent value for the assets Charter will acquire. For a
more detailed description of the opinion of Houlihan Lokey,
see page 58.
Q: When does the company expect to complete the asset sale?
A: We expect that the sale of substantially all of our assets to
Charter will be completed on or about December 31, 2001.
Q. What is management's estimate of the net cash proceeds to be
realized from the asset sale?
A. We currently estimate that, assuming the closing occurs on or
before December 31, 2001, the asset sale will generate net
cash proceeds of approximately $67 million after reductions
for estimated purchase price adjustments, the indemnity
holdbacks and payment from us to Charter for launch fees net
of expense reimbursements due to us from Charter under our
network services agreements with Charter. For additional
details about our estimate of the net cash proceeds from the
asset sale, see page 41.
In addition, as a condition to the closing of the asset sale,
we must pay to third parties $9.5 million (assuming the
closing occurs on or before December 31, 2001) of debt and
lease obligations relating to the assets to be purchased by
Charter. We have also contracted to purchase, subject to the
closing of the asset sale to Charter, 20,222,139 shares of our
common stock currently held by Vulcan for an aggregate
purchase price $4,448,870.
These estimates may ultimately change as a result of
subsequent events. For additional details about the
uncertainties to these estimates, see page 46.
Q. What is management's estimate of the net cash value
immediately following the consummation of the asset sale?
A. We currently estimate that, as of December 31, 2001,
our net cash value will be approximately $43 million to $51
million, or approximately $.71 to $.84 per share of common
stock, assuming the asset sale to Charter is consummated on or
before that date. Furthermore, after giving effect to the
purchase of our common stock from Vulcan, we currently
estimate that, as of December 31, 2001, our per share net cash
value will be approximately $.96 to $1.16, assuming the common
stock purchase from Vulcan is consummated before that date.
"Net cash value" represents the amount of our cash and cash
equivalents, short-term investments and restricted cash
reduced by the amount of our total liabilities. "Per share net
cash value" represents our net cash value divided by the
number of shares of our common stock outstanding. Our actual
net cash value, and per share net cash value, may vary
depending on various factors, including the timing of the
closing of the asset sale to Charter and the common stock
purchase from Vulcan, the proceeds from the sale of assets
other than those we are selling to Charter, final pay out
amounts on known, unknown and contingent
6
liabilities and the level of cash used in our continuing
operations. We also cannot assure you that our per share net
cash value estimate of approximately $.96 to $1.16 will be
reflected in the trading price of our common stock either
prior to or following the closing of the asset sale to Charter
and the common stock purchase from Vulcan. For additional
details about our estimates of our net cash value immediately
following the asset sale, see page 45.
These estimates may ultimately change as a result of
subsequent events. For additional details about the
uncertainties to these estimates, see page 46.
Q. Will any of the money received from the transaction be
distributed to the company's stockholders?
A. We have not yet determined whether we will distribute any of
the proceeds from the asset sale to our stockholders.
At this time we cannot predict whether or not we will make any
distributions to our stockholders. Any decision to make
distributions will be made by our board, in its sole
discretion. For more details about our plans after the sale of
substantially all of our assets, see page 64.
Q: Will the company continue to provide high speed Internet
access to residential customers following the consummation of
the asset sale?
A: We currently have no such plans. In the unlikely event we were
to acquire or develop an ISP business, under our license
agreement with Charter, we would not be permitted to use the
intellectual property we are selling to Charter in any manner
that competes with the business of Charter or its affiliates
(including CCI). For additional details about our license
agreement with Charter, see page 28.
Q: What percentage of the company's existing business do the
international operations constitute?
A: Our international operations recorded revenue of $1.7 million
and $2.1 million for the three and six months ended June 30,
2001, respectively. This represented 19% and 13% of our total
revenue for the three and six months ended June 30, 2001,
respectively. Prior to the first quarter of 2001, our
international operations were limited to the pursuit of
international business opportunities.
Q: What will the company do if the asset sale is not approved by
the stockholders?
A: While the company will continue to exist as a publicly owned
entity, we will not have sufficient capital to fund our
operations and it is likely that we will file for bankruptcy.
If the asset sale is not consummated, our preferred stock will
remain outstanding. Therefore, if we subsequently liquidate
and dissolve, Charter Ventures and Vulcan, as the holders of
our preferred stock, will have a liquidation preference over
holders of our common stock with respect to any liquidating
distribution of our assets. Accordingly, if the asset sale is
not approved or otherwise not consummated, your stock would
likely be rendered worthless.
7
Additionally, if Charter Ventures and Vulcan were to continue
to hold our preferred stock, we would be unable to sell
substantially all of our assets or merge into or otherwise be
acquired by another company without the consent of Charter
Ventures and Vulcan.
Q: What is the board's recommendation as to the asset sale?
A: Your board has unanimously approved the asset purchase
agreement and has determined that the sale of substantially
all of our assets in accordance with the asset purchase
agreement is fair to, and in the best interests of, the
company and our stockholders and recommends that you vote
"FOR" approval of the transaction. For additional details
regarding the board's recommendation and the factors it
considered, see page 40.
Q: Are there risks I should consider in deciding whether to vote
to approve of the asset sale?
A: Yes. In the event that the asset sale is not consummated, we
will not have sufficient capital to fund our operations and it
is likely we will file for bankruptcy. Our present cash
resources, less our liabilities, are far less than they will
be if the asset sale is consummated. If we were to immediately
file for bankruptcy, our common stock would likely be rendered
worthless.
If the asset sale is consummated and we decide not to make any
distributions, the proceeds of the asset sale will be subject
to the risks associated with our continuing to operate our
international business under our existing contract and/or any
other additional businesses we subsequently identify and
acquire or invest in. Going forward and realizing benefits
from these operations will depend on several factors and will
be accompanied by a number of risks, including our ability to
identify suitable companies for acquisition, integrate
acquired companies into our operations and obtain additional
working capital necessary for our business. The board will
have the sole discretion to enter into agreements and
consummate any acquisitions or business combinations for cash,
stock, warrants and/or options. Except for certain mergers or
a liquidation and dissolution, which require stockholder
approval under Delaware law, the board is empowered to take
such actions without obtaining the prior approval of our
stockholders. If any future ventures we decide to explore or
undertake are unsuccessful, we may eventually use all, or a
substantial portion, of our remaining cash on hand. For
additional details about our business subsequent to the
closing and the risks attendant thereto, see page 77.
Q: Do directors have interests in the sale of assets that differ
from mine?
A: None of our current directors (with the exception of Mr.
Daniel J. O'Brien as described below) have any interests in
the asset sale that differ from yours. You should be aware
that certain of our former directors may have interests that
are different from yours as a stockholder. These interests
include:
o Mr. Jerald L. Kent served as a member of our board of
directors from January 1999 until July 30, 2001, when he
resigned from our board. Mr. Kent was the President,
Chief Executive Officer and a director of CCI, Charter
and Charter
8
Ventures until he announced his resignation from such
positions effective September 28, 2001.
o Mr. Stephen E. Silva served as a member of our board of
directors from January 1999 until July 30, 2001, when he
resigned from our board. Until October 18, 2001, Mr.
Silva was Senior Vice President, Corporate Development
and Technology of CCI, Charter and Charter Ventures.
Since October 18, 2001, Mr. Silva has served as
Executive Vice President and Chief Technical Officer of
these entities.
o Mr. William D. Savoy served as a member of our board of
directors from January 1999 until July 30, 2001, when he
resigned from our board. Mr. Savoy is President and
director of Vulcan and a director of CCI and Charter.
For a more detailed description of the interests of directors
and officers that differ from yours see page 66.
Q: Do any of the company's officers have interests in the sale of
assets that differ from mine?
A: You should be aware that certain of our officers (including
Mr. Daniel O'Brien, our President and Chief Executive Officer
and a director of the company) may have interests that are
different from yours as a stockholder. These interests
include:
o In the event that the employment of Mr. O'Brien,
Gregory G. Hodges, our Chief Operating Officer; John
Hundley, our Senior Vice President--Business
Development and Assistant Secretary; Richard George,
our Chief Operating Officer for International; George
E. Willett, our Chief Financial Officer; or Charles
E. Richardson III, our Vice President and General
Counsel, is terminated by us within the 12-month
period following the closing of the transactions
contemplated by the asset purchase agreement, such
executive will be entitled to certain severance
arrangements.
In the event the employment of each of these
executives is not terminated by us within the
12-month period following the consummation of the
asset sale, each of these executives may terminate
his employment upon 60 days' notice to us during the
period beginning on the first anniversary of the
consummation of the asset sale and ending on the 60th
day following the first anniversary, and be entitled
to certain severance arrangements.
o Mr. O'Brien also holds approximately 3,000 shares of
CCI's Class A common stock.
For a more detailed description of the interests of directors
and officers that differ from yours, see page 66.
Q. Why did the company enter into an agreement to purchase shares
of our common stock from Vulcan?
9
A. We believe that our acquisition of Vulcan's common stock,
which is conditioned upon the closing of the asset sale to
Charter, is in the best interest of the company and our
stockholders. We will purchase the shares of our common stock
held by Vulcan for an aggregate of $4,448,870, or $.22 per
share, which reflects a discount of 26% to the 20-day trailing
average closing price of our common stock as of October 26,
2001. Not only is the price less than the then current market
price, but our best current estimates indicate that our
purchase of the Vulcan common stock is accretive to our
stockholders remaining after the asset sale. Specifically, we
believe that the net cash value per share of our then
outstanding common stock will be increased as a result of this
transaction by between $.25 and $.32 per share assuming the
closing of the asset purchase occurs on or before December 31,
2001. If the asset sale to Charter is approved by our
stockholders and the asset sale to Charter and the stock
purchase from Vulcan are consummated, the stock purchase from
Vulcan will reduce our total number of outstanding shares from
60,365,204 to 40,143,065. However, there can be no assurance
that the estimated $.25 to $.32 accretion in the net cash
value of our common stock will be reflected in its trading
price either prior to or following the closing of the asset
sale and Vulcan share repurchase. Nevertheless, we believe
that at $.22 per share, the acquisition of our common stock
owned by Vulcan is a very attractive transaction for the
company and its stockholders.
Q: Who is entitled to vote?
A: All stockholders of record on the close of business on
November [__], 2001 are entitled to vote at the Special
Meeting. The holders of each outstanding share of our common
stock as of such date are entitled to one vote per share with
respect to each matter to be considered at the Special
Meeting. In addition, the holders of each share of our
preferred stock are entitled to one vote for each share of
common stock into which their preferred stock may be
converted. As of the close of business on October 26, 2001,
there were a total of 60,365,204 shares of common stock
outstanding and entitled to vote and 75,000 shares of
preferred stock outstanding and entitled to vote. The
outstanding preferred stock is convertible into 14,952,906
shares of common stock, such that a total of 75,318,110 votes
are eligible to be cast at the Special Meeting.
Q: What vote of stockholders is required to approve the asset
sale?
A: Under Delaware law and our organizational documents, the
approval of the sale of substantially all of our assets
requires the approval of the holders of two-thirds of our
outstanding preferred stock and the approval of the holders of
stock representing a majority of votes eligible to be cast by
both the holders of our preferred stock and the holders of our
common stock voting together as a single class. In the
combined vote, each share of preferred stock entitles its
holder to one vote for each share of common stock into which
it is convertible.
We have entered into a voting agreement, pursuant to which
Charter Ventures, Vulcan and our directors, who collectively
own all of our preferred stock and a majority of the combined
votes entitled to be cast at the Special Meeting, have agreed
to vote in favor of the proposed asset sale. This assures we
will obtain the vote required by Delaware law and our
organizational documents.
10
In addition, as a condition to the closing of the asset sale,
the asset purchase agreement requires the approval of a
majority of the votes actually cast at the Special Meeting by
holders of our common stock other than Charter, Vulcan, their
respective affiliates and certain of our executive officers.
Q: What happens if I do not give my proxy or if I abstain from
voting?
A: For the purposes of voting on the proposal as required by
Delaware law and our organizational documents, abstentions and
broker non-votes have the same effect as a vote against the
proposal. However, pursuant to the voting agreement we have
already obtained commitments for the votes required to approve
the proposal set forth in this proxy statement. Accordingly,
for the purposes of satisfying the requirements set forth in
our organizational documents and Delaware law (and affirming
or defeating the proposal set forth in this proxy statement),
abstentions and broker non-votes will have no practical
effect. NEVERTHELESS, AS DESCRIBED BELOW, YOUR VOTE IS VERY
IMPORTANT. For additional details on the voting agreement, see
page 29.
As a condition to the closing of the asset sale, the asset
purchase agreement requires the approval of a majority of the
votes actually cast at the Special Meeting (in person or by
proxy) by holders of our common stock (other than Charter,
Vulcan, their respective affiliates and certain of our
executive officers). The satisfaction of this condition does
not depend on any minimum number of votes being present or
cast at the Special Meeting. Rather, this condition will be
satisfied by the approval of a simple majority of those votes
actually cast. Accordingly, for the purposes of satisfying
this condition in the asset purchase agreement, non-votes and
abstentions will not be counted; only those votes actually
cast for or against the asset sale will count. Therefore, your
vote is very important.
For additional details on the vote required and the effect of
non-votes and abstentions, see page 16.
Q: How do I vote?
A: The board of directors is soliciting proxies from stockholders
to be used at the Special Meeting. To cast your vote, please
complete, date, sign and mail the proxy card in the enclosed
postage pre-paid envelope. By voting, you will authorize the
individuals named on the proxy card, referred to as proxies,
to vote your shares according to your instructions. You may
specify on the proxy whether you vote for, vote against or
abstain from voting on the proposal.
If you sign the proxy card and leave Item 1 (sale of assets)
or Item 2 (other matters) blank, the proxies will vote FOR
approval of that proposal. If you abstain from voting on Item
1, your vote will not be counted in the tabulation of votes
cast on that proposal.
The proxy card (Item 2) also confers discretionary authority
on the persons named on the proxy card to vote the shares
represented by the proxy card on any other matter that is
properly presented for action at the meeting.
11
Stockholders are also welcome to attend the Special Meeting
and cast their votes in person.
Q: What do I need to do now?
A: You should complete, date and sign your proxy card and mail it
in the enclosed return envelope as soon as possible so that
your shares will be represented at the Special Meeting, even
if you plan to attend the meeting in person.
Q: May I change my vote after I have mailed my signed proxy
card?
A: Yes. You can change your vote by sending in a later dated,
signed proxy card or a written revocation before the Special
Meeting or by attending the Special Meeting and voting in
person. Your attendance at the meeting will not, by itself,
revoke your proxy. If you have instructed a broker to vote
your shares, you must follow the directions received from your
broker to change those instructions.
Q: If my shares are held in "street name" by my broker, will my
broker vote my shares for me?
A: Your broker will vote your shares only if you provide
instructions on how to vote. You should follow the procedures
provided by your broker regarding the voting of your shares.
Q: Who will pay the costs of soliciting the proxies?
A: We will bear all of the costs of soliciting proxies.
Q: What are the tax consequences of the asset sale?
A: The asset sale will not be a taxable transaction to you for
United States federal income tax purposes. However any
proceeds you receive in a subsequent distribution, stock
redemption, stock repurchase or liquidation and dissolution
may be taxable to you. Tax consequences to stockholders may
differ depending on their circumstances. In the event that we
decide to make a distribution, effect a stock redemption,
establish a stock repurchase program or liquidate and
dissolve, you should consult your tax advisor as to the tax
effect applicable to your particular circumstances.
Q: Do I have appraisal rights?
A: Under Delaware law, you will not have appraisal or other
similar rights in connection with the asset sale.
12
Q: Who can help answer my questions?
A: If you have additional questions about this proxy, or would
like additional copies of the proxy statement, you should
contact:
GeorgesonShareholder
17 State Street, 10th Floor
New York, NY 10005
Banks & Brokers Call Collect: 212-440-9800
All Others Call Toll Free: 1-800-223-2064
13
GENERAL INFORMATION
DATE, TIME, PLACE AND PURPOSE OF THE SPECIAL MEETING
Our Special Meeting of stockholders will be held on December [ ], 2001,
at the offices of High Speed Access Corp. at 10901 West Toller Drive, Littleton,
Colorado 80127, 10:00 a.m., mountain time. At the Special Meeting, holders of
shares of our common stock and holders of shares of our preferred stock will be
asked to consider and vote upon a proposal to approve the sale of substantially
all of our assets. Holders of shares of our common stock and holders of shares
of our preferred stock also may be asked to vote on an adjournment of the
Special Meeting if a motion to adjourn the Special Meeting is properly brought
and on the transaction of such other matters as may properly come before the
Special Meeting or any adjournment or postponement thereof.
RECORD DATE AND SHARES ENTITLED TO VOTE
Only holders of record of our common stock, par value $.01, or our
Series D Senior Convertible Preferred Stock, par value $.01, as of the close of
business on November [__], 2001, will be entitled to receive notice of, and to
vote at, the Special Meeting. There will be two shareholder votes at the Special
Meeting.
First, the holders of shares of common stock will vote with the holders
of shares of preferred stock as a single class. With respect to each matter to
be considered at the Special Meeting, the holders of each outstanding share of
common stock as of the record date are entitled to one vote per share and the
holders of each share of preferred stock are entitled to one vote for each share
of common stock into which such share of preferred stock is convertible. As of
the close of business on October 26, 2001, there were a total of 60,365,204
shares of common stock outstanding and entitled to vote and 75,000 shares of
preferred stock outstanding and entitled to vote. The outstanding preferred
stock is convertible into 14,952,906 shares of common stock, such that a total
of 75,318,110 votes are eligible to be cast at the Special Meeting.
Second, the holders of shares of our preferred stock are entitled to
vote as a separate class. In this vote, holders of each share of preferred stock
are entitled to one vote. Charter Ventures and Vulcan together own all of the
preferred stock.
However, as a condition to the closing of the asset sale, the asset
purchase agreement requires the approval of a majority of the votes actually
cast at the Special Meeting by holders of our common stock other than Charter,
Vulcan, their respective affiliates and certain of our executive officers.
QUORUM AND VOTING RIGHTS
The presence in person or by proxy of the holders of shares
representing a majority of votes eligible to be cast at the Special Meeting as
of the record date is necessary to constitute a quorum at the Special Meeting.
Abstentions with respect to any proposal under consideration at the Special
Meeting will be counted for purposes of establishing a quorum.
SOLICITATION OF PROXIES
This proxy statement is furnished to the holders of shares of our
common stock and the holders of shares of our preferred stock in connection with
our solicitation of proxies for use at the Special Meeting. We will bear the
cost of soliciting proxies, including the cost of printing and
14
mailing this proxy statement. In addition to the solicitation by mail, our
directors, officers and employees may solicit proxies from stockholders in
person or by telephone, telegram or electronically. Those directors, officers
and employees will not receive additional compensation for that solicitation but
may be reimbursed for their out-of-pocket expenses. We have also retained a
proxy solicitation firm, GeorgesonShareholder, to aid in the solicitation
process. We will pay that firm a fee that is not expected to exceed $40,000,
plus reasonable expenses. Arrangements will also be made with brokerage houses
and other custodians, nominees and fiduciaries for the solicitation of votes
from beneficial owners of shares held of record by such persons. We will
reimburse those custodians, nominees and fiduciaries for their reasonable
out-of-pocket expenses.
This proxy statement, the attached notice of Special Meeting of
stockholders and the accompanying proxy card are first being mailed to
stockholders on or about November [ ], 2001.
REVOCATION OF PROXIES
You may revoke your proxy at any time prior to the Special Meeting.
Attendance at the Special Meeting will not in and of itself revoke a proxy.
However, voting in person with regard to a matter will revoke any proxy you may
have given with regard to that matter. Any written notice of revocation either
must be delivered at the Special Meeting or must be sent in time to be received
before the day of the Special Meeting, to:
GeorgesonShareholder
17 State Street, 10th Floor
New York, NY 10005
Banks & Brokers Call Collect: 212-440-9800
All Others Call Toll Free: 1-800-223-2064
15
PROPOSAL: THE SALE OF SUBSTANTIALLY ALL OF OUR ASSETS
At the Special Meeting, stockholders will be asked to consider and vote
upon a proposal to approve the sale of substantially all of the company's assets
pursuant to the asset purchase agreement and the transactions contemplated
thereby. Under Delaware law and our organizational documents, a sale of
substantially all of our assets cannot be consummated without the approval of:
o the holders of two-thirds of the shares of preferred stock
outstanding and entitled to vote; and
o the holders of a majority of the shares of common stock and
preferred stock outstanding and entitled to vote, voting together
as a single class. For this purpose, each share of preferred
stock is entitled to one vote for each share of common stock into
which it is convertible.
Attached to this proxy statement as Annex A is a copy of the asset
purchase agreement. Pursuant to the terms of the asset purchase agreement, we,
without further action by the stockholders (except as such action may be
required by law or as our board may deem appropriate), have agreed to sell to
Charter all of our assets related to the provision of high speed Internet access
to residential and commercial customers of Charter via cable modems. The assets
to be acquired by Charter constitute substantially all of our assets. In
consideration for these assets, Charter will (i) pay us a cash amount equal to
$81.1 million (subject to certain adjustments), (ii) assume certain of our
operating liabilities, and (iii) tender to us all outstanding shares of our
preferred stock and a warrant held by Charter to purchase shares of our common
stock.
RECOMMENDATION OF THE BOARD
Our board has unanimously approved the asset purchase agreement and has
determined that the sale of substantially all of our assets and the transactions
contemplated by the asset purchase agreement are fair to, and in the best
interests of, the company and our stockholders, has approved the asset purchase
agreement and the transactions contemplated thereby, and recommends that the
company's stockholders vote FOR the proposal to approve the sale of
substantially all of our assets pursuant to the asset purchase agreement.
VOTE REQUIRED
Under Delaware law and our organizational documents, the approval of
the sale of substantially all of our assets requires the affirmative vote of the
holders of two-thirds of the preferred stock and the affirmative vote of the
holders of shares representing a majority of votes eligible to be cast by
holders of our common stock and holders of our preferred stock, voting together
as a single class. Holders of common stock are entitled to cast one vote per
share of common stock and holders of preferred stock are entitled to cast one
vote for each share of common stock into which their preferred stock is
convertible.
As of the close of business on November [__], 2001 (the record date for
the Special Meeting), there were a total of 60,365,204 shares of common stock
outstanding and entitled to vote and 75,000 shares of preferred stock
outstanding and entitled to vote, which were convertible into 14,952,906 shares
of common stock, such that a total of 75,318,110 votes are eligible to be cast
at the Special
16
Meeting. As of the record date, our directors or their affiliates beneficially
owned an aggregate of approximately 7.1% of our common stock outstanding,
entitling them to cast 5.7% of the votes eligible to be cast in the combined
vote at the Special Meeting. In addition, Charter Ventures and its affiliate
Vulcan, our largest stockholders, owned shares of common stock and preferred
stock entitled to cast approximately 46.7% of the votes eligible to be cast in
the combined vote and all of the votes eligible to be cast in the preferred
stock vote at the Special Meeting.
Shares of our common stock held by nominees for beneficial owners will
be counted for purposes of determining whether a quorum is present if the
nominee has the discretion to vote on at least one of the matters before the
meeting even if the nominee may not exercise discretionary voting power with
respect to other matters and voting instructions have not been received from the
beneficial owner. Such shares are referred to as "broker non-votes." Under
Delaware law and our organizational documents, if you do not give your proxy or
do not instruct your broker to vote your shares or if you abstain from voting,
it will have the same effect as a vote against the proposal to approve the asset
sale. However, Charter Ventures, Vulcan and our directors, who collectively hold
a majority of the votes entitled to be cast at the Special Meeting, have entered
into a voting agreement with the company, under which they have agreed to vote
all their shares in favor of the proposals set forth in this proxy. The voting
agreement assures that we will obtain the vote required under Delaware law and
our organizational documents. Accordingly, for the purposes of satisfying the
requirements of Delaware law and our organizational documents, abstentions and
broker non-votes will have no effect.
As a condition to the closing of the asset sale, however, the asset
purchase agreement requires the approval of a majority of the votes actually
cast at the Special Meeting (in person or by proxy) by holders of our common
stock, other than Charter, Vulcan, their respective affiliates and certain of
our executive officers. The satisfaction of this condition does not depend on
any minimum number of votes to be present or cast at the Special Meeting and
there will not be a separate vote or ballot for the purposes of satisfying this
condition. Rather, this condition will be satisfied by the approval of a simple
majority of those votes actually cast. Accordingly, for the purposes of
satisfying this condition in the asset purchase agreement, broker non-votes and
abstentions will have no effect, whereas votes actually cast for or against the
asset sale will have an effect. Therefore, your vote is very important.
SUMMARY OF OUR AGREEMENTS WITH CHARTER AND ITS AFFILIATES
THE ASSET PURCHASE AGREEMENT
The following is a summary of the significant provisions of the asset
purchase agreement. This summary is qualified in its entirety by the terms of
the asset purchase agreement, a copy of which is included with this Proxy
Statement as Annex A and incorporated herein by reference.
Sale of Assets and Assumption of Certain Liabilities
We and Charter have entered into an asset purchase agreement, dated as
of September 28, 2001, pursuant to which we have agreed to sell to Charter
substantially all of our assets, and Charter has agreed to assume certain of our
liabilities, in each case related to our business of providing high speed
Internet access to Charter's residential and commercial customers via cable
modems pursuant to two network services agreements we are party to with Charter,
dated as of November 25, 1998 and as of May 12, 2000. The assets being sold are
more particularly described in the asset purchase agreement.
17
Purchase Price
The purchase price for the assets that we have agreed to sell to
Charter is $81.1 million in cash, subject to adjustment as described below;
75,000 shares of our preferred stock, together with the cancellation of any
rights to dividends with respect to such shares; and the cancellation of all
warrants to buy shares of our common stock held by Charter. The 75,000 shares of
our preferred stock include 38,000 shares of our preferred stock to be acquired
by Charter from Vulcan immediately prior to the closing of the asset sale.
Purchase Price Adjustment and Holdbacks
At the closing, Charter will hold back $750,000 for purposes of any
post-closing purchase price adjustment which may be effected as described below.
Charter will also hold back an additional $4.0 million for purposes of settling
indemnity claims, if any, under the asset purchase agreement, as described
below.
The cash component of the purchase price will be increased at the
closing by the amount of certain current assets to be acquired by Charter which
will include (i) certain accounts receivable from Charter including those
related to the May 2000 network services agreement, (ii) certain security
deposits and prepayments, and (iii) certain receivables from customers serviced
by the acquired assets. Incremental costs incurred by us pursuant to the
management agreement with Charter (described below) will also be reimbursed at
the closing by means of a purchase price increase.
The cash component of the purchase price will be decreased at the
closing by the sum of (i) the liabilities under the capital leases assumed by
Charter as part of the acquired assets, (ii) certain current liabilities to be
assumed by Charter as of the closing date, including certain accounts payable
and accrued costs related to our employees to be hired by Charter, and (iii)
certain penalties payable by us to Charter if we fail to recruit, hire and begin
training classes for an agreed number of new customer service representatives in
connection with the pre-closing operation of the acquired assets.
We and Charter have up to 60 days after the closing to dispute the
purchase price adjustment effected at the closing. If, following the resolution
of all such disputes, the final purchase price is greater than the amount paid
at the closing, then the amount of that increase together with the entire
$750,000 adjustment holdback will be paid to us by Charter. On the other hand,
if the final purchase price is less than the amount paid at the closing, then
the amount of that decrease will be deducted from the $750,000 adjustment
holdback and the balance of the adjustment holdback released to us. If the
amount of the decrease exceeds $750,000, then we must pay the excess amount to
Charter within five business days. The adjustment holdback will not bear
interest, whether or not it is released to us in whole or in part.
Representations and Warranties
The asset purchase agreement contains various representations and
warranties made by us relating to, among other things:
o our organization, good standing, corporate power and foreign
qualification;
o our corporate authorization in relation to the asset purchase
agreement and the related transaction documents to which we are a
party;
18
o the necessary stockholder approval required for the approval of
the asset purchase agreement and the transactions contemplated
thereby;
o the inapplicability of restrictions on business combinations set
forth in Section 203 of the Delaware General Corporation Law;
o the absence of violations of or defaults under our certificate of
incorporation and by-laws, our material agreements, and other
legal requirements applicable to us, arising as a result of the
execution and performance of the asset purchase agreement;
o governmental filings and consents required in connection with the
asset purchase agreement and related transaction documents;
o the assets being sold comprising all material assets used in the
provision of high speed Internet access to Charter's customers
via cable modems;
o the absence of certain changes or events;
o compliance of this Proxy Statement with the requirements of the
Securities Exchange Act and the correctness of information
provided for inclusion in this Proxy Statement;
o compliance with applicable laws, including environmental laws;
o the absence of litigation;
o security deposits in connection with real estate and capital
leases;
o the status of our material contracts, capital leases and
operating leases;
o real property, including leased premises;
o title to and condition of the assets being sold;
o intellectual property rights;
o taxes;
o labor matters;
o employee benefit plans;
o absence of broker fees;
o our solvency immediately following the closing; and
o the correctness of information provided to Houlihan Lokey.
The asset purchase agreement also contains various representations and
warranties made by Charter relating to, among other things:
19
o its organization, good standing and corporate power;
o its corporate authorization in relation to the asset purchase
agreement and the related transaction documents to which it is a
party;
o absence of violations of or defaults under the Delaware Limited
Liability Company Act, its certificate of formation, its material
agreements, and other legal requirements applicable to Charter,
arising as a result of the execution and performance of the asset
purchase agreement;
o governmental filings and consents required in connection with the
asset purchase agreement and related transaction documents;
o compliance of the Schedule 13E-3 to be filed with the Securities
and Exchange Commission with the requirements of the Securities
Exchange Act;
o the correctness of information provided for inclusion in this
proxy statement;
o absence of brokers fees;
o valid assignment of the network services agreements and the
Amended and Restated Securities Purchase Warrant, dated as of May
12, 2000, from Charter Communications, Inc. to Charter
Communications Holding Company, LLC; and
o the circumstances in which Charter became an interested
stockholder in the company for purposes of Section 203 of the
Delaware General Corporation Law.
Covenants and Agreements of HSA and Charter
Conduct Cable Modem Business in the Ordinary Course. We have agreed to
provide high speed Internet access and certain other services to customers of
Charter in the ordinary course consistent with past practice until the closing.
We will use commercially reasonable efforts to preserve the assets to be
acquired and the provision of high speed Internet access to customers of
Charter, including relationships with other persons that have significant
business dealings therewith. Until the closing date, we will, with respect to
the assets to be acquired by Charter:
o use commercially reasonable efforts to keep available the
services of our employees to be hired by Charter as of the
closing;
o maintain the tangible assets in good repair, order and condition;
o make our modem inventory available to Charter;
o maintain our insurance policies consistent with past practice;
o maintain our books and records consistent with past practice;
o report and write off accounts receivable in accordance with past
practice;
o withhold and pay taxes;
20
o comply in all material respects with all legal requirements; and
o provide Charter with copies of revenue agents reports or tax
deficiency notices and material reports, audits and studies
relating to environmental matters affecting the assets to be
sold.
Until the closing date, we will not, with respect to the assets to be
acquired by Charter:
o sell any of the assets to be acquired other than in the ordinary
course;
o modify, terminate, renew, suspend or abrogate any material
contract or real estate lease or enter into any material
contract;
o modify any network operational or business system;
o modify procedures for disconnection and discontinuation of our
services to Charter;
o terminate the employment of, or materially modify the benefits or
compensation to be received by, any of our employees that Charter
wishes to employ following the closing;
o create or permit to exist any liens on the assets to be sold;
o enter into any collective bargaining agreement;
o modify or terminate any employee benefit plan; or
o decrease customer service charges.
No Solicitation of Transactions. We have agreed that prior to the
closing we will not, and will ensure that our representatives do not, take any
action to encourage or facilitate a third party making a proposal to acquire an
interest in us, or engage in any discussions or negotiations regarding any
proposal of this nature or provide any non-public information regarding us to a
person making such a proposal. We are not prohibited, however, from furnishing
non-public information to, or entering into discussions or negotiations with,
any person making an unsolicited bona fide proposal that our board determines in
good faith could lead to a superior proposal.
For any third party proposal to be considered "superior" to the asset
sale, the board must determine in good faith, following consultation with
outside counsel, that, after taking into account all the terms and conditions of
the proposal, including any break-up fees, expense reimbursement provisions and
conditions to consummation, such proposal is more favorable to our stockholders
than the transactions contemplated by the asset purchase agreement taken as a
whole.
If we receive an unsolicited acquisition proposal, we will promptly
notify Charter of the material terms and the identity of the person making the
proposal and will keep Charter informed as to the status of the proposal.
Employee Matters. Charter has made written offers to our employees that
it wishes to employ following the closing. With respect to those employees,
Charter is required to:
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o endeavor in good faith to offer a position substantially
comparable to that held by the employees immediately prior to the
closing at a salary level or hourly wage equivalent to that
received by the employees immediately prior to the closing;
o offer benefits that are no less favorable than those provided to
similarly situated employees of Charter;
o credit past service with us for purposes of: (i) eligibility to
participate in Charter's employee welfare benefit plans to the
extent permitted by those plans, (ii) participation and vesting
under Charter's employee 401(k) plan and other pension plans,
(iii) any waiting periods under Charter's welfare plans or (iv)
any post-closing severance purposes;
o credit accrued vacation time and sick time, subject to certain
restrictions; and
o pay an aggregate of at least $750,000 in bonuses to those
employees in respect of the 2001 calendar year no later than
April 30, 2002.
Charter will receive a maximum purchase price reduction of $750,000
with respect to the bonuses that it actually pays to our employees that it
hires. In addition, we have agreed to continue to pay, for a period of three
months after the closing, the group health insurance premiums that are necessary
to continue our current group health plan for our continuing employees. We are
required to enforce, at the direction of Charter, certain covenants regarding
the non-solicitation of our employees contained in employment agreements with
certain of our employees.
Launch Fees. No further launch fees will be payable by us to Charter
under the May 2000 network services agreement unless the asset purchase
agreement is terminated in accordance with its terms.
New Customer Service Representatives. We have agreed to recruit, hire
and begin training classes for an agreed number of new customer service
representatives during the pre-closing period. If we fail to comply with this
obligation we must pay Charter $10,000 for each full business day of delay
(beginning on the sixth business day of such delay) in the commencement of any
class with the minimum number of agreed participants and each full business day
of any period during which classes have been early terminated. Any such
penalties are payable at the closing as an adjustment to the purchase price, as
described.
No Solicitation of Employees. We have agreed that, subject to certain
exceptions, for a period of one year following the closing date we will not
solicit for employment any of our employees to be hired by Charter at the
closing or any Charter employees with whom we have had any material business
contact within one year prior to September 28, 2001.
Termination of Charter Contracts. The May 2000 network services
agreement will terminate effective as of the closing. Charter will use its best
efforts to cause the November 1998 network services agreement to terminate
effective as of the closing.
Fees and Expenses. Fees and expenses incurred by us and Charter in
connection with the asset purchase agreement are to be paid by the party
incurring those amounts, except that (i) filing fees in relation to the Schedule
13E-3 will be paid by Charter, (ii) expenses incurred in connection with the
preparation, filing, printing and mailing of this Proxy Statement will be paid
by us, (iii) filing
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fees in relation to filings made under the Hart-Scott-Rodino Antitrust
Improvements Act will be shared equally, and (iv) certain expenses incurred in
connection with an application by Charter to the Kentucky Economic Finance
Authority will be paid by Charter.
Transitional Arrangements. Charter has agreed to retain all material
business records in relation to the acquired assets for a period of three years
after the closing. Charter has also agreed to pay any transfer taxes payable in
connection with the assets being sold and will be responsible for certain
customer care matters effective as of the closing. We and Charter have agreed,
among other things, to cooperate in preparing and filing this document and in
obtaining any third party consents required in connection with the transfer of
assets being sold.
Conditions to Closing
The closing of the sale of the assets to Charter is subject to a number
of conditions, including approval by (i) the holders of at least a majority of
the votes entitled to be cast by our preferred and common stock, voting together
as a single class (with the preferred stock voting on an "as converted to common
stock" basis), (ii) the holders of at least two-thirds of the preferred stock,
voting separately as a single class and (iii) the holders of at least a majority
of our common stock actually voting on the transaction other than Charter
Ventures, Vulcan, any of their respective affiliates, or any of our directors or
executive officers that are entitled to receive a payment in the nature of
compensation contingent upon consummation of the asset sale and related
transactions.
The holders of over 51% of the votes entitled to be cast by our issued
and outstanding common and preferred stock, counted together as a single class
(namely, Charter Ventures, Vulcan and our directors), and the holders of 100% of
our preferred stock have agreed to vote in favor of a resolution approving the
asset purchase agreement. However, it is a condition to the closing of the asset
purchase agreement that a majority of the votes actually cast at the Special
Meeting by holders of our common stock other than Charter Ventures, Vulcan and
certain of our directors or executive officers be cast in favor of the asset
sale.
The obligation of us and Charter to consummate the asset sale and
related transactions is also subject to the satisfaction of the following
conditions: (i) the termination or expiration of any applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended; and
(ii) no temporary restraining order, preliminary or permanent injunction or
other legal restraint or prohibition preventing the consummation of the
transactions contemplated by the asset purchase agreement can be in effect. We
and Charter each received notice, dated October 15, 2001, from the Federal Trade
Commission of early termination of the applicable waiting period under the
Hart-Scott-Rodino Act.
Charter's obligation to consummate the asset sale and related
transactions is subject to the satisfaction or waiver of, among others, the
following additional conditions: (i) our representations and warranties in the
asset purchase agreement must be true and correct; (ii) our performance of our
obligations under the asset purchase agreement and related transaction
documents; (iii) the receipt by Charter of a certificate of one of our
authorized officers identifying our executive officers who are entitled to
receive a payment in the nature of compensation contingent upon consummation of
the asset sale and related transactions; (iv) the receipt by Charter of a
certificate of our President and Secretary as to the incumbency and signatures
of our officers and the adoption and continued effectiveness of our board
resolutions authorizing the asset sale; (v) the receipt of certain third party
consents; (vi) the absence of any event having a material adverse effect on the
assets to be acquired by Charter; (vii) the receipt by Charter of legal opinions
rendered by Weil Gotshal & Manges LLP,
23
our outside counsel; and (viii) the receipt by Charter of copies of the opinions
rendered by Lehman Brothers and Houlihan Lokey, which opinions shall not have
been withdrawn, and a letter from Houlihan Lokey to the effect that Charter may
rely on the its opinion.
Our obligation to consummate the asset sale and related transactions is
subject to satisfaction or waiver of, among others, the following conditions:
(i) the representations and warranties made by Charter in the asset purchase
agreement must be true and correct; (ii) the performance by Charter of its
obligations under the asset purchase agreement and related transaction
documents; (iii) our receipt of a certificate of Charter's President and
Secretary as to the incumbency of the signatures of Charter's officers and the
adoption and continued effectiveness of resolutions of Charter authorizing the
asset purchase; and (iv) our receipt of a legal opinion rendered by Paul,
Hastings, Janofsky & Walker LLP, Charter's outside counsel.
Termination
The asset purchase agreement may be terminated prior to the closing (i)
by the mutual consent of us and Charter; (ii) by either party if our
stockholders fail to approve the asset sale by the requisite votes, or a
temporary restraining order, preliminary or permanent injunction or other legal
restraint or prohibition prevents the consummation of the transactions; (iii) by
us if any of the conditions to our obligation to consummate the asset sale
cannot be fulfilled; (iv) by Charter if any of the conditions to its obligation
to consummate the asset sale cannot be fulfilled; or (v) by either party if the
closing has not occurred by March 31, 2002.
If the asset purchase agreement is terminated due to a party's failure
to satisfy its conditions, or the closing has not occurred by March 31, 2002 as
a result of the negligent or willful failure of a party to perform its
obligations, that party must pay the reasonable out-of-pocket expenses incurred
by the other party prior to the date of termination, including legal and
investment banking fees, together with certain amounts payable under the
management agreement, as described below.
In addition, if we enter into a definitive agreement providing for a
superior alternative transaction, Charter will be entitled to reimbursement of
its reasonable out-of-pocket expenses prior to the date of termination,
including legal and investment banking fees, together with certain fees and
expenses chargeable under the management agreement. The asset purchase agreement
does not provide for the payment of any other breakup fees or other penalties.
Indemnification
We have agreed to indemnify Charter against all claims arising from
breaches of our representations, warranties and covenants, the excluded
liabilities and the pre-closing operation of the assets to be acquired by
Charter. Our pre-closing covenants and representations and warranties will
survive for a period of 18 months after the closing, except that representations
and warranties regarding title to the acquired assets will survive in
perpetuity, the representations and warranties related to taxes will survive
until 90 days after the statue of limitations has expired with respect to claims
thereto and the representations and warranties with respect to certain benefit
plans and environmental matters will survive for 24 months after the closing.
We will have no liability for claims arising from breaches of our
representations and warranties that survive for a maximum period of 18 months or
pre-closing covenants unless the damages in the aggregate for such breaches
exceed $250,000, in which case Charter is entitled to reimbursement from the
first dollar of such damages. In addition, payments for damages related to
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claims arising from breaches of these representations and warranties or
pre-closing covenants (except for (i) breaches of representations and warranties
related to title, taxes, certain employee benefit plans and environmental
matters, (ii) the excluded liabilities, (iii) the operation of the assets to be
acquired by Charter prior to the closing and (iv) common law fraud) will be made
solely from and only to the extent of the $4.0 million indemnification holdback.
Charter is entitled to reimbursement from the first dollar of damages
related to (i) breaches of post-closing covenants and the representations and
warranties related to title, taxes, certain benefit plans and environmental
matters, (ii) the excluded liabilities, (iii) the operation of the assets to be
acquired by Charter before the closing and (iv) actual common law fraud, and
such damages are not limited to the $4.0 million indemnification holdback.
Similarly, Charter has agreed to indemnify us for breaches of its
representations, covenants, the assumed liabilities and the operation of the
assets to be acquired by Charter following the closing. Charter's
representations, warranties and pre-closing covenants survive for a period of 18
months following the closing. Charter will have no liability for these breaches
until the aggregate liability is $250,000, in which case we are entitled to
reimbursement from the first dollar of such damages. In no event will Charter be
subject to liability of greater than $4.0 million for breaches of its
representations, warranties and pre-closing covenants. The $4.0 million cap does
not apply to Charter's liabilities relating to post-closing covenants, the
assumed liabilities and the operation of the assets Charter is to acquire after
the closing.
Twelve months after the closing, $2.0 million of the indemnification
holdback will be released to us, less the aggregate amount of indemnification
claims previously satisfied from the indemnification holdback and any pending
indemnification claims. The balance, less previously paid and any pending
indemnification claims, will be released to us 18 months after the closing. When
any such amounts are released to us, Charter will pay us interest on those
amounts.
These indemnification obligations are limited to actual damages.
Neither we or Charter shall have any liability for indirect or consequential
damages.
Assignment
The asset purchase agreement may not be assigned by either party
without the consent of the other party, except that Charter may assign its right
to purchase any or all of the assets to any of its affiliates, provided that
such assignment will not release Charter from any obligations or liabilities
under the asset purchase agreement.
OTHER AGREEMENTS RELATED TO THE ASSET SALE
In connection with the asset purchase agreement, we have entered into
the following agreements:
MANAGEMENT AGREEMENT
We and CCI have entered into a services and management agreement, dated
as of September 28, 2001, pursuant to which CCI has agreed to perform certain
services previously performed by us under the network services agreements. We
have also agreed to grant CCI the right to manage certain aspects of the
business related to the assets Charter has agreed to acquire.
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Installation, Modem and Marketing Services
Under the terms of the management agreement, from September 28, 2001:
o CCI has agreed to perform the services described in the November
1998 network services agreement relating to the installation of
Internet access service to Charter's residential and commercial
subscribers;
o CCI has agreed to procure, at its cost, after deployment of
certain cable modems currently owned by us, the cable modems
necessary for such installation services; and
o We and CCI have agreed that we will each have the right to
perform, at our respective cost, the marketing of Internet access
service to Charter's residential and commercial subscribers.
Additional Services
CCI may, at its option, perform certain additional services in order to
facilitate the transition of the acquired assets from us to Charter. The
additional services include the right to: participate in our policy-making
relating to customer care and the operation of our Louisville, Kentucky network
operations center; make decisions relating to the pursuit, termination and
prioritization of projects relating to engineering design and information
systems infrastructure and operation of the acquired assets; determine which of
our employees to be hired by Charter will be assigned to provide the services
covered under the management agreement; formulate, implement and supervise
sales, marketing and advertising programs, policies and procedures relating to
the acquired assets; and establish and direct the technical standards and
procedures related to the acquired assets. If CCI exercises its option with
respect to these rights then CCI will be responsible for certain incremental
costs incurred by us as described below.
Installation and Marketing Fees
In connection with CCI's performance of the installation and marketing
services described above, we have agreed to pay CCI the following amounts for
each new subscriber connection added during the period commencing on September
28, 2001 and expiring when neither of the network services agreements with
Charter is in effect or the management agreement is terminated according to its
terms, whichever is earlier: an installation fee of $115, a marketing fee of
$50, $150 for each Com 21 modem installed (other than modems currently owned by
us), and $100 for each DOCSIS modem installed (other than modems currently owned
by us).
These amounts will accrue as a liability of ours during the pre-closing
period. If the closing under the asset purchase agreement occurs, then the
amounts due to Charter will be automatically waived by Charter and no longer
payable. If the management agreement is terminated prior to termination of the
asset purchase agreement, then the accrued amounts will not be payable until the
earlier of the closing under the asset purchase agreement (in which case those
amounts will be automatically waived by Charter) or termination of the asset
purchase agreement (in which case those amounts become immediately due and
payable to Charter).
26
Incremental Costs
CCI has agreed to pay all incremental costs incurred by us arising from
CCI's exercise of its right to perform the additional services. However, CCI's
reimbursement obligation does not extend to costs incurred by us in conducting
the business related to the acquired assets in the ordinary course as required
in the asset purchase agreement or to costs that we would have incurred in the
absence of CCI performing any additional services. If incremental costs are less
than or equal to $100,000, then CCI need not pay us for those incremental costs
until the earlier of the closing under the asset purchase agreement or the
termination of the management agreement (other than as a result of the closing).
The incremental costs will be paid by Charter as a purchase price adjustment
under the asset purchase agreement. Incremental costs in excess of $100,000 are
payable by CCI within 30 days of being invoiced for such costs.
We will not be entitled to reimbursement of any incremental costs
outstanding at the time of termination of the management agreement if (i) we
terminate the management agreement other than in accordance with its terms or
(ii) the asset purchase agreement is terminated in certain circumstances where
we are at fault (including our failure to satisfy certain closing conditions
under the asset purchase agreement or the failure of the closing to occur by
March 31, 2002 due to our negligent or willful failure to perform our
obligations thereunder), or if we enter into a definitive agreement providing
for an alternative transaction.
Standard of Care
CCI has agreed to employ reasonable industry standards in performing
its services under the management agreement but will not be liable for any
losses suffered or incurred by us except for actual losses caused by CCI's bad
faith, willful misconduct or gross negligence.
Indemnification for Third Party Claims
We have agreed to indemnify CCI and certain other persons from all
claims of whatever nature brought against CCI by third parties in connection
with CCI's authorized activities under the management agreement. This right to
indemnification does not extend to claims, losses or liabilities that arise as a
result of the bad faith, willful misconduct or gross negligence of CCI or the
other indemnified persons.
CCI has agreed to indemnify us and certain other persons from all
claims of whatever nature brought against us by third parties in connection with
CCI's failure to perform its obligations under the management agreement or as a
result of CCI's bad faith, willful misconduct or gross negligence in the
performance of its obligations thereunder.
We and CCI have also agreed to indemnify each other against third party
claims where one of them may be vicariously liable for the conduct of the other
or where we and CCI may be jointly or severally liable, but the indemnity only
applies for such liability as may be imputed to a party under the law based on
the conduct of the other, including conduct arising out of any act or omission
of the other under certain specified employment laws.
Termination
The management agreement will terminate upon the closing under the
asset purchase agreement, the earlier termination of the asset purchase
agreement in accordance with its terms, or
27
upon the occurrence of certain bankruptcy events with respect to us (including
insolvency, the appointment of a receiver to a substantial part of our assets,
the filing of a voluntary petition for bankruptcy or the filing of an
involuntary petition for bankruptcy that is not dismissed within 45 days of
filing). In addition, the management agreement may be terminated:
o by our and CCI's mutual written consent;
o by us, if CCI breaches any of the terms of the management
agreement and fails to cure the breach within thirty (30) days
after receipt of written notice of the breach;
o by us, if CCI commits any act constituting gross negligence or
willful misconduct; and
o by CCI, upon thirty (30) days prior written notice to us.
LICENSE AGREEMENT
We and Charter have entered into a License Agreement, dated as of
September 28, 2001, pursuant to which Charter has granted to us the right to use
certain intellectual property to be sold by us to Charter under the asset
purchase agreement in the conduct of our retained businesses. The license
agreement will become effective upon the closing under the asset purchase
agreement.
Licensed Rights
The licensed rights include domestic (U.S.) and international
(non-U.S.) software tools licenses which are non-exclusive, royalty-free,
non-transferable and non-sublicensable licenses in HSA-created aspects and
software for specified applications. We may only use the domestic license in the
operation of our U.S. web-hosting and broadband ISP business to facilitate the
winding down of those businesses. We may only use the international license in
the operation of our non-U.S. consulting and Internet service provisioning
activities. We have agreed that we will not use either license or any related
intellectual property rights in any manner that competes with the business of
Charter or its affiliates.
License Term
The domestic license will expire when we cease our domestic ISP and
web-hosting activities or June 30, 2002, whichever is earlier. The international
license will expire three years from the date of the closing under the asset
purchase agreement.
Ownership and Use of Licensed Property
Charter will be the sole owner of the software tools and other
intellectual property rights that are the subject of the domestic and
international licenses, including any corrections, enhancements and updates
provided to, or created by, us for those software tools and other intellectual
property rights. We have agreed to use the licensed rights in a manner
conforming with our customary uses and that any services rendered in connection
with the licensed rights will be provided in accordance with applicable law. We
have also agreed that we will do nothing to impair Charter's ability to operate
the acquired assets.
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Termination
The license agreement may be terminated by Charter if we (i) attempt to
use, sublicense, subcontract, assign or convey the licensed rights in a manner
contrary to the terms of the license agreement or take any other action
inconsistent with or in derogation of Charter's rights in the intellectual
property that is the subject of the licensed rights, (ii) engage in any activity
which infringes on or dilutes any of the intellectual property rights sold under
the asset purchase agreement or (iii) materially breach the provisions of the
license agreement and fail to cure the breach within ten days after receipt of
notice of the breach.
In addition, the license agreement will immediately terminate if we
file a voluntary petition under the United States Bankruptcy Code or any similar
statute, law, rule or regulation, or have an involuntary petition filed against
us under any such law, or a receiver is appointed for our businesses, unless
such petition or appointment of a receiver is dismissed within thirty days.
Restrictions on Assignment and Transfer
Neither the license agreement nor the domestic or international
licenses may be assigned or transferred by us without the prior written consent
of Charter. An assignment or transfer requiring the written consent of Charter
will be deemed to occur upon any merger of us with or into any third party, any
sale or transfer of 25% or more of any one class of stock, or any series of
mergers, sales or transfers totaling in the aggregate 25% or more of any one
class of stock, in us, except in the case of stock sales among existing
stockholders. Charter may withhold its consent to any assignment or transfer in
its absolute discretion.
VOTING AGREEMENT
We, Charter Ventures, Vulcan and our directors have entered into a
voting agreement, dated as of September 28, 2001, pursuant to which Charter
Ventures, Vulcan and our directors have agreed to vote all shares of our common
stock and/or preferred stock over which they have voting control in favor of a
resolution approving the asset purchase agreement and the transactions
contemplated thereby and against any competing acquisition proposal.
The shares of our common stock and preferred stock held by Charter
Ventures, Vulcan and our directors represent approximately 51.4% of the votes
entitled to be cast by our total issued and outstanding voting stock (assuming
conversion of all 75,000 shares of preferred stock) and 100% of the preferred
stock.
The voting agreement will terminate if the asset purchase agreement is
terminated.
STOCK PURCHASE AGREEMENT
In connection with the transactions contemplated by the asset purchase
agreement, Vulcan and Charter have entered into a stock purchase agreement
pursuant to which Charter will purchase from Vulcan 38,000 shares of our
preferred stock, which represents all of our preferred stock owned by Vulcan.
The purchase price will be $8 million in cash.
The closing of the sale of our preferred stock under the stock purchase
agreement will occur immediately prior to the closing of the asset purchase
agreement.
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The stock purchase agreement terminates if the asset purchase agreement
terminates.
BILLING LETTER AGREEMENT
We and Charter have entered into a billing letter agreement, dated as
of September 28, 2001, pursuant to which Charter has elected, in accordance with
the November 1998 network services agreement, to assume responsibility for
invoicing cable subscribers and collecting revenues with respect to selected
systems designated by Charter in connection with the assets to be acquired by
Charter. We have agreed to assist Charter in the transition of this billing
function, including by delivering certain of the databases and related
information that we use in the billing function and by making available
technical or personnel support upon request.
TERMINATION AGREEMENT
We, Charter, Vulcan and Marcus Cable, Inc. have entered into a
termination agreement, dated as of September 28, 2001, pursuant to which the
parties thereto have agreed that, effective upon the closing under the asset
purchase agreement (i) the Programming Content Agreement, dated as of November
25, 1998 among us and Vulcan and (ii) the Systems Access and Investment
Agreement, dated as of November 25, 1998 among us, Charter, Vulcan and Marcus
Cable will terminate and that all rights, obligations and liabilities of the
parties thereunder will be extinguished effective as of the closing. The
programming content agreement and systems access agreement will remain in effect
if the asset purchase agreement is terminated.
NON-SOLICITATION AGREEMENTS
Messrs. Daniel J. O'Brien and Gregory G. Hodges have each entered into
a non-solicitation agreement with Charter, dated as of September 28, 2001,
pursuant to which Messrs. O'Brien and Hodges have agreed that they will not,
directly or indirectly, whether on their own behalf or on behalf of any other
party, employ or solicit for employment any of our employees to be hired by
Charter, or induce or attempt to induce any of those employees to terminate
their employment with Charter or any of its affiliates. These restrictions apply
for a period of one year following the closing date. Each of the
non-solicitation agreements will terminate if the asset purchase agreement is
terminated.
NASDAQ LISTING
On September 10, 2001, we received formal notice from the Nasdaq Stock
Market that we were not in compliance with the continuing listing requirements
because the market price of our common stock was below $1.00 per share. However,
on September 27, 2001, in response to the extraordinary market conditions
following the terrorist attacks on September 11, Nasdaq announced that it had
implemented an across-the-board moratorium on the minimum bid and public float
requirements for continued listing until January 2, 2002. On October 9, 2001, we
received notification from Nasdaq that the previously announced moratorium would
apply to us. Nevertheless, we currently believe that we will not be in
compliance with these requirements after the moratorium is lifted. We anticipate
that the market price of our common stock will remain below $1.00 per share and
may decline further if, among other things, we make distributions to our
stockholders. We also expect that our market capitalization will fall below the
minimum required for continued listing by Nasdaq. Accordingly, we do not expect
our common stock to remain eligible for listing and we expect that it will be
de-listed in 2002. If our common stock is de-listed, trading of our common stock
would be conducted in the over-the-counter market on an electronic bulletin
board established for unlisted securities in what are commonly referred to as
the "pink sheets."
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GOVERNMENT APPROVALS
The company and Charter each filed a Premerger Notification and Report
Form for review under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, with the Federal Trade Commission and the Antitrust Division of the
United States Department of Justice. On October 15, 2001, the Federal Trade
Commission granted early termination of the waiting period.
Consummation of the asset sale is conditioned upon, among other things,
the absence of any preliminary or permanent injunction or other order issued by
any federal or state court of competent jurisdiction which prohibits or
restricts the consummation of the sale. Both the company and Charter believe
that all material filings and approvals have been made or obtained, or will be
made or obtained, as the case may be.
APPRAISAL RIGHTS
Under the Delaware General Corporation Law, you are not entitled to any
rights of appraisal or similar rights in connection with the approval of the
sale of substantially all of the company's assets.
TRANSACTION EXPENSES
We plan to use a portion of the proceeds to fund transaction expenses
related to the asset sale. We estimate that we will incur approximately $5
million in costs and expenses associated with the asset sale, as set forth in
the table below:
<Table>
<Caption>
Expenses Estimated Amount
-------- ----------------
Financial advisory fees................................ $3,500,000
Legal fees............................................. 1,000,000
Accounting fees........................................ 80,000
Printing and mailing fees.............................. 125,000
SEC filing fees........................................ 20,000
Miscellaneous.......................................... 275,000
==========
Total.................................................. $5,000,000
</Table>
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SPECIAL FACTORS
BACKGROUND OF THE COMPANY'S DECISION TO SELL SUBSTANTIALLY ALL OF ITS ASSETS
FORMATION OF THE SPECIAL COMMITTEE AND SOLICITATION OF A STRATEGIC TRANSACTION
On June 23, 2000, we engaged Lehman Brothers to endeavor to arrange a
private placement of equity or equity-linked securities to be issued by us and
to act as joint lead and sole book running placement agent in connection with a
potential private placement of securities having an aggregate purchase price of
$200 million.
From August 2000 until approximately November 2000, Lehman Brothers
contacted approximately 200 potential financial investors and approximately 14
potential strategic investors. Lehman Brothers arranged meetings with 11
potential investors. No follow up meetings were requested and no indications of
interest were received from any potential investors.
During the course of Lehman Brothers' fundraising efforts, on August 9,
2000, we received a term sheet from CCI and Vulcan relating to an offer to
purchase shares of Series D Senior Convertible Preferred Stock for an aggregate
purchase price of $75.0 million.
On October 19, 2000, we entered into a stock purchase agreement with
Charter Ventures and Vulcan, pursuant to which Charter Ventures and Vulcan
agreed to purchase an aggregate of 75,000 shares of newly-issued Series D Senior
Convertible Preferred Stock for an aggregate purchase price of $75.0 million.
On October 19, 2000, Lehman Brothers rendered an opinion as to the
fairness and commercial reasonableness of the proposed investment by Charter
Ventures and Vulcan. Based on its analysis, Lehman Brothers concluded that the
terms of the Series D Senior Convertible Preferred Stock, taken as a whole, were
commercially reasonable and that, as of the date of the opinion, from a
financial point of view, the consideration we were to receive was fair to us.
On December 4, 2000, we issued an aggregate of 75,000 shares of Series
D Senior Convertible Preferred Stock to Charter Ventures and Vulcan for cash
consideration of $75.0 million, pursuant to the stock purchase agreement, dated
October 19, 2000.
On May 1, 2001, the board of directors formed a Special Committee and
charged it with investigating a broad range of strategic options, including, but
not limited to, a sale of the company, a sale of the company's assets, an
acquisition, merger, consolidation or other business combination, a strategic
transaction or a public or private sale of debt or equity securities. Messrs.
Irving W. Bailey, II, Michael Gellert, David A. Jones, Jr., Robert Saunders and
Daniel O'Brien, each a director, were appointed by the board to serve on the
Special Committee. None of the directors employed by Charter or its affiliates,
including Vulcan, were appointed to the Special Committee.
On May 30, 2001, the Special Committee engaged Lehman Brothers to,
among other things, assist it in connection with the following:
o Identifying opportunities for a potential business combination.
o Advising the Special Committee concerning opportunities for such
a business combination, whether or not identified by Lehman
Brothers.
32
o Participating on our behalf in negotiations concerning such
business combination, as requested by the Special Committee.
During the period from May 25, 2001 to September 13, 2001, Lehman
Brothers considered numerous parties and, after discussion with management and
the Special Committee, contacted the 21 most likely strategic partners seeking a
transaction. Of these 21 potential strategic partners, four requested a copy of
the descriptive memorandum and financial model. Lehman Brothers also contacted
certain financial investors whom it had contacted in 2000 in connection with the
potential private placement. Other than CCI, none of the potential strategic
partners or financial investors contacted by Lehman Brothers conducted due
diligence or expressed an interest in considering a transaction with us. In
addition, since the public announcement of CCI's non-binding offer on August 1,
2001, we have not received any indications of interest from any other party
regarding a sale of the company or a sale of substantially all of our assets.
PRELIMINARY CONTACTS WITH CCI
In May and June 2001, Messrs. Jones and Kent had various discussions
about the company's situation and its need to either engage in a strategic
transaction or raise additional capital. In these discussions, Mr. Jones raised
the possibility of CCI submitting an offer to purchase all of the outstanding
stock of the company.
On June 5, 2001, Lehman Brothers received a letter sent by Merrill
Lynch on behalf of CCI indicating CCI's interest in a potential transaction with
us.
On June 6, 2001 and June 7, 2001, CCI and its advisors conducted due
diligence on us in our Denver office. CCI and its advisers continued their due
diligence via telephone for approximately two weeks following the June 6 and 7
trip to Denver.
On July 13, 2001, Mr. Jerald L. Kent, then-President and Chief
Executive Officer of CCI, orally indicated to Mr. David A. Jones, Jr., the
chairman of our board, that CCI might be interested in acquiring some or all of
the company. Mr. Kent stated that he could not provide more specific details
about any proposal until CCI's management completed its initial due diligence
review. Mr. Kent stated that he would contact Mr. Jones when CCI's management
had completed its initial diligence review.
Also on July 13, 2001, Mr. Jones reported to the Special Committee that
CCI might be interested in entering into a strategic transaction and that such
transaction may consist of the acquisition by CCI of some or all of our assets,
a merger or other business combination. Mr. Jones also stated that no formal
offer had been made by CCI and that he would be contacted by Mr. Kent in the
near future to continue the preliminary discussions.
On July 13, 2001, Lehman Brothers engaged in discussions with Merrill
Lynch, CCI's financial advisor, regarding the details of a potential transaction
with CCI. While Lehman Brothers did not receive official feedback from CCI's
advisor, their discussion indicated that CCI might be interested in purchasing
our customer care center and network operations center in Louisville, Kentucky
and the assets used in connection with our network service contracts with CCI.
The consideration for these assets could consist of cash and the shares of our
preferred stock owned by Charter Ventures. CCI reiterated its earlier request
seeking access to certain non-public information concerning the company in order
to further explore a possible transaction. Lehman Brothers advised
33
Merrill Lynch that the Special Committee sought to sell the entire company,
rather than selected assets.
On July 18, 2001, Mr. Kent contacted Mr. Jones and informed him that
CCI would be unwilling to make an offer to merge with or acquire the entire
company but was interested in continuing discussions related to a possible
purchase by CCI of certain of our assets, including our agreements with CCI and
Vulcan and the assets we use to perform our obligations under these agreements.
Mr. Kent advised that he would be prepared to discuss the terms of a possible
transaction with Mr. Jones shortly.
On July 19, 2001, the Special Committee met telephonically with its
legal and financial advisors. Mr. Jones advised the Special Committee of his
discussion with Mr. Kent, in which Mr. Kent indicated that CCI was unwilling to
make an offer to acquire the entire company but instead might be interested in
continuing discussions regarding a possible purchase of specific assets of the
company. The Special Committee discussed the viability of the various non-core
businesses and requested that management analyze the various businesses on a
stand-alone basis. Lehman Brothers informed the Special Committee as to the
status of discussions with potential buyers and investors. Lehman Brothers
advised the Special Committee that, given the current economic conditions
generally and the current economic conditions within the broadband market
specifically, Lehman Brothers believed it would be very difficult for us to
raise the capital necessary to sustain these businesses on a stand-alone basis.
The Special Committee instructed Lehman Brothers to continue its discussions
with CCI while trying to solicit offers from other potential buyers. The Special
Committee expressed its concern that sufficient consideration would not be
obtained in a possible sale of assets to CCI. The Special Committee instructed
Mr. Jones to summarize to Mr. Kent the Special Committee's concerns and explore
the possibility of CCI purchasing additional assets. In addition, Weil, Gotshal
& Manges LLP, our legal counsel, briefly discussed our obligations under our
network services agreements with CCI. Weil Gotshal also described how a
company's fiduciary duties change once it enters the "zone of insolvency." The
Special Committee also discussed bankruptcy as an alternative to a transaction
with CCI.
On July 24, 2001, Mr. Kent and Mr. Jones met telephonically to discuss
the terms of a possible transaction to determine whether to continue
discussions. The terms discussed included (i) the possible purchase of certain
of our assets that relate to the network services contracts with CCI, the
company's Louisville, Kentucky call center and network operations center and
other related assets, (ii) a possible purchase price of approximately $70.0
million in cash, minus any liabilities that might be assumed by CCI and (iii)
the cancellation of the shares of our preferred stock owned by Charter Ventures,
including any accrued dividends. Mr. Kent explained that CCI was not interested
in purchasing our DSL, international or web-hosting subsidiaries or business,
our Denver call center or executive offices, our contract with AOL/Time Warner
or our cash on hand. In addition, Mr. Kent noted that CCI had not completed its
due diligence review of the company.
On July 25, 2001, the Special Committee met telephonically with its
legal and financial advisors to discuss and evaluate the terms of the potential
transaction discussed by Mr. Kent and Mr. Jones. Lehman Brothers provided a
preliminary analysis of the terms discussed, which indicated that the ultimate
value of any proposal CCI might make to us would depend on, among other things,
the time required to negotiate and close a transaction, the operating expenses
we would incur prior to the closing, any costs and taxes we would incur as a
result of the transaction; and our payment and satisfaction of, or creation of a
financial reserve for, our accrued and contingent liabilities. The Special
Committee requested that management engage in a more complete financial and
strategic
34
analysis of the terms discussed with Mr. Kent. In addition, the Special
Committee instructed Mr. Jones to raise the Special Committee's concerns with
Mr. Kent.
On July 27, 2001, the Special Committee met telephonically with its
legal and financial advisors to discuss and evaluate management's financial and
strategic analysis of the terms discussed with CCI and the actions necessary to
maximize our projected post-closing cash balances, including our ability to
limit our operating expenses prior to the closing of a possible transaction. The
Special Committee requested that management offer its recommendation as to
whether we should, if a transaction with CCI were to be consummated, distribute
all or a portion of the proceeds and our cash-on-hand to stockholders or retain
and use the proceeds to fund our international business and our obligations
under our agreement with AOL/Time Warner. In either event, it was agreed that we
would need to amend our agreement with AOL/Time Warner so as to preclude that
agreement from being inadvertently transferred to, or enforceable against, CCI
in connection with a potential transaction. The Special Committee instructed
management and Lehman Brothers to seek further clarification from CCI with
respect to the terms of a possible transaction; the goal of such discussion
being (i) to increase the cash portion of the purchase price to $82.0 million;
(ii) the assumption by CCI of the operating expenses associated with the cable
modem business and incurred prior to the closing of the asset sale; (iii) the
settlement of any outstanding launch fee amounts owed by the company to CCI;
(iv) the cancellation of Charter Ventures' preferred stock, including any
accrued dividends; and (v) the cancellation of Vulcan's preferred stock,
including any accrued dividends.
Later on July 27, 2001, certain of our senior executive officers,
together with the chairman of the Special Committee, contacted CCI to convey the
Special Committee's initial reaction to the terms discussed by Messrs. Kent and
Jones. Lehman Brothers also contacted Merrill Lynch, CCI's financial advisor,
seeking additional details relating to a potential transaction and stating that
any proposal should include the cancellation of shares of preferred stock held
by Charter Ventures and Vulcan, as well as an increase of the cash component of
the purchase price.
On July 27, 2001, we were informed that Messrs. Kent, Silva and Savoy
were resigning from our board of directors.
On July 30, 2001, we received letters from Messrs. Kent, Silva and
Savoy confirming their resignation from our board of directors. Upon the
resignations of Messrs. Kent, Silva and Savoy, the members of the Special
Committee constituted our entire board of directors.
THE JULY 31ST WRITTEN PROPOSAL FROM CCI
On July 30, 2001, we received a written proposal from CCI, which
provided, among other things, that, subject to the fulfillment of certain
conditions:
o CCI, or a subsidiary of CCI to be identified by CCI at a later
date, would pay us an amount equal to approximately $73.0 million
in cash, subject to a working capital adjustment, minus the
amount of any liabilities assumed by the purchasing Charter
entity, minus certain other obligations or set-offs.
o The purchasing Charter entity would assume certain of our
operating commitments.
o Vulcan would tender to the purchasing Charter entity all shares
of preferred stock held by Vulcan. The purchasing Charter entity
would tender to us all of the outstanding
35
shares of our preferred stock (including the shares of preferred
stock held by Charter Ventures) and the warrants to acquire our
common stock held by Charter.
o The purchasing Charter entity would acquire all assets used in,
or necessary to, the performance of our network service
agreements with Charter and all equipment used in the provision
of services to Charter customers.
o The purchasing Charter entity would acquire the Louisville call
center, the network operation center, the Colorado and Washington
D.C. data centers and all services associated with these centers.
o The purchasing Charter entity would acquire the Charter e-mail
complex and web hosting server currently provided by us.
o The purchasing Charter entity would acquire all intellectual
property, data and inventory related to the acquired assets.
o The purchasing Charter entity would not acquire, among other
things, our cash on hand, our international operations, our DSL
business, the executive offices, the Denver call center, Digital
Chainsaw, our agreements with AOL/Time Warner and other cable
operators or any employment agreements.
Later that day, the board met telephonically to discuss the written
proposal from CCI. Because of the complexity of CCI's proposal, the board
requested that management immediately begin a complete analysis of its terms. In
particular, the board was concerned by the magnitude of the potential adjustment
to the purchase price and other factors that might affect the net cash proceeds,
such as accrued but unpaid launch fees due to Charter under our network services
agreement with Charter, our accounts receivable from Charter, shut down costs
associated with discontinuing operations and the ongoing cost associated with
continuing our other operations.
On August 1, 2001, the board, senior management and our legal and
financial advisors met telephonically to discuss management's preliminary
strategic and financial analysis of CCI's proposal and management's estimated
range of aggregate and per-share, post-closing, post-wind down cash. The board
asked management to further refine its analysis with respect to how much we
could decrease our expenses. The board also discussed the strategic implications
of CCI's proposal, including our ability to continue our remaining businesses
and our ability to perform under our agreement with AOL/Time Warner.
On August 2, 2001, the board, senior management and our legal and
financial advisors met, telephonically, to continue a comprehensive strategic
and financial review of CCI's proposal. The board discussed which liabilities it
should seek to have the purchasing Charter entity assume. The board also noted
that it would soon need to determine whether to liquidate the businesses CCI was
not proposing to purchase and instructed management to further analyze
liabilities associated with shutting down our non-core businesses.
On August 3, 2001, the board met prior to the annual stockholders'
meeting to formulate a strategy for its negotiations with CCI. The key concerns
were:
o increasing the cash consideration from $73.0 million; and
36
o the assumption by the purchasing Charter entity during the
pre-closing period of certain operating expenses associated with
the business CCI desired to purchase.
The board requested that senior management relay to CCI these concerns.
The board also agreed that, if we were to proceed with a transaction with CCI,
we should seek to sign a definitive agreement as soon as possible in order to
shift to CCI as early as possible the operating expenses associated with the
assets to be sold. Management reported to the board that termination notices had
been sent to substantially all of the employees of our DSL business that day in
an effort to decrease our operating expenses as early as possible. The board
then discussed whether it should set a deadline for CCI before which a
definitive agreement must be executed, but determined that an overly aggressive
deadline might prove difficult to meet.
Later on August 3, 2001, certain members of our senior management and
Mr. Saunders, contacted Mr. Curtis Shaw, Charter's Senior Vice President and
General Counsel, to discuss the board's key concerns relating to the proposed
transaction with CCI or one of its subsidiaries, as identified by the board at
its meeting earlier that day.
NEGOTIATING THE ASSET PURCHASE AGREEMENT
On August 4, 2001, Weil Gotshal forwarded a preliminary draft of an
asset purchase agreement to CCI, Merrill Lynch and Paul, Hastings, Janofsky &
Walker LLP, CCI's legal counsel.
On August 6, 2001, the board and senior executive officers met,
telephonically, with Weil Gotshal to discuss whether the company had entered the
"zone of insolvency" and the implications this analysis might have on the
fiduciary duties of the board. In addition, the board discussed plans to shut
down certain operations and the potential liquidation of any remaining
operations if a transaction with CCI or one of its subsidiaries is consummated.
On August 7, 2001, Merrill Lynch informed Lehman Brothers that CCI
needed to complete its due diligence relating to its analysis of the ongoing
operating expenses that we would incur prior to closing with respect to the
assets that CCI proposed to purchase in order to address the assumption of these
expenses in their comments.
During the period from August 13 to August 21, 2001, we, together with
our counsel and advisors, and CCI, together with its counsel and advisors,
exchanged comments on the initial draft of the asset purchase agreement via
telephone conversations and electronic mail.
On August 22, 23 and 24, 2001, we and our counsel met in New York City
with representatives and counsel of Charter. The purpose of these meetings was
to negotiate the specific terms of the asset purchase agreement and related
transaction documents. During this period, CCI identified Charter as the
subsidiary that would be the purchasing Charter entity.
During the period from August 24 to September 3, 2001, we, together
with our counsel and advisors, exchanged comments on the asset purchase
agreement and related transaction documents with Charter, its counsel and
advisors via telephone and electronic mail.
On September 4, 5, 6 and 7, 2001, we and our counsel met in New York
City with representatives and counsel of Charter to negotiate the terms of the
asset purchase agreement and related transaction documents. During the course of
these discussions, we and Charter conceptually
37
agreed on the basis upon which the cash consideration would be increased from
$73.0 million to $81.1 million, subject to certain offsets and adjustments.
From September 8 to September 20, 2001, we and our advisors exchanged
further comments on the agreements with Charter and its advisors.
On September 19, 2001, we finalized our engagement of Houlihan Lokey
Howard & Zukin Financial Advisors, Inc., whom we retained based on their
expertise in rendering solvency-related opinions. Specifically, we retained
Houlihan Lokey to render an opinion to the effect that the $81.1 million in cash
(subject to adjustments and holdbacks) and the liabilities assumed by Charter,
constitute fair consideration and reasonably equivalent value for the assets to
be acquired.
On September 20, 2001, the board met with its advisors, telephonically,
to discuss the asset purchase agreement and related transaction documents. The
board asked Lehman Brothers whether, in its opinion, the consideration to be
received by the company in the proposed transaction was fair to the company from
a financial point of view. Lehman Brothers recounted our current circumstances,
including its efforts to find additional potential investors, the failure of
these efforts, the value of the consideration to be received, the lack of other
offers since we announced having received CCI's original proposal and Lehman
Brothers' belief, based on these facts, that we had no other realistic
alternatives. Given its analysis and based upon and subject to certain matters
to be stated in a written opinion, Lehman Brothers verbally advised the board it
was of the opinion, as of September 21, 2001 and based upon the assumptions
made, matters considered and limits of review to be set forth in its written
opinion, that, from a financial point of view, the consideration to be received
by the company in the proposed transaction is fair to the company. Lehman
Brothers also informed the board that it would render a written fairness opinion
to this effect.
On September 21, 2001, Lehman Brothers rendered its opinion, as of
September 21, 2001 and based upon the assumptions made, matters considered and
limits of review to be set forth in the opinion, that, from a financial point of
view, the consideration to be received by the company in the proposed
transaction is fair to the company.
Also on September 21, 2001, certain members of our senior management
and Mr. Saunders met with Houlihan Lokey, telephonically, to discuss the opinion
as of September 21, and based upon the assumptions made, matters considered and
limits of review to be set forth in the opinion Houlihan Lokey was to render.
Houlihan Lokey described the analysis it had undertaken and verbally advised the
board that, in its opinion, the cash consideration to be received by the
company, which is subject to certain adjustments, and the assumption of certain
liabilities, constituted fair consideration and reasonably equivalent value for
the assets to be acquired by Charter. Later the same day, the board received
Houlihan Lokey's written opinion to that effect. Mr. Saunders then reported on
his conversation to the other members of the board.
Also on September 21, 2001, the board of directors unanimously
concluded the sale of assets to Charter to be fair to, and in the best interests
of, the company, and our stockholders, and adopted a resolution approving the
asset purchase agreement and the transactions contemplated thereby.
Following the approval of the asset sale by our board, representatives
of Charter informed us that they wanted to better understand the potential
liabilities relating to certain stockholder litigation filed in the Court of
Chancery in the State of Delaware. After careful consideration of these risks,
the boards of both companies reaffirmed their conclusions that such stockholder
litigation claims are without merit.
In order to assure that the holders of our common stock who are
unaffiliated with Charter or Vulcan have a meaningful role in determining
whether the transaction
38
is consummated, the parties agreed that, as a condition to the closing of the
asset sale, the approval of a majority of the votes cast at the Special Meeting
by the holders of our common stock other than Charter Ventures, Vulcan and
certain of our executive officers would be a condition to the consummation of
the asset sale.
On September 28, 2001, the parties executed the asset purchase
agreement and the other agreements related thereto.
NEGOTIATING THE PURCHASE OF OUR COMMON STOCK FROM VULCAN
At various times after receiving CCI's original written proposal on
July 31, 2001, our management and board discussed the possibility of acquiring
all of the shares of common stock currently held by Vulcan at a discount in
order to effectively increase the cash available for a potential distribution to
the stockholders of our common stock following the closing of the asset sale
with Charter. However, it was decided that management should wait until the
asset sale with Charter was more certain. On September 26, 2001, the board
revisited the possibility of purchasing all of the shares of common stock
currently held by Vulcan and requested that management initiate contact with
Vulcan with respect to a possible transaction.
On October 10, 2001, Mr. O'Brien contacted Mr. William Savoy, regarding
a possible transaction. Mr. Savoy indicated his willingness to discuss the
potential sale to us of our common stock held by Vulcan for consideration
consisting of (i) a cash payment equal to the recent trading price of our common
stock, discounted by approximately one-third, and (ii) a resolution to
discussions with respect to our possible interest in Digeo Broadband, Inc.
On October 12, 2001, the board met, telephonically, with management and
our counsel to consider and evaluate the potential acquisition of our common
stock held by Vulcan consistent with the discussion on October 10, 2001 between
Mr. O'Brien and Mr. Savoy. In its deliberations, the board considered (i) the
accretion of value to other stockholders that would result from the proposed the
transaction with Vulcan, (ii) the fact that any prior discussion with Vulcan
with respect to our possible interest in Digeo had never been finalized, and
(iii) the discount to the market price of our common stock based on the
illiquidity of Vulcan's large holding that would be appropriate in light of the
perceived benefits of the proposed transaction. The board requested that
management prepare a more detailed analysis of these issues for a meeting to
occur on October 15, 2001.
On October 15, 2001, the board met telephonically with senior
management and our counsel to continue its deliberations with respect to the
potential acquisition of our common stock held by Vulcan. The board considered
management's analysis of the issues raised at the October 12, 2001 meeting, as
well as whether the acquisition of the common stock would provide greater per
share value to our stockholders than the price per share we would pay to Vulcan.
In deliberating on this issue, the board considered the risk that a reinvestment
of the proceeds from the asset sale to Charter might not be successful, thereby
leaving stockholders with shares of common stock having a market value, or
actual value, less than the price per share paid to Vulcan. After deliberating,
the board resolved to authorize management to send to Vulcan a written offer
(subject to the board's receipt of information from Vulcan necessary to value
our interest in Digeo and final approval of the terms of any transaction) to
purchase 20,222,139 shares of our common stock held by Vulcan in consideration
of: (i) an aggregate of $3,440,000, or $.17 per share and (ii) a resolution with
respect to our possible interest in Digeo.
39
Later on October 15, 2001, Mr. O'Brien sent a letter to Mr. Savoy
describing the company's offer as determined by the board. The correspondence
included a draft of a stock purchase agreement for use in the transaction.
On October 19, 2001, Mr. Hundley and Vulcan's counsel, met
telephonically, to discuss the company's offer to purchase the shares of our
common stock held by Vulcan.
On October 25, 2001, Vulcan's counsel informed Mr. Hundley that Vulcan
would be willing to sell the shares of our common stock held by Vulcan for a per
share purchase price of approximately $.24.
On October 26, 2001, our board met, telephonically, to discuss Vulcan's
response to our offer to purchase the shares of our common stock held by Vulcan.
After deliberating on Vulcan's counter-offer, the board authorized Mr. O'Brien
to counter with an offer of $.22 per share.
On October 29, 2001, Vulcan accepted our counter-proposal to purchase
all of the shares of our common stock held by Vulcan for an aggregate cash
purchase price of $4,448, 870, or $.22 per share, and cross terminations and
releases, by us, of any right to subscribe for an interest in, or provide
services to, Digeo and, by Vulcan, of any right to require us to provide
financing or services to Digeo. The counterproposal also contemplated that the
stock purchase from Vulcan would close subject to, and simultaneously with, the
asset sale to Charter, while the waivers and releases would be effective
immediately.
On October 30, 2001, our board deliberated on the terms described above
and, after concluding such deliberations, approved the purchase of our common
stock from Vulcan pursuant to the terms described above.
On November 1, 2001, the parties finalized and executed definitive
documents relating to the stock purchase from Vulcan.
RECOMMENDATIONS OF THE BOARD OF DIRECTORS; REASONS FOR THE SALE OF SUBSTANTIALLY
ALL OF THE COMPANY'S ASSETS
RECOMMENDATIONS OF THE BOARD OF DIRECTORS
On September 21, 2001 our board, consisting entirely of directors
unaffiliated with Charter or Vulcan, unanimously approved the asset purchase
agreement, determined that the terms of the asset purchase agreement are fair
to, and in the best interests of, the company and our stockholders, and
determined to recommend to our stockholders that they vote to approve the sale
of substantially all of our assets pursuant to the asset purchase agreement.
Accordingly, our board recommends that you vote "FOR" the approval of
the sale of substantially all of our assets to Charter.
The members of our senior management and their affiliates have informed
us that they intend to vote their shares for the approval of the asset sale to
Charter.
40
REASONS FOR THE SALE OF SUBSTANTIALLY ALL OF OUR ASSETS
In reaching its determination that the sale of substantially all of our
assets is fair to, and in the best interests of, the company and our
stockholders, and in recommending that our stockholders vote to approve the
asset purchase agreement and the sale of substantially all of our assets, the
board consulted with our senior management and our financial and legal advisors
and considered the following factors:
o Lack of Operating Capital. We do not have the funds to continue
our current operations past early 2002. If we reject Charter's
proposal, it is likely that we will file for bankruptcy.
o Lack of Alternatives. With the assistance of Lehman Brothers, the
board has thoroughly explored market interest in various
strategic transactions, including the possibility of engaging in
a joint venture, a strategic partnership or a merger. The board
concluded that any alternatives to the asset sale were either not
feasible or were likely to provide significantly less value to
the holders of our common stock.
o Market Conditions. As a result of current market conditions and
upon the advice of Lehman Brothers, the board does not believe we
would be able to raise the capital necessary to fund our existing
business.
o Relief from Operating Liabilities. The asset sale and
accompanying management agreement will relieve us of certain of
our operating liabilities.
o Purchase Price. The board believes that the purchase price
Charter has agreed to pay represents the highest price that
Charter would be willing to pay in acquiring the assets it seeks
to acquire. This determination was the result of the board's
arm's-length negotiations with Charter in an attempt to obtain
the highest possible price.
o Net Cash Proceeds from Sale. We currently estimate that, assuming
the asset sale is consummated on or prior to December 31, 2001,
the asset sale will generate net cash proceeds of approximately
$67 million, after giving effect to our estimate of the purchase
price adjustments, the indemnity and purchase price holdbacks,
transaction costs and any payment from us to Charter for launch
fees less expense reimbursements due to us from Charter. Our
estimates of these proceeds and adjustments are as follows:
Cash purchase price $ 81,100,000
MINUS: Anticipated net purchase price adjustments
(including assumed capital leases and current
liabilities and acquired current assets) 1,750,000
MINUS: Indemnity and purchase price adjustment holdbacks 4,750,000
MINUS: Launch fees payable to Charter, net of expense
reimbursements payable to us 2,600,000
MINUS: Transaction costs and expenses 5,000,000
-----------
Estimated aggregate cash proceeds at closing $67,000,000
===========
41
In addition, as a condition to closing the asset sale, we must
pay to third parties $9.5 million (assuming the closing occurs on
or before December 31, 2001) to satisfy debt and lease
obligations relating to the assets to be purchased by Charter.
We also currently anticipate that most of the indemnity holdbacks
will ultimately be released to us in accordance with the asset
purchase agreement. For additional details about the asset
purchase agreement, see page 17.
o Net Cash Value. We currently estimate that, as of December 31,
2001, our net cash value will be approximately $43 million to $51
million, or approximately $.71 to $.84 per share of common stock,
assuming the asset sale to Charter is consummated on or before
that date. Furthermore, after giving effect to the purchase of
our common stock from Vulcan, we currently estimate that, as of
December 31, 2001, our per share net cash value will be
approximately $.96 to $1.16, assuming the common stock purchase
from Vulcan is consummated before that date. "Net cash value"
represents the amount of our cash and cash equivalents,
short-term investments and restricted cash reduced by the amount
of our total liabilities. "Per share net cash value" represents
our net cash value divided by the number of shares of our common
stock outstanding. Our actual net cash value, and per share net
cash value, may vary depending on various factors, including the
timing of the closing of the asset sale to Charter and the stock
purchase from Vulcan, the proceeds from the sale of assets other
than those we are selling to Charter, final pay out amounts on
known, unknown and contingent liabilities and the level of cash
used in our continuing operations. We also cannot assure you that
our per share net cash value estimate of approximately $.96 to
$1.16 will be reflected in the trading price of our common stock
either prior to or following the closing of the asset sale to
Charter and the common stock purchase from Vulcan.
o Reinvestment and/or Distribution to Stockholders. The proceeds
from the asset sale will allow us maximum flexibility with
respect to our ability to satisfy our ongoing obligations, avail
ourselves of potentially profitable investment opportunities
and/or make a cash distribution to the holders of our common
stock.
o Cancellation of Preferred Stock. Charter has agreed to tender for
cancellation all of our outstanding shares of preferred stock as
partial consideration for the assets. The cancellation of these
shares will eliminate Charter Ventures' and Vulcan's preference
over any distributions we might make in connection with a
liquidation, thereby facilitating any future distribution to
holders of our common stock, as well as providing these common
stock holders with the potential upside from their continued
investment in the company.
o Charter Ventures and Vulcan Power to Veto Alternatives. Charter
Ventures and Vulcan have the ability to block the consummation of
any alternative transaction by voting their preferred stock
against such a transaction.
o Lehman Brothers. Lehman Brothers' presentation to the board
relating to its financial analyses and oral and written opinions
that, from a financial point of view, the
42
consideration to be received by the company in the proposed
transaction is fair to the company.
o Increase From Original Offer. The purchase price increased from
what had been initially proposed.
The board believed that each of the above factors generally supported
its determination. The board did, however, consider the potential adverse
effects of other factors on the proposed asset sale. These included the
following:
o Our Operations Subsequent to the Asset Sale. The assets to be
sold constitute substantially all of our assets and the sale of
these assets will leave us with very few remaining assets and
very little revenue. Furthermore, we have no immediate plans to
replace them with other assets that would allow us continue our
operations on the scale we have in the past.
o Severance Payments to Our Officers. Of the proceeds from the
proposed transaction, approximately $2.77 million will be subject
to severance payments to certain of our officers. For a
description of these severance arrangements, see page 66.
o Holdback of Sale Proceeds. $4.75 million of the sale proceeds
will be held back for periods of up to 18 months and will be
subject to indemnity claims asserted by Charter. These holdbacks
will be held by Charter and, accordingly, not escrowed with an
independent third party. For additional details on the asset
purchase agreement, including these holdbacks, see page 17.
o Lack of Concrete Business Plan Subsequent to the Asset Sale. We
have not identified any specific acquisitions or other
transactions to engage in subsequent to the completion of the
asset sale, nor do we have any current plans to select any
particular industry or business. There can be no assurance that
we will be successful in identifying business opportunities or
acquisitions, or, if we identify such opportunities, that we can
successfully complete them. If we are unsuccessful we may
eventually use all, or a substantial portion of our remaining
cash on hand.
o Net Loss Subsequent to Asset Sale. After the consummation of the
asset sale, we anticipate that our net loss for the first quarter
of 2002 to be between approximately $600,000 and approximately
$1.0 million, or $.02 and $ .03 per share. This estimate is based
on our assumptions that (i) we fulfill our existing contractual
obligations with respect to our international business, (ii) we
do not consummate a strategic transaction during the first
quarter of 2002, (iii) we employ a total of 12 to 15 employees to
pursue strategic opportunities and provide general and
administrative support for our international operations and the
winding down of our remaining businesses (other than our
international business) and (iv) we consummate the purchase of
Vulcan's common stock prior to January 1, 2001. We cannot assure
you that these assumptions will ultimately prove correct.
o Inability to Consummate the Proposed Asset Sale. There is a risk
that the proposed asset sale will not be completed, in which
case, we will likely file for bankruptcy.
43
The above discussion concerning the information and factors considered
by the board is not intended to be exhaustive, but includes the material factors
considered by the board in making its determination. In view of the variety of
factors considered, the board did not quantify or otherwise attempt to assign
relative weights to these factors. In addition, individual members of the board
may have given different weight to different factors and therefore may have
viewed certain factors more positively or negatively than others.
Both as part of and in addition to the board's evaluation of the
factors set forth above, the board considered various estimates prepared by
senior management. As the board recognized, there can be no assurance that any
of the estimates set forth above, or anywhere else in this proxy statement will
be realized. Stockholders, in determining whether to vote in favor of the asset
sale, are cautioned not to attribute undue certainty to any estimates set forth
herein. For additional details about these estimates, and the assumptions
underlying these estimates, see page 46.
OUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE SALE OF THE
ASSETS TO CHARTER IS IN THE BEST INTEREST OF THE COMPANY AND THE STOCKHOLDERS
AND RECOMMENDS THAT YOU VOTE IN FAVOR OF THE SALE OF THE ASSETS PURSUANT TO THE
ASSET PURCHASE AGREEMENT.
POSITION OF THE COMPANY AS TO THE FAIRNESS TO STOCKHOLDERS UNAFFILIATED WITH
CHARTER AND VULCAN OF THE SALE OF SUBSTANTIALLY ALL OF THE ASSETS OF THE COMPANY
We believe the asset sale is substantively fair to our stockholders who
are unaffiliated with Charter and Vulcan. However, we express no opinion as to
the substantive fairness of the asset sale to Charter or Vulcan. Our belief as
to the substantive fairness is based on various factors, including:
o Recommendation of the Board of Directors. Our board, consisting
entirely of directors not affiliated with Charter or Vulcan,
recommended the approval of the asset purchase agreement and the
asset sale and, based on the factors described above, determined
that the asset sale is fair to our stockholders who are
unaffiliated with Charter and Vulcan.
o Fairness of the Consideration. We retained Lehman Brothers, a
leading internationally recognized investment bank, and Lehman
Brothers rendered an opinion that, from a financial point of
view, the consideration to be received by the company in the
proposed transaction is fair to the company.
o Our board also retained Houlihan Lokey, a leading internationally
recognized investment bank, and Houlihan Lokey rendered an
opinion that the payment of $81.1 million cash consideration,
which is subject to adjustment, and the assumption of liabilities
by Charter, constitutes fair consideration and reasonably
equivalent value for the assets Charter will acquire.
o Net Cash Proceeds from Sale. We currently estimate that, assuming
the asset sale is consummated on or before December 31, 2001, the
asset sale will generate net cash proceeds of approximately $67
million, after giving effect to our estimate of the purchase
price adjustments, the indemnity and purchase price holdbacks,
transaction costs and any payment from us to Charter for launch
fees less expense reimbursements due to us from Charter. Our
estimates of these proceeds and adjustments are as follows:
44
Cash purchase price $ 81,100,000
MINUS: Anticipated net purchase price adjustments
(including assumed capital leases assets and
current liabilities and acquired current) 1,750,000
MINUS: Indemnity and purchase price adjustment
holdbacks 4,750,000
MINUS: Launch fees payable to Charter, net of
expense reimbursements payable to us 2,600,000
MINUS: Transaction costs and expenses 5,000,000
-------------
Estimated aggregate cash proceeds at closing $ 67,000,000
=============
In addition, as a condition to closing the asset sale, we must
pay to third parties $9.5 million (assuming the closing occurs on
or before December 31, 2001) to satisfy debt and lease
obligations relating to the assets to be purchased by Charter.
We also currently anticipate that most of the indemnity holdbacks will
ultimately be released to us in accordance with the asset purchase agreement.
For additional details about the asset purchase agreement, see page 17.
o Net Cash Value. We currently estimate that, as of December 31,
2001, our net cash value will be approximately $43 million to $51
million, or approximately $.71 to $.84 per share of common stock,
assuming the asset sale to Charter is consummated on or before
that date. Furthermore, after giving effect to the purchase of
our common stock from Vulcan, we currently estimate that, as of
December 31, 2001, our per share net cash value will be
approximately $.96 to $1.16, assuming the common stock purchase
from Vulcan is consummated before that date. "Net cash value"
represents the amount of our cash and cash equivalents,
short-term investments and restricted cash reduced by the amount
of our total liabilities. "Per share net cash value" represents
our net cash value divided by the number of shares of our common
stock outstanding.
Accordingly, we expect that, as of December 31, 2001, this
estimated per share net cash value will represent:
Before giving effect to the purchase of common stock from
Vulcan:
1. a premium of 154% to 202% over $.29 the closing
price per share of our common stock on November 1,
2001, the last full trading day before this proxy
statement was filed; and
2. a premium of 319% to 397% over $.17, the closing
price per share of our common stock on September 27,
2001, the last full trading day before we entered
into the asset purchase agreement with Charter.
After giving effect to the purchase of common stock from
Vulcan:
45
1. a premium of 243% to 314% over $.29, the closing
price per share of our common stock on November 1,
2001, the last full trading day before this proxy
statement was filed; and
2. a premium of 465% to 582% over $.17, the closing
price per share of our common stock on September 27,
2001, the last full trading day before we entered
into the asset purchase agreement with Charter.
We believe it is unlikely that a third party would make an
offer that is superior, on a per share net cash value basis,
to Charter's offer.
Our actual net cash value, and per share net cash value,
may vary depending on various factors, including the timing of
the closing of the asset sale to Charter and the common stock
purchase from Vulcan, the proceeds from the sale of assets other
than those we are selling to Charter, final pay out amounts on
known, unknown and contingent liabilities and the level of cash
used in our continuing operations. We also cannot assure you that
our per share net cash value estimate of approximately $.96 to
$1.16 will be reflected in the trading price of our common stock
either prior to or following the closing of the asset sale to
Charter and the common stock purchase from Vulcan.
o Cancellation of Preferred Stock. Charter has agreed to tender for
cancellation all of our outstanding shares of preferred stock as
partial consideration for the assets. The cancellation of these
shares will eliminate Charter Ventures and Vulcan's preference
over any distributions we make in connection with a liquidation,
thereby facilitating any future distribution to holders of our
common stock as well as providing these holders with the
potential upside from their continued investment in the company.
o Lack of Alternatives. With the assistance of Lehman Brothers, the
Special Committee, and, after the resignation of the directors
affiliated with Charter and Vulcan, the entire board, thoroughly
explored market interest in various strategic transactions,
including the possibility of engaging in a joint venture, a
strategic partnership or a merger. The board concluded that any
alternatives to the asset sale were either not feasible or were
likely to provide significantly less value to the holders of our
common stock.
The above discussion is not intended to be exhaustive, but includes the
material factors upon which we have based our determination that the asset sale
is fair to our stockholders who are unaffiliated with Charter and Vulcan. Many
of these factors, however, are based on estimates. There can be no assurance
that any of the estimates set forth above, or anywhere else in this proxy
statement, will be realized. Stockholders, in determining whether to vote in
favor of the asset sale, are cautioned not to attribute undue certainty to any
of the estimates set forth herein.
These estimates are based on a variety of assumptions relating to,
among other things, general economic conditions, the length of time until the
closing of the asset sale, the fees and expenses associated with consummating
the asset sale and the purchase of our common stock from Vulcan, the amount of
our liabilities which must be satisfied or reserved against in connection with
the winding down of our operations (other than our international business), the
market value of our remaining assets and the time required to sell such assets
(other than our international business), our ability to fulfill our existing
contractual obligations with respect to our international business on a
stand-alone basis, our ability to identify, acquire and successfully operate new
businesses, our ability to continue our operations without depleting all of our
available cash and the amount and nature of any unknown or contingent
liabilities.
46
While we have attempted to accurately estimate the amount and nature of
our contingent liabilities, we cannot assure you that these contingent
liabilities will not be greater than we have estimated if and when they are
incurred. Whether or not our estimates will ultimately prove correct will depend
on various factors, including our success in settling our long-term capital
lease obligations with our lenders; our success in settling our long-term lease
obligations with the landlord of our Kipling office facilities; our success in
terminating our network services agreements with service providers other than
Charter; our success in disposing of the complaints brought against us by some
of our stockholders; whether additional complaints are filed against us by our
stockholders; and whether we become subject to unexpected claims with respect to
our recent workforce reductions under state and federal law, the disposition of
Digital Chainsaw, our abandonment of our DSL operations, and the disposition of
our assets related to our DSL operations.
We also believe the asset sale is procedurally fair to our stockholders
who are unaffiliated with Charter and Vulcan. However, we express no opinion as
to the procedural fairness of the asset sale to either Charter or Vulcan. Our
belief as to procedural fairness is based upon various factors, including:
o Appointment of Special Committee. Our board appointed a Special
Committee and authorized it to identify alternatives, consider,
evaluate, negotiate the terms of and make a recommendation to the
board as to the fairness of a strategic transaction. The Special
Committee identified, considered, evaluated and negotiated the
preliminary terms of the asset sale.
o Membership of Special Committee. The Special Committee consisted
entirely of directors who are not affiliated with either Charter
or Vulcan.
o Resignation of Charter and Vulcan Directors. On July 30, 2001,
all of the members of our board who were affiliated with either
Charter or Vulcan resigned from our board. Accordingly, as of
July 30, 2001, the members of the Special Committee constituted
our entire board of directors.
o Engagement of Lehman Brothers. The Special Committee engaged
Lehman Brothers, a leading internationally recognized investment
bank that is not affiliated with the company's management or
Charter or Vulcan, to serve as independent financial advisor to
the Special Committee, and the board received a fairness opinion
from Lehman Brothers that, from a financial point of view, the
consideration to be received by the company in the proposed
transaction is fair to the company.
o Engagement of Houlihan Lokey. The board engaged Houlihan Lokey, a
leading internationally recognized financial advisor that is not
affiliated with the company's management or Charter or Vulcan, to
render an opinion that the payment of $81.1 million cash
consideration, which is subject to adjustments, and the
assumption of liabilities by Charter, constitutes fair
consideration and reasonably equivalent value for the assets
Charter will acquire.
o Retention of Weil, Gotshal & Manges LLP. The Special Committee
retained the law firm Weil, Gotshal & Manges LLP, which is not
affiliated with the company's management or Charter or Vulcan, to
serve as independent legal advisor to the Special Committee.
47
o Legal Advice of Weil, Gotshal & Manges LLP. The Special
Committee, and, after the resignation of the directors affiliated
with Charter and Vulcan, the entire board, received legal advice
from Weil Gotshal concerning the Special Committee's, and later
the board's, authority and responsibilities in connection with
its evaluation of the asset sale.
o Negotiation of Asset Purchase Agreement. The asset purchase
agreement was extensively negotiated at an arm's length basis
among the board, Charter and their respective advisors, and the
board and its advisors successfully negotiated an increase in the
cash consideration from $73 million to $81.1 million (subject to
certain adjustments and holdbacks). In addition, whereas terms
initially discussed with Charter included the cancellation of our
preferred stock, including any accrued dividends, held by Charter
only, further negotiations resulted in the cancellation of all
the shares of our preferred stock, including any accrued
dividends and with a par value of $75 million, held by both
Charter and Vulcan.
o Deliberations of the Board. The Special Committee, and, after the
resignation of the directors affiliated with Charter and Vulcan,
the entire board, engaged in extensive deliberations regarding
the asset sale during the period from June 5, 2001 until
September 28, 2001 and held approximately 20 meetings during this
period.
o Representation of Stockholders Unaffiliated with Charter and
Vulcan. The Special Committee, and, after the resignation of the
directors affiliated with Charter and Vulcan, the entire board,
represented solely the interests of our stockholders who are
unaffiliated with Charter and Vulcan in connection with the asset
sale and, we believe, intended to act, and did in fact act, in
the best interests of these stockholders in connection with its
negotiations and deliberations.
o Approval of Board of Directors. Our board, consisting entirely of
directors not affiliated with Charter or Vulcan, recommended the
approval of the asset purchase agreement and the asset sale and,
based on the factors described above, determined that the asset
sale is fair to our stockholders who are not affiliated with
either Charter or Vulcan.
o Approval of Stockholders Unaffiliated with Charter and Vulcan.
Because of our affiliate relationship with Charter and Vulcan, we
have included a condition to the closing of the asset purchase
agreement that requires the approval of a majority of the votes
actually cast by holders of our common stock other than Charter,
Vulcan or certain of our executive officers.
We therefore believe that the asset sale is substantively and
procedurally fair to our stockholders who are unaffiliated with Charter and
Vulcan for the reasons and factors described above. In reaching this
determination, we have not assigned specific weights to particular factors and
considered all factors as a whole. None of the factors that we considered led us
to believe that the asset sale is unfair to our stockholders who are
unaffiliated with Charter and Vulcan. We express no opinion as to Charter,
Vulcan or their respective affiliates.
CHARTER'S REASONS FOR THE PURCHASE OF SUBSTANTIALLY ALL OF THE COMPANY'S ASSETS
Charter has informed us that its purpose for the transaction is to
acquire assets necessary and sufficient to offer and provide high speed Internet
access services to its cable customers without
48
continued primary reliance on third party service providers. In determining to
purchase substantially all of our assets, Charter has informed us that it
considered the following factors:
o The Need to Provide High Speed Internet Access Services to Its
Cable Customers. Charter believes that the provision of a suite
of services, including high speed Internet access, is essential
to attracting and retaining cable customers. Charter believes
that substantially all of its core business competitors offer and
provide voice and data services to their cable customers, either
directly or through third party Internet access providers.
Charter considers the continued growth of data subscribers to be
a key component of its business objectives and that any
interruption of high speed Internet access services or
deterioration in the quality of services may result in the loss
of cable subscribers.
o The Term and Complexity of Our Agreements with Charter. Charter
currently has two primary agreements with us related to the
provision of high speed Internet access and related services.
Each of these agreements provides for a broad range of services
to many customers across several geographic regions. Absent an
event of early termination, the agreements remain in effect with
respect to each service system for five years after the
initiation of services. Charter recognized that there would be
material penalties arising from its early termination of these
agreements without cause. Charter believes that monitoring the
type and quality of the services that we provide to Charter's
cable customers pursuant to our various agreements is difficult
and time consuming and that terminating these agreements may be
costly and may disrupt the provision of services to its
customers.
o Inability to Continue to Adequately Provide Services. Charter has
a significant concern regarding our liquidity constraints.
Charter considered our business, operations, financial condition,
operating results and prospects, including our financial
performance during 2000 and 2001 period, as well as our current
cash position and liquidity needs. Charter also considered that
we have informed Charter that we do not have the funds to
continue our current operations past early 2002 and that if we
reject its proposal, it is likely that we will file for
bankruptcy. In this regard, Charter considered that on April 18,
2001 we notified non-Charter multiple cable service operators
that we intended to exit the turnkey business, terminating
certain of such contracts and terminating certain employees as
cost cutting measures. Charter considered that we notified our
non-Charter cable operators of our intent to exit their contracts
on August 30, 2001. Charter believes that there is a significant
potential for service to begin to deteriorate as we moved to
conserve cash and that it may lose data subscribers due to our
cost cutting measures. Charter further believes that its remedies
for any interrupted services or decreased service quality may not
be adequate. Charter also considered current market conditions
and the results of the process conducted by Lehman Brothers to
find an investor and the lack of possible strategic alternatives
to its proposed purchase of substantially all of our assets.
o The Problems Associated with Charter's Obtaining Similar Services
from Other Internet Service Providers. Charter has considered its
ability to obtain alternative service providers in light of the
other factors described above. Charter believes that the terms of
its agreements with us and the penalties associated with early
termination thereof, together with the logistical problems
associated with changing service providers for its many and
geographically dispersed customers, makes it likely that
retaining alternative
49
service providers may result in an interruption of services and a
loss of cable customers to Charter.
o Charter Believes that the Assets It Has Agreed to Purchase
Constitute Substantially All of the Assets Necessary for Charter
to Provide High Speed Internet Access to its Current Customers.
We currently provide high speed Internet access services to
approximately 37% of Charter's data subscriber base. The assets
Charter has agreed to purchase are already assembled and
configured to provide high speed Internet access services to
Charter's customers and, Charter believes, constitute
substantially all of the assets necessary for Charter to continue
to provide high speed Internet access to Charter's customers.
o The Advantages of Purchasing the Assets Prior to a Bankruptcy of
the Company. While Charter may be well positioned to purchase our
assets in a bankruptcy liquidation if we were to file for
bankruptcy, Charter believes that scenario would not be optimal
for several reasons. First, Charter may lose data subscribers due
to operational turmoil resulting from a bankruptcy filing and the
related proceedings. Second, resolution of a bankruptcy and any
purchase of assets in such proceeding could potentially cause a
material delay in Charter's ability to purchase the assets. In
addition, Charter believes it is important to take steps as soon
as possible to ensure that its data subscriber base continues to
receive uninterrupted quality service. Finally, Charter is
concerned that our agreements with Charter might be assigned by a
bankruptcy court without Charter's consent to a third party with
whom Charter may be less comfortable as a provider of services to
its customers.
o Structure of the Transaction. Charter did not wish to acquire the
company by merger or to acquire all of our assets because it did
not wish to acquire assets or businesses not used to provide
services to its customers, such as our DSL assets, our
international business assets or contracts with other cable
operators. In addition, Charter was not interested in purchasing
many of our assets that it considered redundant or otherwise
unnecessary for its continued operation of our cable modem
business. Charter did not believe that it would be able to build
its own data service operation quickly enough to avoid potential
disruption to its customers that might result from potential
deterioration of data services to Charter's customers.
POSITION OF CHARTER AS TO THE FAIRNESS TO STOCKHOLDERS UNAFFILIATED WITH CHARTER
AND VULCAN OF THE SALE OF SUBSTANTIALLY ALL OF THE COMPANY'S ASSETS
Charter believes that the purchase and sale of substantially all of our
assets pursuant to the asset purchase agreement is substantively and
procedurally fair to our stockholders who are unaffiliated with Charter or
Vulcan. Charter based its belief on the following factors:
o Formation of and Approval of the Transaction by a Special
Committee of our Board of Directors. Charter considered the
formation of a Special Committee of our Board of Directors to
consider the proposed transaction with Charter. The Special
Committee consists entirely of directors not affiliated with
Charter or Vulcan and as of July 30, 2001, the members of the
special committee constituted all of the members of our board.
Charter also considered that our board unanimously approved the
asset purchase agreement, determined that the terms of the asset
purchase agreement are fair to, and in the best interests of, the
company and our stockholders (other than Charter Ventures and
50
Vulcan), and determined to recommend to our stockholders that
they vote to approve the sale of substantially all of our assets
to Charter pursuant to the asset purchase agreement.
o The Opinions of Independent Financial Advisors Lehman Brothers
and Houlihan Lokey. Charter considered that Lehman Brothers
rendered an opinion to our board that, from a financial point of
view, the consideration to be received by the company in the
proposed transaction is fair to the company. Charter also
considered that Houlihan Lokey rendered an opinion to our board
that the payment of $81.1 million cash consideration, which is
subject to adjustments, and the assumption of liabilities by
Charter, constitutes fair consideration and reasonably equivalent
value for the assets Charter will acquire.
o Diligent Search for Alternatives. Charter considered that the
board, with the assistance of Lehman Brothers, thoroughly
explored market interest in various strategic transactions,
including the possibility of engaging in a joint venture, a
strategic partnership or a merger, and concluded that any
alternatives to the asset sale were either not feasible or were
likely to provide significantly less value to the holders of our
common stock. Charter also considered that it and Vulcan have the
ability to block the consummation of other corporate
reorganization transactions by voting their preferred stock
against such a transaction.
o Arm's Length Negotiations. The asset purchase agreement was
negotiated at arm's length with our Special Committee, which
acted independently, with the assistance of its legal and
financial advisors and on behalf of holders of our common stock.
o Approval by a Majority of the Votes Cast by Holders of our Common
Stock Not Affiliated with Charter or Vulcan. To assure that our
stockholders other than Charter and Vulcan have the opportunity
to approve or disapprove the asset sale, the asset purchase
agreement requires the approval of a majority of the votes
actually cast at the Special Meeting by holders of our common
stock other than Charter, Vulcan and certain of our executive
officers.
o Lack of Operating Capital. Charter considered that we do not
believe we have the funds to continue our current operations past
early 2002 and that if we reject Charter's proposal, it is likely
that we will file for bankruptcy.
o Reinvestment and/or Distribution to Stockholders. The proceeds
from the asset sale will allow us flexibility with respect to our
ability to satisfy our on-going obligations, avail ourselves of
potentially profitable investment opportunities and/or make a
cash distribution to the holders of our common stock.
o Cancellation of Preferred Stock. Charter considered that the
cancellation of all of our outstanding shares of preferred stock
as partial consideration for the assets will eliminate Charter
and Vulcan's preference over any distributions we make in
connection with a liquidation.
The above discussion concerning the information and factors considered
by Charter is not intended to be exhaustive, but includes the material factors
considered by Charter in making its determination. In view of the variety of
factors considered, Charter did not attach specific weight to any factors in
reaching its belief as to fairness. In addition, individual members of Charter's
board
51
may have given different weight to different factors and therefore may have
viewed certain factors more positively or negatively than others.
In addition, certain of the factors considered by Charter are based on
estimates of its directors and senior management. There can be no assurance that
any of such estimates will be realized.
Charter is not making any recommendation as to how holders of our
common stock should vote on the proposed transaction.
OPINIONS OF FINANCIAL ADVISORS
LEHMAN BROTHERS
Lehman Brothers acted as financial advisor to our board of directors in
connection with the proposed transaction and delivered its oral opinion
(subsequently confirmed in writing) to the board of directors during the
September 21, 2001 meeting of the board to the effect that, as of the date
thereof, and based on and subject to the assumptions, limitations and
qualifications set forth in the opinion, from a financial point of view, the
consideration to be received by the company in the sale of certain assets of its
cable modem business to Charter was fair to the company.
THE FULL TEXT OF LEHMAN BROTHERS' WRITTEN OPINION, DATED SEPTEMBER 21,
2001, IS ATTACHED AS ANNEX B TO THIS DOCUMENT. STOCKHOLDERS MAY READ SUCH
OPINION FOR A DISCUSSION OF ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS
OF THE REVIEW UNDERTAKEN BY LEHMAN BROTHERS IN RENDERING ITS OPINION. THE
SUMMARY OF THE LEHMAN BROTHERS OPINION AND THE METHODOLOGY USED TO RENDER THE
OPINION THAT IS SET FORTH IN THIS DOCUMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE OPINION ATTACHED AS ANNEX B TO THIS DOCUMENT.
Lehman Brothers' opinion is for the information and assistance of the
board and was rendered to the Special Committee in connection with its
consideration of the proposed transaction. Lehman Brothers' opinion is not
intended to be and does not constitute a recommendation to any of our
stockholders as to how such stockholder should vote with respect to the proposed
transaction. Lehman Brothers was not requested to provide and did not make any
recommendation to the Special Committee as to our underlying business decision
to proceed with or effect the proposed transaction. In addition, Lehman
Brothers' opinion does not in any manner address (i) the use of proceeds from
the proposed transaction, including the amount of proceeds to be distributed to
the stockholders in the event that our board of directors determines that any
proceeds should be distributed to such stockholders, or (ii) the viability of
the company's remaining businesses following consummation of the proposed
transaction.
In connection with the preparation and delivery of its opinion to the
board, Lehman Brothers performed a variety of financial and comparative
analyses, as described below. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial and comparative analysis and the application of those methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Furthermore, in arriving at its opinion,
Lehman Brothers did not attribute any particular weight to any analysis or
factor considered by it, but, rather, made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Lehman
Brothers believes that its analyses must
52
be considered as a whole and that considering any portion of such analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the process underlying its opinion. In its analyses,
Lehman Brothers made numerous assumptions with respect to industry performance,
general business and economic conditions and other matters, many of which are
beyond the control of the company and Charter. Any estimates or projections
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable than as set forth therein.
No limitations were imposed by the company on the scope of Lehman
Brothers' investigation or the procedures to be followed by Lehman Brothers in
rendering its opinion. In arriving at its opinion, Lehman Brothers did not
ascribe a specific range of values to the assets to be sold to Charter, but,
rather, made its determination as to the fairness, from a financial point of
view, of the consideration to be received by the company in the sale of certain
assets of our cable modem business to Charter on the basis of the financial and
comparative analyses described below.
In arriving at its opinion, Lehman Brothers reviewed and analyzed,
among other factors:
o the asset purchase agreement and the specific terms of the
proposed transaction;
o our Annual Report on Form 10-K for the fiscal year ended December
31, 2000 and our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2001 and such other publicly available
information concerning the company that Lehman Brothers believed
to be relevant to its analysis;
o the results of the efforts by (i) the company and Lehman Brothers
to solicit indications of interest from third parties with
respect to an investment in the company, and (ii) the company and
Lehman Brothers to solicit indications of interest from third
parties with respect to other strategic transactions, including a
sale, of the company;
o Charter's operational and financial relationships with the
company and its governance rights with respect to the company and
the implications of those relationships and rights on the our
ability to raise additional capital from third party investors or
to enter into other strategic transactions;
o financial and operating information with respect to the business,
operations and prospects of the company and the assets to be sold
to Charter in particular, furnished to Lehman Brothers by the
company;
o a comparison of the historical financial results and present
financial condition of the assets to be sold to Charter with
those of other companies Lehman Brothers deemed relevant;
o a comparison of the financial terms of the proposed transaction
with the financial terms of certain other recent transactions
that Lehman Brothers deemed relevant;
o the pro forma impact of the proposed transaction on our current
and future financial position;
53
o alternatives available to the company in the absence of the
proposed transaction to fund the future capital and operating
requirements of the assets to be sold Charter; and
o the value of the assets to be sold to Charter and our other
assets in the event of our liquidation, in comparison to the
obligations to the holders of our preferred stock and other of
our liabilities and obligations.
Lehman Brothers also conducted discussions with our management
concerning our industry, businesses, operations, assets, financial conditions
and prospects, and undertook such other studies, analyses and investigations as
Lehman Brothers deemed appropriate.
In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information it used without
assuming any responsibility for independent verification of such information,
and Lehman Brothers further relied upon the assurances of our management that it
was not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of the
company furnished to Lehman Brothers by the company, upon advice of the company,
Lehman Brothers assumed that such projections had been reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
company's management as to the future financial performance of the company, and
relied upon those estimates in arriving at its opinion. In addition, Lehman
Brothers has discussed with the management of the company certain somewhat more
conservative assumptions and estimates which resulted in the company providing
Lehman Brothers with certain downward adjustments to the forecasts of the
company for Lehman Brothers' consideration.
In arriving at its opinion, Lehman Brothers did not conduct a physical
inspection of the company's properties and facilities and did not make or obtain
any evaluations or appraisals of the assets or liabilities of the company.
The following is a summary of certain financial and comparative
analyses performed by Lehman Brothers and presented to the board. Certain of the
analyses include information presented in tabular format. In order to fully
understand the financial analyses used by Lehman Brothers, the tables must be
read together with the text of each summary. The tables alone do not constitute
a complete description of the financial analyses.
Analysis of the Assets to be Sold to Charter
Comparable Trading Analysis. Using publicly available information,
including estimates in published third-party research reports, Lehman Brothers
reviewed and compared certain actual and projected financial and stock market
information for publicly traded companies in four sectors: Business Internet
Service Providers (ISPs), DSL Providers, Inbuilding Access Providers, and Other
Service Providers (OSPs) / Cable. Lehman Brothers reviewed a larger universe of
companies than companies listed below but decided to exclude companies with
negative enterprise value (determined as equity market value plus debt plus
preferred stock plus minority interests minus cash and marketable securities).
In the Business ISPs sector, Lehman Brothers reviewed AppliedTheory Corp., Digex
Incorporated, Exodus Communications, Inc., Globix Corp., and InterNAP Network
Services Corp. In the DSL Providers sector, Lehman Brothers reviewed DSL.net,
Inc. and Network Access Solutions Corp. In the Inbuilding Access Providers
sector, Lehman Brothers reviewed Allied Riser Communications Corporation, Ardent
Communications, Inc., and Cypress Communications, Inc. In
54
the OSPs / Cable sector, Lehman Brothers reviewed At Home Corporation's
("Excite@Home") cable business, @Home. The comparable companies were chosen
because they are publicly traded companies with operations that, for purposes of
analysis, may be considered similar to the assets Charter proposes to acquire.
With respect to each of the comparable companies, Lehman Brothers calculated
enterprise values (determined as above, except for @Home where @Home's portion
of Excite@Home's total enterprise value was estimated to be proportionate to the
cable modem-related revenues of @Home (including @Work) as a percentage of total
Excite@Home revenues) as multiples of run rate (defined as 4 times the latest
quarterly revenues), projected 2001 and 2002 revenues (in each case based upon
published estimates of third party research analysts):
MEAN MEDIAN HIGH LOW
---- ------ ---- ---
Enterprise Value as a Multiple of:
Run Rate Revenues ........................ 3.0x 2.5x 5.3 0.6x
2001 Revenues............................. 2.1x 2.1x 3.8x 0.3x
2002 Revenues............................. 1.4x 1.5x 2.6x 0.3x
</Table>
Given the uncertainty surrounding the long-term viability regarding the
operations of selected comparable companies, Lehman Brothers only applied the
multiples of enterprise value to 2001 revenues. Lehman Brothers also considered
the high-low range of 2001 revenue multiples instead of using the mean or median
multiples to capture a broader range of potential values related to the assets
Charter proposes to acquire. Applying 2001 revenue multiples of 0.3x and 3.8x
derived from its analysis of the comparable companies to the projected 2001
revenues for the assets Charter proposes to acquire, Lehman Brothers calculated
a range of implied enterprise value for the assets Charter proposes to acquire
of $7.9 million to $89.5 million.
However, because of the inherent differences in the businesses,
operations, financial conditions and prospects of the assets Charter proposes to
acquire and the comparable companies, Lehman Brothers believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative results
of the comparable companies analysis, and, accordingly, also made qualitative
judgments concerning differences between the characteristics of the comparable
companies and the assets Charter proposes to acquire that would affect the
values of the assets Charter proposes to acquire and such companies.
Comparable Transaction Analysis. Lehman Brothers reviewed certain
publicly available information regarding the terms and financial characteristics
of selected business combination transactions that were announced or took place
from August 2000 through August 2001, which Lehman Brothers believed to be
comparable to the proposed transaction. Given that market conditions were
drastically different a year ago, Lehman Brothers deemed it appropriate to
review transactions within the past year rather than over a longer historical
time frame. Public transactions in the broadband and telecommunications space
reviewed by Lehman Brothers included the following:
ACQUIROR TARGET
AT&T Corp...................... NorthPoint Communications Assets
McLeodUSA, Inc................. CapRock Communications Corp.
WorldCom, Inc.................. Intermedia Communications (CLEC only)
TimeWarner Telecom............. GST Telecommunications Assets
</Table>
55
For the selected transactions, Lehman Brothers determined enterprise
value multiples of projected forward year revenues:
ENTERPRISE VALUE AS MULTIPLE
OF FORWARD-YEAR REVENUES
<Table>
<Caption>
MEAN MEDIAN HIGH LOW
---- ------ ---- ---
1.9x 1.8x 3.8x 0.3x
</Table>
The recent transactions are representative of the declining valuations
surrounding broadband and telecommunications companies. The forward multiples
decreased from 3.8x based on the transaction between Time Warner Telecom and GST
Telecommunications in August 2000 to 0.3x based on the transaction between AT&T
Corp. and NorthPoint Communications in March 2001. Lehman Brothers used the
high-low range of 0.3x - 3.8x to obtain a broader assessment of the potential
values of the assets Charter proposes to acquire. Applying the high-low
multiples derived from its analysis of the selected domestic broadband and
communications transactions to the assets Charter proposes to acquire, Lehman
Brothers calculated a range of implied enterprise value of $6.5 million to $88.4
million.
However, because the reasons for and the circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of the
assets Charter proposes to acquire and the businesses, operations and prospects
of the acquired companies or acquired assets of certain companies included in
the selected transactions, Lehman Brothers believed that it was inappropriate
to, and, therefore, did not, rely solely on the quantitative results of the
precedent transactions analysis, and accordingly also made qualitative judgments
concerning differences between the characteristics of these transactions and the
proposed transaction that would affect the acquisition values of the assets
Charter proposes to acquire.
Discounted Cash Flow Analysis. Using a discounted cash flow
methodology, Lehman Brothers calculated the net present value of the assets
Charter proposes to acquire based upon the following two alternative
assumptions: (1) Charter renews the agreement entered between Charter and the
company in May 2000 when its term expires in May 2005 and indefinitely
thereafter and (2) Charter cancels the May 2000 agreement in May 2005 and
Charter subscribers cease to be subscribers of the company in 2005 and 2006. In
both scenarios, projected after-tax cash flows were calculated as unlevered
after-tax earnings plus amortization and depreciation less capital expenditures
and net changes in working capital. In estimating a discount rate, Lehman
Brothers considered a number of factors including the following: that a 20.0%
discount rate is not relevant for the following reasons: (1) the company does
not currently have sufficient funding to reach cash flow breakeven in its
existing businesses; (2) the company has been effectively shut out of the
capital markets; (3) the company has no current prospects for raising required
capital; and (4) the increased perception of risk by investors surrounding
broadband service providers. Accordingly, Lehman Brothers applied a 40.0%
discount rate in order to reflect its belief that investors would demand a
significantly higher return than our historical discount rate of 20.0% if the
company attempts to raise additional capital to fund the assets Charter proposes
to acquire.
56
In the scenario in which Charter renews the May 2000 agreement with the
company in May 2005 and indefinitely thereafter, Lehman Brothers performed a
cash flow analysis with the terminal year of 2010 and calculated a terminal
value for the assets Charter proposes to acquire by applying a perpetuity growth
rate of 5.0%-6.0%. The cash flow streams and terminal value were discounted to
present values using a discount rate of 40.0%. From this analysis, Lehman
Brothers calculated a reference range of implied asset value of approximately
$2.0 million to $2.6 million.
In the scenario in which Charter cancels the May 2000 agreement with
the company in May 2005 and Charter subscribers cease to be subscribers of the
company in 2005 and 2006. Based on the company's estimates, Lehman Brothers
performed a 5-year cash flow analysis and assumed no terminal value for the
assets Charter proposes to acquire. The cash flow streams were discounted to
present values using a discount rate of 40.0%. Consequently, from this analysis,
Lehman Brothers concluded that there is no positive value for the assets Charter
proposes to acquire.
Funding Gap Analysis. To supplement the above valuation analysis,
Lehman Brothers performed a funding gap analysis to assess the company's capital
requirements to fund the assets Charter proposes to acquire to cash flow
breakeven (defined as the after-tax cash flow reaching positive). Projected
after-tax cash flows were calculated as unlevered after-tax earnings plus
amortization and depreciation less capital expenditures and net changes in
working capital. Using the company's estimates of $18.2 million in cash at the
beginning of 2002, the company would require $25.5 million in 2002, $23.1
million in 2003 and $7.5 million in 2004, or cumulatively, $56.2 million to
breakeven in the assets Charter proposes to acquire. In the course of Lehman
Brothers' role as the company's strategic and financial advisor in general and
during Lehman Brothers' recent efforts in raising capital for the company in
particular, Lehman Brothers did not become aware of any opportunities to raise
the capital necessary to fund the assets Charter proposes to acquire to
breakeven.
Lehman Brothers is an internationally recognized investment banking
firm and, as part of its investment banking activities, is regularly engaged in
the evaluation of businesses and other securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Special Committee selected
Lehman Brothers because of its expertise, reputation and familiarity with the
company in particular and the media and telecommunications industries in
general, and because its investment banking professionals have substantial
experience in transactions similar to the proposed transaction.
Lehman Brothers is acting as financial advisor to the company's board
of directors in connection with the proposed transaction. Lehman Brothers has
also performed various investment banking services for the company in the past
(including serving as lead manager for the company's initial public offering)
and has received customary fees for such services. In the ordinary course of its
business, Lehman Brothers may actively trade in the securities of HSA and CCI or
its affiliates for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Fees and Expenses.
Pursuant to an engagement letter, dated May 31, 2001, we have agreed to
pay Lehman Brothers the following fees for the financial advisory services
provided by Lehman Brothers in connection with the asset sale: (i) a retainer of
$100,000, payable upon execution of the engagement letter and creditable against
any subsequently payable transaction fee, as further described below, (ii)
57
an opinion fee of 30% of the estimated success fee, payable upon delivery of the
fairness opinion, if any, and creditable against any subsequently payable
transaction fee, and (iii) a transaction fee payable upon consummation of any
business combination involving the company, in an amount equal to the greater of
(x) $2.0 million and (y) 2.0% of the consideration involved in the transaction,
plus an additional 0.25% of the consideration involved in the transaction if the
consideration involved in the transaction exceeds $245 million. Based on a
transaction value of approximately $156 million, we estimate total fees for the
financial advisory services provided by Lehman Brothers to be approximately $3.1
million. Of this total, we have already paid approximately $1.0 million. The
balance of total fees due are payable at closing. Based on a transaction value
of approximately $156 million, we estimate the total fees for the financial
advisory services provided by Lehman Brothers to be approximately $3.1 million.
Of this amount, we paid approximately $1.0 million upon our receipt of the
fairness opinion rendered by Lehman Brothers. The balance is payable upon the
consummation of the asset sale. In addition, we have agreed to indemnify Lehman
Brothers for certain liabilities incurred by Lehman Brothers in connection with
its engagement.
HOULIHAN LOKEY
The preparation of a financial opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. The
following is a brief summary and general description of the valuation
methodologies utilized by Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
The summary does not purport to be a complete statement of the analyses and
procedures applied, the judgments made or the conclusion reached by Houlihan
Lokey or a complete description of its presentation. Houlihan Lokey believes,
and so advised our board, that its analyses must be considered as a whole and
that selecting portions of its analyses and of the factors considered by it,
without considering all factors and analyses, could create an incomplete or
inaccurate view of the process underlying its analyses and opinions.
As a condition to entering into the asset purchase agreement, Charter
required us to obtain a qualified investment banking firm to render an opinion
to be addressed to our board, as to whether the $81.1 million in cash (subject
to adjustments) we will receive from Charter together with the liabilities
assumed by Charter constitutes fair consideration and reasonably equivalent
value for the assets Charter seeks to acquire. The board evaluated its options
and retained Houlihan Lokey to render this opinion. On September 21, 2001
Houlihan Lokey presented to us its analysis as hereinafter described and
delivered its written opinion that, as of such date and based on the matters
described therein, the $81.1 million in cash (subject to adjustments) together
with the liabilities assumed by Charter constitutes fair consideration and
reasonably equivalent value for the assets Charter seeks to acquire.
THE COMPLETE TEXT OF HOULIHAN LOKEY'S OPINION DATED SEPTEMBER 21, 2001,
IS ATTACHED HERETO AS ANNEX C. THE SUMMARY OF THE OPINION SET FORTH BELOW IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION. THE
HOLDERS OF OUR COMMON STOCK ARE URGED TO READ SUCH OPINION CAREFULLY IN ITS
ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED
AND THE ASSUMPTIONS MADE BY HOULIHAN LOKEY.
Houlihan Lokey's opinion to our board of directors addresses only the
value of the assets Charter seeks to acquire, and does not constitute an opinion
regarding the fairness of the transactions contemplated by the asset purchase
agreement or a recommendation to the stockholders as to how any stockholder
should vote at the Special Meeting. Houlihan Lokey has not been requested to,
and did
58
not, solicit third party indications of interest in acquiring all or part of the
assets Charter seeks to acquire. The consideration we will receive from Charter
was arrived at by negotiation between us and Charter.
In connection with the preparation of its opinion, Houlihan Lokey made
such reviews, analyses and inquiries as it deemed necessary and appropriate
under the circumstances. Among other things, Houlihan Lokey:
1. Reviewed our annual reports to stockholders and on Form 10-K for
the fiscal years ended December 31, 1999 and 2000 and quarterly
reports on Form 10-Q for the two quarters ended June 30, 2001,
and the interim financial statements we prepared for the period
ended July 31, 2001, which our management identified as being the
then-most current financial statements available;
2. Reviewed a pro forma balance sheet and the stated value of the
assets Charter seeks to acquire and of certain liabilities to be
sold by us in the transactions contemplated by the asset purchase
agreement;
3. Reviewed the asset purchase agreement between the company and
Charter draft dated September 20, 2001;
4. Met with certain of our senior management to discuss the
operations, financial condition, future prospects and projected
operations and our performance and the assets Charter seeks to
acquire;
5. Reviewed forecasts and financial projections prepared by our
management with respect to us and the assets Charter seeks to
acquire for the years ended December 30, 2001 through 2010;
6. Reviewed the historical market prices and trading volume for our
publicly traded securities;
7. Reviewed certain other publicly available financial data for
certain companies that Houlihan Lokey deemed comparable to us;
and
8. Conducted such other studies, analyses and inquiries as Houlihan
Lokey deemed appropriate.
In assessing the fair consideration and reasonably equivalent value for
the assets Charter seeks to acquire, Houlihan Lokey completed an independent
valuation of the assets Charter seeks to acquire using the market multiple, the
discounted cash flow, and the comparable transaction approaches. Houlihan Lokey
also analyzed the stated book value of the assets Charter seeks to acquire.
Market Multiple Approach. The first approach, the market multiple
approach, typically involves the multiplication of various earnings and cash
flow and asset value measures by appropriate risk-adjusted multiples. Multiples
are determined through an analysis of certain publicly traded companies, which
are selected on the basis of operational and economic similarity with our
principal business operations and the assets Charter seeks to acquire. Earnings
and cash flow multiples for the comparable companies are calculated based upon
daily trading prices.
59
In analyzing the comparable companies, Houlihan Lokey found that none
have any meaningful levels of earnings or cash flow, and, therefore, those
measurements produce no meaningful multiples. Houlihan Lokey, therefore,
analyzed the relevant multiples of the tangible asset value, tangible book value
and revenues of the comparable companies, and the assets Charter seeks to
acquire. A comparative risk analysis between us, the assets Charter seeks to
acquire and the public companies formed the basis for the selection of
appropriate risk adjusted multiples for the assets Charter seeks to acquire. The
risk analysis incorporates both quantitative and qualitative risk factors, which
relate to, among other things, the nature of the industry in which we and the
assets Charter seeks to acquire and other comparable companies are engaged.
For purposes of such analysis, Houlihan Lokey selected seven publicly
traded, domestic companies involved in providing broadband Internet access and
service. These companies include:
o At Home Corp. o Juno Online Services, Inc.
o Exodus Communications, Inc. o Log On America, Inc.
o Fastnet Corp. o Prodigy Communications Corp.
o Internet America, Inc.
Houlihan Lokey computed multiples for the last fiscal year end and for
the latest trailing twelve months. Projections of revenues, asset value, book
value or other relevant measures for the comparable companies by industry
analysts or other public sources were not available. Therefore, multiples of
projected financial performance could not be calculated.
The multiples of equity value to the tangible book value of the
comparable companies at the last fiscal year end ranged from 0.3 to 6.5 with a
median of 1.00. Similarly, the multiples for the comparable companies based on
the latest quarter's tangible book value ranged from 1.3 to 1.9, with a median
of 1.6. However, due to material changes in the balance sheets of many of the
comparable companies since their last fiscal year end, five of the seven
comparable companies had negative tangible book value in the latest quarter,
resulting in multiples that were not meaningful for those companies.
The multiples of enterprise value to the tangible asset value of the
comparable companies at the last fiscal year end ranged from 0.2 to 3.3, with a
median of 0.6. Similarly, the multiples for the comparable companies based on
the latest quarter's tangible asset value ranged from 0.3 to 4.3, with a median
of 0.8. (The enterprise value of a company is calculated as the aggregate public
trading value of its common stock plus preferred stock plus debt, less cash on
the balance sheet.)
The multiples of enterprise value to the revenues of the comparable
companies at the last fiscal year end ranged from 0.2 to 2.4, with a median of
1.5. Similarly, the multiples for the comparable companies based on the trailing
twelve-month revenues ranged from 0.1 to 2.1, with a median of 1.0.
The market multiple approach indicated a value for the assets Charter
seeks to acquire in the range of $30.9 million to $40.8 million.
Discounted Cash Flow Approach. In the second approach, the discounted
cash flow approach, financial projections prepared by management are typically
used. The present value of interim cash flows and the terminal value are
determined using a risk-adjusted rate of return or "discount rate." The discount
rate, in turn, is developed through an analysis of rates of return on
alternative investment opportunities on investments in companies with similar
risk characteristics to
60
ours. The terminal value is estimated by using a multiple of EBITDA in the final
year of the projections.
Management prepared financial projections under two scenarios. The
first scenario assumes that once our current contracts with Charter's cable
systems expire (between 2004 and 2006), they are not renewed, and we lose the
Charter business. The second scenario assumes that our network service agreement
contracts with Charter are renewed, and that we obtain additional network
service agreement contracts to provide service to all of Charter's approximately
200 cable systems, up from the approximately 50 cable systems we served in
September 2001. Furthermore, the second scenario assumes that we are able to
complete a financing in 2002 to raise sufficient funds in order to finance the
projected growth.
Houlihan Lokey analyzed management's financial projections, and based
on discussions between Houlihan Lokey and our management, certain assumptions
were adjusted (specifically the number of new cable systems launched per year
and the incremental penetration rate).
The terminal value of the assets Charter seeks to acquire were
determined by applying a risk adjusted multiple to the projected EBITDA in the
terminal year (2010) of the projections. A terminal multiple of 6.0 was selected
to account for the likelihood of limited growth prospects for the assets Charter
seeks to acquire past the terminal year.
The discounted cash flow approach utilizing management's adjusted
projections in the second scenario yielded a value indication for the assets
Charter seeks to acquire in the range of $21.1 million to $56.5 million.
Comparable Transaction Approach. The comparable transaction approach,
also involves multiples of earnings and cash flow and other financial measures.
Multiples used in this approach are determined through an analysis of
transactions involving controlling interests in companies with operations
similar to our principal business operations and the assets Charter seeks to
acquire.
Houlihan Lokey was unable to identify any relevant transactions it
considered comparable to the proposed asset sale to Charter and, therefore was
unable to use the transaction approach to develop an indication of value for the
assets Charter seeks to acquire.
Book Value Approach. Lastly, Houlihan Lokey compared the stated value
of the assets Charter seeks to acquire, adjusted by certain liabilities to be
assumed by Charter, to the purchase price to be paid by Charter in the proposed
transaction. The net book value of the assets Charter seeks to acquire was
approximately $27.6 million as of the date of Houlihan Lokey's opinion.
* * * *
Houlihan Lokey has relied upon and assumed, without independent
verification, that the financial forecasts and projections provided to it have
been reasonably prepared and reflect the best currently available estimates of
the future financial results and condition of us and the assets Charter seeks to
acquire, and that there has been no material change in our assets, financial
condition, business, operations or prospects or those of the assets Charter
seeks to acquire since the date of the most recent financial statements made
available to it.
Houlihan Lokey did not independently verify the accuracy and
completeness of the information supplied to it with respect to us and the assets
Charter seeks to acquire and does not
61
assume any responsibility with respect to such information. Houlihan Lokey has
not made any physical inspection of us or the assets Charter seeks to acquire,
or independent appraisal of any of our properties or assets, other than the
aggregate value of the assets Charter seeks to acquire. Houlihan Lokey's opinion
is necessarily based on business, economic, market and other conditions as they
exist and can be evaluated by it as at the date of its letter.
Houlihan Lokey is a nationally recognized investment-banking firm with
special expertise in, among other things, valuing businesses and securities and
rendering financial opinions. Houlihan Lokey is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, private placements of debt and equity,
corporate reorganizations, employee stock ownership plans, corporate and other
purposes. Houlihan Lokey does not beneficially own nor has it ever beneficially
owned any interest in the securities issued by either us or Charter.
Fees and Expenses.
Pursuant to an agreement dated September 19, 2001, we retained Houlihan
Lokey on behalf of our board of directors to render an opinion as to whether the
consideration we will receive from Charter constitutes fair consideration and
reasonably equivalent value for the assets Charter seeks to acquire. We have
agreed to pay Houlihan Lokey a fee of $250,000 plus its reasonable out-of-pocket
expenses incurred in connection with its opinion. We have further agreed to
indemnify Houlihan Lokey against certain liabilities and expenses in connection
with the rendering of its services. No portion of the fee is contingent upon the
consummation of the transactions contemplated by the asset purchase agreement or
the conclusions reached in Houlihan Lokey's opinion.
EFFECTS OF THE ASSET SALE
We believe that, assuming the asset sale closes on or before December
31, 2001, we will obtain approximately $67 million in net cash proceeds from the
sale, have a net cash value of approximately $43 million to $51 (before giving
effect to the stock purchase from Vulcan) million and incur net losses of
approximately $600,000 to $1.0 million in the first quarter of 2002. We also
believe that the asset sale will have no material federal income tax effect on
our stockholders unaffiliated with Charter and Vulcan. The assumptions
underlying these estimates are set forth below.
o Net Cash Proceeds from Sale. We currently estimate that, assuming
the asset sale is consummated on or before December 31, 2001, the
asset sale will generate net cash proceeds of approximately $67
million, after giving effect to our estimate of the purchase
price adjustments, the indemnity and purchase price holdbacks,
transaction costs and any payment from us to Charter for launch
fees less expense reimbursements due to us from Charter. Our
estimates of these proceeds and adjustments are as follows:
<Table>
Cash purchase price $ 81,100,000
MINUS: Anticipated net purchase price adjustments
(including assumed capital leases and current
liabilities and acquired current assets) 1,750,000
MINUS: Indemnity and purchase price adjustment holdbacks 4,750,000
MINUS: Launch fees payable to Charter, net of expense
reimbursements payable to us 2,600,000
MINUS: Transaction costs and expenses 5,000,000
-------------
Estimated aggregate cash proceeds at closing $ 67,000,000
=============
</Table>
62
In addition, as a condition to closing the asset sale, we must
pay to third parties $9.5 million (assuming the closing occurs on
or before December 31, 2001) to satisfy debt and lease
obligations relating to the assets to be purchased by Charter.
We also currently anticipate that most of the indemnity holdbacks
will ultimately be released to us in accordance with the asset
purchase agreement. For additional details about the asset
purchase agreement, see page 17.
o Net Cash Value. We currently estimate that, as of December 31,
2001, our net cash value will be approximately $43 million to $51
million, or approximately $.71 to $.84 per share of common stock,
assuming the asset sale to Charter is consummated on or before
that date. Furthermore, after giving effect to the purchase of
our common stock from Vulcan, we currently estimate that, as of
December 31, 2001, our per share net cash value will be
approximately $.96 to $1.16, assuming the common stock purchase
from Vulcan is consummated before that date. "Net cash value"
represents the amount of our cash and cash equivalents,
short-term investments and restricted cash reduced by the amount
of our total liabilities. "Per share net cash value" represents
our net cash value divided by the number of shares of our common
stock outstanding. Our actual net cash value, and per share net
cash value, may vary depending on various factors, including the
timing of the closing of the asset sale to Charter and the stock
purchase from Vulcan, the proceeds from the sale of assets other
than those we are selling to Charter, final pay out amounts on
known, unknown and contingent liabilities and the level of cash
used in our continuing operations. We also cannot assure you that
our per share net cash value estimate of approximately $.96 to
$1.16 will be reflected in the trading price of our common stock
either prior to or following the closing of the asset sale to
Charter and the common stock purchase from Vulcan.
o Net Loss Subsequent to Asset Sale. After the consummation of the
asset sale, we anticipate that our net loss for the first quarter
of 2002 to be between approximately $600,000 and approximately
$1.0 million, or $.02 and $.03 per share. This estimate is based
on our assumptions that (i) we fulfill our existing contractual
obligations with respect to our international business, (ii) we
do not consummate a strategic transaction during the first
quarter of 2002, (iii) we employ a total of 12 to 15 employees to
pursue strategic opportunities and provide general and
administrative support for our international operations and the
wind down of our remaining assets (other than our international
business) and (iv) we consummate the purchase of Vulcan's common
stock prior to January 1, 2002. We cannot assure you that these
assumptions will ultimately prove correct.
o Federal Income Tax Consequences of the Asset Sale. The sale of
substantially all of our assets will not cause any federal income
tax consequences for you. Any proceeds you
63
receive in a subsequent distribution, stock redemption, stock
repurchase or liquidation and dissolution may be taxable to you.
Tax consequences to stockholders may differ depending on their
circumstances. In the event that we decide to make a
distribution, effect a stock redemption, establish a stock
repurchase program or liquidate and dissolve, you should consult
your tax advisor as to the tax effect applicable to your
particular circumstances.
There can be no assurance that any of the estimates set forth above, or
anywhere else in this proxy, will be realized. Stockholders, in determining
whether to vote in favor of the asset sale, are cautioned not to attribute undue
certainty to any estimates set forth herein. Such estimates are based on a
variety of assumptions relating to, among other things, general economic
conditions, the length of time until the closing of the asset sale and the
purchase of our common stock from Vulcan, the fees and expenses associated with
consummating the asset sale, the amount of our liabilities which must be
satisfied or reserved against in connection with the winding down of our
operations (other than our international business), the amount and nature of any
unknown or contingent liabilities, the market value of our remaining assets and
the time required to sell such assets (other than our international business),
the continued viability of our international business on a stand-alone basis,
our ability to identify, acquire and successfully operate new businesses and our
ability continue our operations without depleting all of our available cash.
PLANS AFTER THE SALE OF SUBSTANTIALLY ALL OF OUR ASSETS
We have not yet determined what our strategic direction will be
following the consummation of the asset sale and are considering at least three
possible alternatives.
o Option 1 - Make No Distribution; Retain the Proceeds and Reinvent
the Business. We may elect to:
(i) make no distribution to stockholders;
(ii) proceed, as expeditiously and prudently as possible,
with the sale of all of our remaining assets except
those related to our international operations or new
strategic initiatives; and
(iii) use all of the proceeds from the asset sale to
fulfill our existing contractual obligations with
respect to our international business and pursue
select domestic business opportunities as they arise,
including the possible acquisition of an existing
business or the development of one or more new
businesses.
o Option 2 - Make a Partial Distribution; Retain Part of the
Proceeds and Reinvent the Business. We may elect to:
(i) make a portion of the proceeds from the asset sale
available to our stockholders through a direct
distribution, a stock redemption or stock repurchase
program;
(ii) proceed, as expeditiously and prudently as possible,
with the sale of all of our remaining assets except
those related to our international operations or new
strategic initiatives; and
64
(iii) use the remaining proceeds from the asset sale to
fulfill our existing contractual obligations with
respect to our international business and pursue
select domestic business opportunities as they arise,
including the possible acquisition of an existing
business or the development of one or more new
businesses.
o Option 3 - Distribute All of the Proceeds; Wind Down the Business
and Dissolve. We may decide to cease all of our operations and
seek stockholder approval of a plan of liquidation and
dissolution so that we may liquidate all of our remaining assets,
pay our known liabilities, distribute all of our remaining cash
on hand (subject to the set aside of adequate reserves to cover
known, unknown and contingent liabilities that we reasonably
expected to be incurred) and dissolve.
At this time, we cannot predict which option we will pursue. We
currently do not know whether we will make any distributions, or, if we do, the
number, amount or timing of such distributions. Furthermore, we cannot assure
you that we will continue to operate our international business beyond mid-2002.
Additionally, we may not be successful in identifying, developing and executing
a new business strategy and could eventually use all, or a substantial portion,
of our remaining cash on hand in connection with any such new business efforts.
For additional details about our business after the asset sale, see page 77.
Whichever option we ultimately decide to pursue, we anticipate setting
aside a portion of the proceeds from the asset sale for potential liabilities
arising from, among other things, the indemnification provisions of the asset
purchase agreement and our severance arrangements with certain of our executive
officers.
The board of directors will have sole authority and discretion with
respect to (i) whether to make any distributions other a distribution made as
part of a plan of liquidation and dissolution, (ii) the timing and amount of any
such distribution, and (iii) any decision to acquire, or invest in, any new
business for cash or in exchange for company debt and/or options or warrants.
ACCORDINGLY, EXCEPT IN THE CASE OF (A) A DISTRIBUTION AS PART OF A PLAN OF
LIQUIDATION AND DISSOLUTION OR (B) CERTAIN MERGERS WITH OR INTO ANOTHER COMPANY,
EACH AS REQUIRED BY DELAWARE LAW, NO ADDITIONAL OR SUBSEQUENT VOTE OF THE
STOCKHOLDERS WILL BE REQUIRED TO APPROVE ANY DISTRIBUTION, ACQUISITION OR
INVESTMENT.
DISTRIBUTIONS
If we decide to make a distribution to our stockholders, the number,
amount and timing of, and record date for, any distribution(s) will be
determined by our board in its sole discretion and will depend upon various
factors, including:
o the amounts deemed necessary by our board to pay or provide for
all of our liabilities and obligations, including our potential
liabilities and obligations arising from the indemnification
provisions of the asset purchase agreement and the severance
provisions contained in the employment agreements of certain of
our executive officers;
o the amounts deemed necessary by our board to fulfill our existing
contractual obligations with respect to our international
operations and other investments or businesses, to the extent we
determine to continue to operate these businesses;
65
o the amounts deemed necessary by our board to acquire and develop
new and potential business opportunities;
o the timing and proceeds of the sale of our remaining assets; and
o approval of a plan of liquidation and dissolution by our
stockholders, if we decide to liquidate and dissolve.
Any decision to make a distribution in the future will be based upon
estimates of the costs associated with each of these factors, as well as the
funds necessary to complete the liquidation of any or all of our on-going
operations. Furthermore, each of these factors will be dependent upon a number
of contingencies and conditions, many of which are beyond our control, including
market conditions and actions by third parties. As a result, any estimates with
respect to our ability to make a distribution will involve judgments and
assumptions that, although they may be considered reasonable at the time by
management, may not be realized. Accordingly, we cannot predict whether we will
be able to make any distribution, or, if we do, the amount or timing of such
distribution.
In addition, if contingent or unknown liabilities exist, any
distribution may be reduced or delayed. Also, claims, liabilities and expenses
will continue to accrue following approval of the asset sale, as we anticipate
that expenses for professional fees and other expenses of a liquidation and
dissolution will be significant. These expenses would reduce the amount of cash
available for distribution to stockholders if we determine to make such a
distribution.
We do not anticipate updating or otherwise publicly revising the
estimates presented in this document to reflect circumstances existing or
developments occurring after the preparation of these estimates or to reflect
the occurrence of anticipated events. The estimates were not audited or reviewed
by independent auditors.
INTERESTS IN THE SALE OF ASSETS THAT DIFFER FROM YOUR INTERESTS
In considering the recommendations of the board of directors with
respect to the proposed asset sale, our stockholders should be aware that:
o With the exception of Mr. O'Brien, our current directors DO NOT
have any interests that differ from your interests as a
stockholder.
o Some of our officers (including Mr. O'Brien) MAY HAVE interests
that differ from your interests as a stockholder.
o The board was aware of the actual and potential conflicts of
interest described below.
From January 1999 until July 30, 2001, Messrs. Kent, Silva and Savoy
were members of our board of directors. Mr. Kent was the President, Chief
Executive Officer and a director of CCI, Charter and Charter Ventures; Mr. Silva
was the Senior Vice President, Corporate Development and Technology of CCI,
Charter and Charter Ventures; and Mr. Savoy was and remains the President of
Vulcan and a director of Vulcan, CCI and Charter. Charter Ventures and Vulcan
are our two largest stockholders, together owning all of our preferred stock and
20,221,139 shares of common stock, entitling them to cast 46.7% of the votes
eligible to be cast by holders of our preferred stock and common stock voting
together as a single class. Mr. Paul G. Allen, the ultimate beneficial owner of
the stock owned by Charter Ventures and Vulcan, is the Chairman of CCI and
Charter and the sole shareholder of Vulcan. Immediately prior to
66
the closing of the asset sale, Charter will purchase 38,000 shares of our
preferred stock from Vulcan for an aggregate purchase price of $8,000,000, as
described above. Additionally, Mr. Kent represented CCI in its preliminary
discussions with us in connection with the sale of substantially all of our
assets to Charter. Mr. Kent resigned from Charter and its affiliates effective
September 28, 2001. Mr. Silva became Executive Vice President and Chief
Technical Officer of CCI and Charter on October 18, 2001.
As a result of this affiliate status and to obviate any conflicts of
interest, a Special Committee of the board of directors, which had previously
been formed to consider possible strategic alternatives, was charged with
receiving proposals related to, and evaluating and negotiating the terms of, the
sale of substantially all of our assets to Charter and the related asset
purchase agreement. No person employed by or affiliated with Charter took part,
on our behalf, in the evaluation of the proposed sale of assets to Charter.
Furthermore, on July 27, 2001, we were informed that Messrs. Kent, Silva and
Savoy would be resigning from our board of directors. We received written
confirmation of these resignations on July 31, 2001. Therefore, prior to CCI's
delivery of a written proposal with respect to the proposed asset sale on July
30, 2001, Messrs. Kent, Silva and Savoy were no longer members of our board of
directors. Between the date of CCI's first written proposal on July 31, 2001 and
the execution of the asset purchase agreement on September 29, 2001, none of our
remaining directors have had any contact with Messrs. Kent, Silva or Savoy,
except, if at all, in their capacity as representatives of Charter and/or
Vulcan. Accordingly, none of our current directors have any interests in the
asset sale that differ from yours (other than those interests of Mr. O'Brien
described below). At all times, each of our directors and executive officers
were aware of the affiliation of Messrs. Kent, Silva and Savoy with CCI and
Charter and Mr. Savoy with Vulcan.
Because the transactions contemplated by the asset purchase agreement
constitute a "change of control" under our employment and restricted stock award
agreements with certain of our executive officers, these officers will be
entitled to certain severance benefits in the event that their employment is
terminated within the 12-month period following the consummation of the asset
sale and the related transactions as set forth below.
o Mr. Daniel J. O'Brien, President and Chief Executive Officer. If
we terminate Mr. O'Brien's employment within the 12-month period
following the consummation of the asset sale, Mr. O'Brien will be
entitled to receive (i) his base salary and vacation accrued
through his termination date plus continued base salary for a
period of 24 months following his termination; (ii) a bonus
payment of $500,000; (iii) the continuation of his group health
benefits for a period of not less than 18 months following his
termination; (iv) the right, within one year of his termination,
to exercise all outstanding stock options granted to him; and (v)
an offsite office and secretarial support paid by us for a period
of 12 months following his termination. In addition, any
restrictions on stock awarded to Mr. O'Brien pursuant to his
restricted stock agreement will lapse in the event his employment
is terminated by us without cause or his employment is
constructively terminated by us within the 12-month period
following the consummation of the asset sale.
If Mr. O'Brien's employment is not terminated by us within the
12-month period following the consummation of the asset sale, Mr.
O'Brien may terminate his employment upon 60 days' notice to us
during the period beginning on the first anniversary of the
consummation of the asset sale and ending on the 60th day
following the first anniversary. If Mr. O'Brien elects to
terminate his employment pursuant to this
67
provision he will be entitled to the same severance benefits as
if his employment were terminated by us as described above.
In addition, Mr. O'Brien is the holder of 3,000 shares of CCI
Class A common stock.
o Mr. Gregory G. Hodges, Chief Operating Officer. If we terminate
Mr. Hodges' employment within the 12-month period following the
consummation of the asset sale, Mr. Hodges will be entitled to
receive (i) his base salary and vacation accrued through his
termination date plus continued base salary for a period of 12
months following his termination; (ii) any bonus payment
previously fixed and declared by the board, but not yet paid as
of the termination date, and if no bonus has been paid for 2001,
a payment of $125,000; (iii) the continuation of his group health
benefits for a period of not less than 18 months following his
termination; and (iv) the right, within one year of his
termination, to exercise all outstanding stock options granted to
him. In addition, any restrictions on stock awarded to Mr. Hodges
pursuant to his restricted stock agreement will lapse in the
event his employment is terminated by us without cause or his
employment is constructively terminated by us within the 12-month
period following the consummation of the asset sale.
If Mr. Hodges' employment is not terminated by us within the
12-month period following the consummation of the asset sale, Mr.
Hodges may terminate his employment upon 60 days' notice to us
during the period beginning on the first anniversary of the
consummation of the asset sale and ending on the 60th day
following the first anniversary. If Mr. Hodges elects to
terminate his employment pursuant to this provision he will be
entitled to the same severance benefits as if his employment were
terminated by us as described above.
o Mr. George Willett, Chief Financial Officer. If we terminate Mr.
Willett's employment within the 12-month period following the
consummation of the asset sale, Mr. Willett will be entitled to
receive (i) his base salary and vacation accrued through his
termination date plus continued base salary for a period of 12
months following his termination; (ii) any bonus payment
previously fixed and declared by the board, but not yet paid as
of the termination date, and if no bonus has been paid for 2001,
a payment of $84,000; (iii) the continuation of his group health
benefits for a period of not less than 18 months following his
termination; and (iv) the right, within one year of his
termination, to exercise all outstanding stock options granted to
him. In addition, any restrictions on stock awarded to Mr.
Willett pursuant to his restricted stock agreement will lapse in
the event his employment is terminated by us without cause or his
employment is constructively terminated by us within the 12-month
period following the consummation of the asset sale.
If Mr. Willett's employment is not terminated by us within the
12-month period following the consummation of the asset sale, Mr.
Willett may terminate his employment upon 60 days' notice to us
during the period beginning on the first anniversary of the
consummation of the asset sale and ending on the 60th day
following the first anniversary. If Mr. Willett elects to
terminate his employment pursuant to this provision he will be
entitled to the same severance benefits as if his employment was
terminated by us as described above.
68
o Mr. Charles E. Richardson, III, Vice President and General
Counsel. If we terminate Mr. Richardson's employment within the
12-month period following the consummation of the asset sale, Mr.
Richardson will be entitled to receive (i) his base salary and
vacation accrued through his termination date plus continued base
salary for a period of 12 months following his termination; (ii)
any bonus payment previously fixed and declared by the board, but
not yet paid as of the termination date and, if no bonus has been
paid for 2001, a payment of $75,000; (iii) the continuation of
his group health benefits for a period of not less than 18 months
following his termination; and (iv) the right, within one year of
his termination, to exercise all outstanding stock options
granted to him. In addition, any restrictions on stock awarded to
Mr. Richardson pursuant to his restricted stock agreement will
lapse in the event his employment is terminated by us without
cause or his employment is constructively terminated by us within
the 12-month period following the consummation of the asset sale.
If Mr. Richardson's employment is not terminated by us within the
12-month period following the consummation of the asset sale, Mr.
Richardson may terminate his employment upon 60 days' notice to
us during the period beginning on the first anniversary of the
consummation of the asset sale and ending on the 60th day
following the first anniversary. If Mr. Richardson elects to
terminate his employment pursuant to this provision he will be
entitled to the same severance benefits if employment was
terminated by us as described above.
o Mr. Richard George, Chief Operating Officer for International. If
we terminate Mr. George's employment within the 12-month period
following the consummation of the asset sale, Mr. George will be
entitled to receive (i) his base salary and vacation accrued
through his termination date plus continued base salary for a
period of 12-months following his termination; (ii) any bonus
payment previously fixed and declared by the board, but not yet
paid as of the termination date; (iii) the continuation of his
group health benefits for a period of not less than 18 months
following his termination; and (iv) the right, within one year of
his termination, to exercise all outstanding stock options
granted to him. In addition, any restrictions on stock awarded to
Mr. George pursuant to his restricted stock agreement will lapse
in the event his employment is terminated by us without cause or
his employment is constructively terminated by us within the
12-month period following the consummation of the asset sale.
If Mr. George's employment is not terminated by us within the
12-month period following the consummation of the asset sale, Mr.
George may terminate his employment upon 60 days' notice to us
during the period beginning on the first anniversary of the
consummation of the asset sale and ending on the 60th day
following the first anniversary. If Mr. George elects to
terminate his employment pursuant to this provision he will be
entitled to the same severance benefits as if his employment was
terminated by us as described above.
o Mr. John Hundley, Senior Vice President of Business Development.
If we terminate Mr. Hundley's employment within the 12-month
period following the consummation of the asset sale, Mr. Hundley
will be entitled to receive (i) his base salary and vacation
accrued through his termination date plus continued base salary
for a period of 12-months following his termination; (ii) any
bonus payment previously fixed and declared by the board, but not
yet paid as of the termination date; (iii) the continuation of
his group health benefits for a period of not less than 18 months
following his termination;
69
and (iv) the right, within one year of his termination, to
exercise all outstanding stock options granted to him.
If Mr. Hundley's employment is not terminated by us within the
12-month period following the consummation of the asset sale, Mr.
Hundley may terminate his employment upon 60 days' notice to us
during the period beginning on the first anniversary of the
consummation of the asset sale and ending on the 60th day
following the first anniversary. If Mr. Hundley elects to
terminate his employment pursuant to this provision he will be
entitled to the same severance benefits as if his employment was
terminated by us as described above.
70
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 2000
and 1999 and the period from April 3, 1998 (the date of our inception) to
December 31, 1998 and the balance sheet data at December 31, 2000, 1999 and
1998, have been derived from our Consolidated Financial Statements which have
been audited by PricewaterhouseCoopers LLP. The consolidated financial
statements at December 31, 2000 and 1999 and the years then ended and the
auditors' report thereon are included elsewhere in this proxy statement.
The unaudited pro forma financial information for the year ended
December 31, 1998 was prepared by combining the historical results of the two
companies we acquired, High Speed Access Network, Inc. ("HSAN") and CATV.net,
Inc. ("CATV"), with our historical results. We have presented this information
to provide a better picture of what our business might have looked like if we
had acquired both of these companies as of January 1, 1998. Since the pro forma
financial information which follows is based upon the operating results of CATV
and HSAN during the period when they were not under the control of our
management, the information presented may not be indicative of the results which
would have actually been obtained had the acquisitions occurred on January 1,
1998 nor are they indicative of future operating results.
The selected financial data as of June 30, 2001 and for the six months
ended June 30, 2001 and 2000 are unaudited. In the opinion of our management,
the unaudited financial statements from which such data have been derived
include all adjustments (consisting only of normal, recurring adjustments) which
are necessary for a fair presentation of results of operations for such periods.
71
(In thousands, except share, per share and operating data)
APRIL 3, 1998
(INCEPTION) TO
DECEMBER 31,
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
2001 2000 2000 1999 1998
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Net revenue ..................................... $ 16,304 $ 4,751 $ 14,200 $ 3,446 $ 337
Costs and expenses:
Operating ...................................... 46,147 30,790 70,289 24,021 2,067
Engineering .................................... 12,840 10,391 23,960 9,255 2,266
Sales and marketing ............................ 7,440 12,465 25,147 18,134 3,696
General and administrative:
Non-cash compensation expense from stock
options, warrants and restricted stock ...... 270 48 216 3,039 --
Amortization of distribution agreement costs . 4,679 1,116 2,674 3,723 --
Write-down of intangible assets .............. -- -- 22,444 -- --
Other general and administrative expenses .... 13,399 9,140 25,093 11,888 2,323
------------ ------------ ------------ ------------ ------------
Total general and administrative ............... 18,348 10,304 50,427 18,650 2,323
------------ ------------ ------------ ------------ ------------
Total costs and expenses ....................... 84,775 63,950 169,823 70,060 10,352
------------ ------------ ------------ ------------ ------------
Loss from operations ............................ (68,471) (59,199) (155,623) (66,614) (10,015)
Investment income ............................... 2,299 3,991 7,371 6,181 94
Interest expense ................................ (1,227) (1,020) (2,158) (519) (54)
------------ ------------ ------------ ------------ ------------
Net loss ........................................ (67,399) (56,228) (150,410) (60,952) (9,975)
Accretion to redemption value of mandatorily
redeemable convertible preferred stock and
mandatorily redeemable convertible
preferred stock dividends ...................... -- -- -- (230,270) (120,667)
------------ ------------ ------------ ------------ ------------
Net loss available to common stockholders ....... $ (67,399) $ (56,228) $ (150,410) $ (291,222) $ (130,642)
============ ============ ============ ============ ============
Basic and diluted net loss available to common
stockholders per share ......................... $ (1.15) $ (1.03) $ (2.67) $ (8.69) $ (21.07)
============ ============ ============ ============ ============
Weighted average shares used in calculation
of basic and diluted net loss available to
common stockholders per share .................. 58,726,179 54,780,674 56,347,891 33,506,735 6,200,000
PRO FORMA
COMBINED YEAR
ENDED
DECEMBER 31,
1998
------------
STATEMENT OF OPERATIONS DATA:
Net revenue ..................................... $ 450
Costs and expenses:
Operating ...................................... 2,401
Engineering .................................... 2,372
Sales and marketing ............................ 4,078
General and administrative:
Non-cash compensation expense from stock
options, warrants and restricted stock ...... 947
Amortization of distribution agreement costs . --
Write-down of intangible assets .............. --
Other general and administrative expenses .... 2,616
------------
Total general and administrative ............... 3,563
------------
Total costs and expenses ....................... 12,414
------------
Loss from operations ............................ (11,964)
Investment income ............................... 95
Interest expense ................................ (54)
------------
Net loss ........................................ (11,923)
Accretion to redemption value of mandatorily
redeemable convertible preferred stock and
mandatorily redeemable convertible
preferred stock dividends ...................... (120,667)
------------
Net loss available to common stockholders ....... $ (132,590)
============
Basic and diluted net loss available to common
stockholders per share ......................... $ (21.39)
============
Weighted average shares used in calculation
of basic and diluted net loss available to
common stockholders per share .................. 6,200,000
The company has experienced operating losses since its inception and therefore
earnings have been inadequate to cover fixed charges. The company's fixed
charges consist primarily of interest on debt and capital lease obligations as
disclosed above.
(In thousands, except share, per share and operating data)
<Table>
<Caption>
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999 1998
------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments ..................................... $ 56,466 $ 128,076 $ 178,730 $ 17,888
Working capital ................................. 34,154 94,802 160,744 14,162
Total assets .................................... 144,179 219,707 230,426 27,504
Long-term debt and capital lease
obligations less current portion ................ 8,405 13,693 11,609 749
Total stockholders' equity (deficit) ............ 100,133 164,366 196,130 (126,427)
Book value per share ............................ $ 1.70
</Table>
<Table>
<Caption>
JUNE 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2001 2000 1999 1998
------------ ------------ ------------ ------------
OPERATING DATA:
Systems under contract .......................... 149 201 153 41
Homes passed under contract ..................... 6,300,000 6,600,000 1,529,000 863,000
Homes deployed (1) .............................. 4,200,000 3,800,000 1,900,000 145,000
Residential cable modem end users ............... 176,000 100,000 16,099 1,619
</Table>
----------
(1) Homes deployed represents the number of homes passed in systems where we are
able to offer our cable modem Internet access services.
72
INFORMATION ABOUT HIGH SPEED ACCESS CORP.
OVERVIEW
We provide high speed Internet access to residential and commercial
customers primarily via cable modems. As of June 30, 2001 we had agreements to
provide our services to 41 cable operators, covering 149 systems and
approximately 6,300,000 homes passed. The term "homes passed" refers to the
number of homes that potentially can be served by a cable system. As of
September 30, 2001, we had deployed our services in systems covering
approximately 3,850,000 homes passed and had approximately 200,000 high speed
residential end users. Approximately 3,675,000 of our 3,850,000 homes passed are
deployed to business and residential customers of Charter.
On September 28, 2001, we entered into an asset purchase agreement with
Charter, pursuant to which we will sell to Charter substantially all of the
assets and operations associated with our provision of high speed Internet
access to residential and commercial customers of Charter and its affiliates via
cable modems. We have also agreed to continue these operations until the closing
of the asset sale. For a description of the asset purchase agreement and the
other agreements related thereto, see page 17. For a description of our existing
operating agreements with Charter, see page 116.
We are presently winding down most of our operations other than those
subject to the asset purchase agreement. After the closing of the asset purchase
agreement, we intend to fulfill our existing contractual obligations with
respect to our international ISP infrastructure services business through 2002.
At this time, we cannot predict whether the sole contract pursuant to which we
currently operate our international business will be extended when it terminates
in August 2002. If the closing of the asset purchase agreement does not occur,
we will likely file for bankruptcy.
RECENT DEVELOPMENTS
Since July 2001, we have taken the following actions to reduce our
operating costs:
o Exit from One-Way Cable TV Markets. We have completed our
previously announced exit from one-way cable TV markets. In the
second quarter of 2001, we recorded a $1.7 million asset
impairment charge for the write-down of equipment used in one-way
markets and a $1.1 million charge for other operating costs,
primarily non-cancelable lease obligations.
o Exit from Most Two-Way Cable TV Markets. We have commenced
negotiations to exit all of our two-way cable system agreements
except for those with Charter. As of September 30, 2001, we were
in the process of terminating service in 40 systems covering
approximately 500,000 homes passed and serving 23,000 high speed
residential customers. We will not recognize any revenue from
these subscribers subsequent to October 1, 2001, although we may
continue to provide certain services, including e-mail, personal
web pages and assistance in transitioning services to new
providers, through November 30, 2001. During the quarter ended
September 30, 2001 we expect to record an asset impairment charge
of $17.5 million for the write-down of the equipment used in
these markets, additional excess inventory used in the cable
modem business, furniture and fixtures and equipment located in
our Denver corporate headquarters and call center and other
regional offices, and the write off of the remaining goodwill
associated with the acquisition of CATV and HSAN.
73
o Wind Down of Digital Chainsaw; No Earnout Payment. During the
quarter ended September 30, 2001, we expect to record an asset
impairment charge of $2.2 million for the write-down of the
Digital Chainsaw assets, including the write-off of the remaining
goodwill associated with the acquisition of Digital Chainsaw.
In June 2000, we entered into an agreement to acquire Digital
Chainsaw, Inc. a Florida-based web hosting and systems
integration company. In August 2000, we issued 3,000,000 shares
of common stock in connection with this transaction in exchange
for all for the outstanding shares of Digital Chainsaw. The
purchase agreement requires us to issue up to $25.0 million of
our common stock to Digital Chainsaw's former shareholders if
Digital Chainsaw met certain revenue performance targets during
2000 and 2001. On September 29, 2001, we issued to the Digital
Chainsaw former shareholders' representative a report indicating
that Digital Chainsaw had not met the revenue performance targets
established for 2000 and 2001. On October 31, 2001 we sold
certain operating assets of Digital Chainsaw, including its
hosted customer websites.
o Abandon DSL Effort. We have discontinued our efforts to enter the
DSL market and are attempting to sell our DSL equipment. For the
quarter ended September 30, 2001, we expect to record an asset
impairment charge relating to the DSL assets of $3.2 million. In
connection with the purchase of certain DSL assets, we entered
into a $1.9 million debt financing agreement with Lucent in July
2001. The debt obligation was paid in full on September 28, 2001
at a discount of $250,000. This transaction, along with prior
purchases, has fulfilled our $5.0 million purchase obligation
with Lucent.
o Write Off Unnecessary Information Systems. We expect to record an
asset impairment charge totaling approximately $4.6 million for
the quarter ended September 30, 2001 for information systems
which are not being acquired by Charter and are not required for
our continued operations.
o Exit Unnecessary Leased Space. We expect to record a charge
totaling approximately $4.0 million to $5.0 million during the
quarter ended September 30, 2001 for non-cancelable lease
obligations for office space which we currently intend to vacate.
o Prepay Certain Obligations. We expect to pay certain debt and
lease obligations immediately prior to the closing of the asset
sale. We expect to pay approximately $9.5 million related to
these obligations and record a charge of approximately $1.1
million related to the early termination of these obligations
assuming closing of the asset sale occurs on or prior to December
31, 2001.
o Terminate AOL/TimeWarner Agreement. In September 2001, our
agreement with Time Warner Cable, a unit of AOL/Time Warner,
covering the provision of high speed Internet access services
over AOL/Time Warner's cable systems terminated in accordance
with its terms. We had entered into this agreement in May 2001.
o Reduce Workforce. We have reduced our workforce to include only
those employees that Charter has agreed to hire on the closing
date, those necessary to operate any assets to be operated as a
going concern after the closing and those necessary to effect the
orderly wind-down and/or restructuring of our remaining assets.
Excluding our international operating personnel (21 employees as
of October 15, 2001), we expect to
74
reduce our staff to 12 to 15 full time employees on or about
January 1, 2002, after the consummation of the asset sale. During
the quarter ended September 30, 2001, we incurred approximately
$3.0 million in severance and related costs relating to these
workforce reductions. We do not expect that we will incur
additional costs related to workforce reductions or severance in
the fourth quarter of 2001.
At the present time, with the exception of the continuing Charter
operations and the wind-down of our non-Charter turnkey and web
hosting businesses, the only assets we are operating are those
directly related to the fulfillment of our existing contractual
obligations to provide professional services to Kabel
Nordrhein-Westfalen GmbH. & Co. KG, in Germany.
We will continue to monitor the size of our workforce and the
levels of our other operating costs and cash commitments with a
view to conserving cash, thereby enhancing our ability to pursue
alternative business strategies and/or maximize a potential
distribution to our stockholders.
OUR BUSINESS PRIOR TO THE CLOSING
Until the closing of the asset purchase agreement, we will provide high
speed Internet access via cable modems to residential and commercial customers
of Charter. At the closing, we will transfer to Charter essentially all of the
assets related to these operations in accordance with the terms of the asset
purchase agreement. In the event that the closing does not occur, we will likely
file for bankruptcy.
We provide services to residential and commercial customers of Charter
primarily in exurban markets. Pursuant to our existing operating agreements with
Charter, we provide a suite of services on a comprehensive "turnkey" basis as
well as on an unbundled or "network services" basis. These services enable
Charter's customers to receive high speed Internet access. Previously we had
similar relationships with cable system operators other than Charter. However,
we have exited or are exiting from these relationships.
In connection with the asset purchase agreement, we have entered into a
management agreement with CCI relating to the management of these operations
prior to the closing. Under the management agreement, CCI will assume
responsibility for the purchase and installation of cable modems and will share
marketing responsibilities with us. For a more detailed description of the
management agreement, see page 25.
RESIDENTIAL
Our core service offerings consist of providing cable modem Internet
access and local start pages to customers of Charter. We entered into long-term
exclusive contracts with Charter to provide a suite of services on a
comprehensive turnkey basis, as well as on an unbundled or Network Services
basis. Our turnkey offering enables Charter to outsource installation and
marketing (except as otherwise described in connection with the management
agreement), billings, technical and ongoing operational functions in order to
implement and maintain high speed Internet access and related services for its
end users.
75
COMMERCIAL
We also provide high speed Internet access and enhanced service
applications to small- and medium-sized enterprises, or SMEs, customers of
Charter utilizing cable modem technology. Our services provide SMEs with a
cost-effective solution for high speed Internet access as a result of our
scalable bandwidth. Our high bandwidth capability allows us to offer SMEs
enhanced services such as virtual private networks, web hosting and application
services via third party providers.
PRODUCTS AND SERVICES
Residential High Speed Internet Access. We offer our basic high speed
Internet service via cable modems to residential end users, who are customers of
Charter's cable systems, for a monthly fee of typically less than $40. Monthly
service includes unlimited access time, multiple e-mail accounts and Web browser
software. In addition, we typically rent cable modems to the residential end
user for an additional $9.95 per month. Almost all of our turnkey high speed
access end users currently rent a cable modem from us. Our high speed access
services are available to end users in two-way cable systems. A two-way cable
system provides always-on access and does not require the use of a phone line to
transmit data from the home to the Internet.
Local Content. We are party to an agreement with Vulcan to provide
local content targeting the interests of local communities, including civic,
commercial and school related issues, and information on local services,
including shops, restaurants and events currently not focused on by national,
regional or city-wide content aggregation services. Accordingly, we use local
content as a means of attracting and retaining additional end users and
differentiating our service. This agreement will terminate as of the closing.
For a description of our operating agreement with Vulcan, see page 116. For a
description of the termination agreement, see page 30.
Services Provided Directly to Charter. In addition we provide Charter
with a comprehensive suite of services on both an unbundled network services
basis and on a comprehensive turnkey basis. Our turnkey offering enables Charter
to outsource marketing, technical and ongoing operational functions in order to
implement and maintain high speed Internet access services for its end users.
Under the turnkey basis, Charter is responsible only for providing space in the
headend for our equipment and access to the necessary bandwidth, as well as for
maintaining the integrity of the performance of the cable plant. Subject to the
terms of the management agreement, our turnkey model provides the following
services and support to Charter:
o Purchase and installation of the telecommunications and data
network hardware and software necessary to offer service;
o System testing and project management;
o Arrangements for the installation of a cable modem at the end
user's home or business;
o Connection to and maintenance of the Internet backbone system;
o Ongoing local and corporate-level sales and marketing efforts;
o 24-hours-a-day, seven-days-a-week customer care and technical
support for end users;
o 24-hours-a-day, seven-days-a-week monitoring of the network and
the cable partner's plant; and
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o Direct customer billing.
SALES AND MARKETING
Our promotional efforts in turnkey systems typically include direct
mail of standardized marketing materials, local television and radio
advertising, and a public relations and media campaign. Charter often
participates in our promotional efforts. Our selling efforts for residential end
users focus largely on inbound and outbound telemarketing. Telemarketing may
either be conducted in-house or outsourced. We design some of our programs to
create "word of mouth" interest in our services. For example, we provide free
broadband access to elementary and secondary schools in our service areas. We
also generally contract the installation of cable modems at the end user site to
local computer stores, which we believe also increases community awareness of
our services.
NETWORK OPERATIONS
Our network strategy is to provide a flexible, scalable design that
allows us to optimize performance to the end user while allowing us to achieve
operating cost efficiencies. We provide high speed access by first connecting
our end users through our cable headend to the cable or telephone
infrastructure. We then connect through high speed data lines provided by local
exchange carriers to backbone facilities provided by UUNet and others, which
connect our systems to the Internet.
OUR BUSINESS AFTER THE CLOSING
We have not yet determined what our strategic direction will be
following the consummation of the asset sale and are considering at least three
possible alternatives. Currently, we anticipate pursuing one of the following
three options.
o Option 1 - Make No Distribution; Retain the Proceeds and Reinvent
the Business. We may elect to:
(i) make no distribution to stockholders:
(ii) proceed, as expeditiously and prudently as possible,
with the sale of all of our remaining assets except
those related to our international operations or new
strategic initiatives; and
(iii) use all of the proceeds from the asset sale to
fulfill our existing contractual obligations with
respect to our international business and pursue
select domestic business opportunities as they arise,
including the possible acquisition of an existing
business or the development of one or more new
businesses.
o Option 2 -- Make a Partial Distribution; Retain Part of the
Proceeds and Reinvent the Business. We may elect to:
(i) make a portion of the proceeds from the asset sale
available to our stockholders through a direct
distribution, a stock redemption or stock repurchase
program;
77
(ii) proceed, as expeditiously and prudently as possible,
with the sale of all of our remaining assets except
those related to our international operations or new
strategic initiatives; and
(iii) use the remaining proceeds from the asset sale to
fulfill our existing contractual obligations with
respect to our international business and pursue
select domestic business opportunities as they arise,
including the possible acquisition of an existing
business or the development of one or more new
businesses.
o Option 3 -- Distribute All of the Proceeds: Wind Down the
Business and Dissolve. We may decide to cease all of our
operations and seek stockholder approval of a plan of liquidation
and dissolution so that we may liquidate all of our remaining
assets, pay our known liabilities, distribute our remaining cash
on hand (subject to the set aside of adequate reserves to cover
known, unknown and contingent liabilities that we reasonably
expect to be incurred) and dissolve.
At this time, we cannot predict which option we will pursue. We
currently do not know whether we will make any distributions, or, if we do, the
number, amount or timing of such distributions. Furthermore, we cannot assure
you that we will continue to operate our international business beyond mid-2002.
Additionally, we may not be successful in identifying, developing and executing
a new business strategy and could eventually use all, or a substantial portion,
of our remaining cash on hand in connection with any such new business efforts.
In the event we decide to pursue option 1 or option 2, we anticipate
that our operations would consist of the businesses described below. In
evaluating the prospects of any business we determine to pursue after the
closing, you should carefully consider the risks described below in determining
whether to vote for or against the proposal included in this proxy. There may be
additional risks that we do not currently know of or that we currently deem
immaterial because of the information available to us. All of these risks may
impair our business operations and could decrease the value of your investment.
INTERNATIONAL BUSINESS
We intend to fulfill our existing contractual obligations to provide
professional services relating to the design testing and implementation of
broadband Internet access infrastructure services to Kabel Nordrhein-Westfalen
GmbH & Co. KG ("KNRW") in Germany. We would expect these services to continue
through 2001 and into mid 2002. Revenues from the service agreement are
recognized as services are provided. For the three and six months ended June 30,
2001, we recognized revenues from the service agreement of $1.7 million and $2.1
million, respectively. Although we believe our international business will be
profitable in the current year and beyond, we cannot assure you that it will be
profitable.
Furthermore, although the term of our current master contract with KNRW
expires in February 2004, our present engagement will terminate in mid 2002. We
cannot predict whether KNRW will extend the terms of our existing contract with
them or enter into another contract with us when our current contract expires.
Additionally, KNRW has the right to terminate our contract with them after the
18-month anniversary of the execution of the contract (August 2002) or in the
event we engage in a transaction constituting a "change of control" of High
Speed Access International, the subsidiary through which we operate our
international business. We cannot assure you that KNRW
78
will not terminate our contract with them in August 2002 or attempt to do so
following the consummation of the asset sale.
OTHER BUSINESS OPPORTUNITIES; POSSIBLE DISSOLUTION
We also may decide to explore opportunities to acquire, invest in or
develop new lines of business. To date, the board has not proposed a new
strategic direction for the company. Accordingly, we cannot predict what
businesses we may enter or strategies we may adopt; and thus can offer no
indication of what risks and opportunities might arise in the context of such a
new direction.
Similarly, any new strategic direction we choose could likely involve
the acquisition or development of other businesses. Any decision we make with
respect to any new strategic direction will likely involve risks, including the
following:
o We have no specific plan as to what businesses or products we may
seek to acquire or develop, and therefore may have no operating
history or experience in such businesses upon which you may base
an evaluation of any strategic business plan and determine our
prospects. Any business we might develop will likely involve all
of the risks, uncertainties, expenses and difficulties frequently
encountered by development stage companies.
o Our future success depends, in significant part, on our ability
to attract, hire and retain directors, management and other
personnel with the managerial, marketing and technical skills
that may be required by any business or businesses that we
acquire in the future. Competition for personnel is intense, and
there is a limited number of persons with knowledge of, and
experience in, any industry we might seek to enter. If we fail to
timely identify, recruit and hire qualified personnel, we may be
unable to compete effectively.
o To be successful in any planned acquisition, we will need to
identify applications, technologies and businesses that are
complementary, and we may need to integrate disparate
technologies and corporate cultures and potentially manage a
geographically dispersed company. Each subsequent acquisition may
divert our attention from our existing business concerns and
expose us to unforeseen liabilities or risks associated with
entering new markets. Integrating newly acquired organizations
and technologies into our company could be expensive, time
consuming and may strain our resources. We anticipate that we
will face intense competition for acquisitions, and that many of
these competitors will be larger, better-funded organizations. If
we fail to execute our acquisition strategy successfully for any
reason, our business may be adversely affected. We do not have a
tested business model and we cannot be sure that any business
model we develop will yield positive results.
o We may pay for some of our acquisitions by issuing additional
common stock and this could dilute our stockholders. We may also
use cash to buy companies or technologies in the future. If we do
use cash, we may need to incur debt to pay for these acquisitions
as well as to fund any operating losses. Acquisition financing
may not be available on favorable terms or at all. In addition,
we may be required to amortize significant amounts of goodwill
and other intangible assets in connection with future
acquisitions, which would have an adverse affect on our results
of operations.
79
We intend to identify potential acquisition candidates through contacts
with persons and entities including investment banks, accountants, consultants,
and other professionals. Affiliates of ours, including their officers and
directors who are instrumental in identifying or closing future acquisitions,
may be compensated by payment of fees or in amounts which are in addition to the
amount of salary, bonus or directors fees which we customarily pay such
individuals. Any such additional compensation will be determined on a case by
case basis by the board of directors prior to or at the time of the acquisition.
As of this date we are not a party to any agreement regarding the provision of
such services or payments of such fees or amounts.
COMPETITION
Historically we have faced competition for partnerships with cable
operators from other cable modem-based providers of Internet access services and
for end users from providers of other types of data and Internet services. We
have experienced difficulties in achieving widespread acceptance of our
services.
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. In particular, @Home, Road Runner and
Earthlink and their respective cable partners are deploying high speed Internet
access services over cable networks. @Home, through its @Home Solutions product,
markets to systems in markets with at least 20,000 homes passed. Other
competitors in the cable-based Internet access markets are those companies
seeking to establish distribution arrangements with cable system operators in
exurban markets and/or provide one-way system capability. In addition, other
cable system operators have launched their own cable-based Internet services
that could limit the market for our services.
We also compete with traditional Internet service providers, which
provide basic Internet access to residential and commercial end users and
businesses, generally using the existing telephone network. While not presently
offering the advantages of broadband access, these services are widely available
and inexpensive. Many online service providers, such as America Online, have the
advantage of large customer bases, industry experience, longer operating
histories, greater name recognition, established relationships with advertisers
and content and application providers, and significant financial, marketing and
sales resources.
GOVERNMENT REGULATION
Our business has two main components. First, we supply information and
entertainment to customers primarily over the cable systems of our cable system
partners. This information and entertainment includes materials that we obtain
from third parties (including Vulcan and its affiliates) as well as information
generally available on the Internet that our customers will reach by means of
our service. Second, we install and maintain the equipment needed to transmit
that information to customers over the cable systems of our cable partners in a
form that can be understood by customers' personal computers. There are certain
risks associated with both aspects of this business.
With regard to supplying information, we are subject to the same types
of risks that apply to all businesses that publish, broadcast or distribute
information. These include potential liability for defamation, libel, invasion
of privacy and similar claims, as well as potential liability for copyright or
trademark infringement and similar claims. In addition, the law relating to the
liability of Internet and online service providers for information carried on or
disseminated through their networks is unsettled. There are also some specific
federal laws regarding the distribution of obscene or indecent
80
content by means of communications facilities (including distribution of such
content to minors) under which we are subject to potential liability. These
risks are mitigated to some extent by a federal law passed in 1996 that
immunizes Internet service providers from legal liability for defamation and
similar claims in connection with information that the Internet service provider
did not itself create. The law regarding these issues is controversial, and
could be changed in ways that would expose us to greater liability. Also, the
Digital Millennium Copyright Act, passed in 1998, creates a "safe harbor" from
copyright infringement liability for Internet service providers who meet its
requirements, which we intend to do. Finally, if we expand our operations to
other countries with less extensive legal protections for publishers and
speakers, our potential liability for our activities in those countries could be
much greater than in the United States.
The other main aspect of our business -- installing and maintaining the
equipment needed to permit cable systems to transmit information in a
computer-accessible format -- is not currently regulated by state or federal
governments. Even so, the business of our cable partners is subject to
regulation by the federal government and by local governments (which issue
franchises to cable systems) in accordance with federal law. There are four main
ways that these regulations could change that might severally and negatively
affect our business.
First, our service is generally classified by cable operators as a
"cable service." This means that our cable partners may offer our service over
their cable systems under their present franchise rights. If our service is not
a cable service, then some franchising authorities (usually cities or countries)
might claim that our cable partners need separate authorization to offer it.
This separate authorization 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.
Second, if our service is not a "cable service," it could be
reclassified as a "telecommunications service." This could subject our cable
partners (and possibly us) to regulation as "telecommunications carriers" at the
state and federal level. 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. It is not clear what impact compliance with those
regulations would have on our business, but the impact could be severe.
Moreover, we or our cable partners might then have to get a "telecommunications
franchise" from some localities. This franchise might not be available on
reasonable terms, or at all.
EMPLOYEES
As of October 15, 2001, we employed 575 people. After our recent
reductions, our workforce consists only of those employees necessary to continue
our operations with Charter until the closing of the asset purchase agreement,
to support our international operations and to administer the winding down
and/or sale of our other assets. Charter has agreed to hire approximately 450 of
these employees. After the asset sale closes, we expect our staffing to be
approximately 12 to 15 employees to support our international operations,
administer the winding down and/or sale of our other assets and pursue strategic
alternatives, in addition to the 21 international operating personnel
81
that we expect to continue to employ. None of our employees is subject to any
collective bargaining arrangements, and we consider our relations with employees
to be good.
PROPERTY
During the second half of 2000, we moved our principal executive office
to Littleton, Colorado where we now lease approximately 70,000 square feet. We
also lease a facility in Denver, Colorado with approximately 33,000 square feet
for customer care and telemarketing operations. In addition, during the second
half of 2000, we moved our Louisville, Kentucky operations to a 100,000 square
foot leased facility in Louisville. This space is primarily used for network
operations and customer care. We also lease, and are seeking to sublet or
terminate our leases with respect to, regional offices for technical and sales
personnel in Atlanta, Georgia, Sterling, Virginia, Schaumburg, Illinois, Hunt
Valley, Maryland and St. Petersburg, Florida in addition to local marketing
offices in the geographic areas where we offer our services.
LEGAL PROCEEDINGS
The company, our directors, our former directors as well as CCI and
Paul Allen have been named as defendants in three class action lawsuits filed in
the Court of Chancery of the State of Delaware (Denault, et. al. v. O'Brien, et.
al., Civil Action No. 19045NC, Tesche, et. al. v. O'Brien, et al., Civil Action
No. 19046NC and Johnson, et. al. v. O'Brien, et. al., Civil Action No. 19053NC).
All three lawsuits, which subsequently have been consolidated, allege, among
other things, that the initially proposed cash purchase price of $73 million is
grossly inadequate and that "[t]he purpose of the proposed acquisition is to
enable CCI and Allen to acquire [the company's] valuable assets for their own
benefit at the expense of [the company's] public shareholders."
The suits allege that the defendants breached their fiduciary duties
owed to the company in connection with the making and consideration of Charter's
proposal. The plaintiffs ask to represent the interests of all common
stockholders of the company and seek injunctive relief preventing the company
from going forward with the transaction, to rescind the transaction in the event
it is consummated and unspecified monetary damages. We believe these lawsuits
are without merit and intend to vigorously defend against the claims made
therein.
We are not a party to any other material legal proceedings.
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DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning our
directors and executive officers. The executive officers serve at the pleasure
of the Board of Directors and the Chief Executive Officer.
<Table>
<Caption>
NAME POSITION
----------------- -----------------------------------------------
David A. Jones, Jr. Chairman of the Board and Director
Daniel J. O'Brien Director, President and Chief Executive Officer
Irving W. Bailey, II Director
Michael E. Gellert Director
Robert S. Saunders Director
George E. Willett Chief Financial Officer
Gregory G. Hodges Chief Operating Officer
John G. Hundley Senior Vice President - Business Development and
Assistant Secretary
Charles E. Richardson, III Vice President, General Counsel and Secretary
</Table>
David A. Jones, Jr., has served as Chairman of the Board and a director
of the Company since April 1998. Since 1994, Mr. Jones has been Chairman of
Chrysalis Ventures, a private equity management firm. Mr. Jones also serves as
Vice Chairman and a director of Humana, Inc., and as a director of MidAmerica
Bancorp, Inc.
Daniel J. O'Brien, the company's President and Chief Executive Officer,
has been a director since September 2000. Mr. O'Brien joined the company as
Chief Operating Officer in October 1999 and was named President in November 1999
and Chief Executive Officer in February 2000. From 1995 to October 1999, Mr.
O'Brien was President and Chief Operating Officer of Primestar, Inc. and
previously served as President of Time Warner Satellite Services.
Irving W. Bailey, II, has been a director of the Company since April
1998. Mr. Bailey currently serves as President of Bailey Capital Corporation, a
private investment company, and has held this position since 1997. He also
served in various executive capacities with Providian Corporation from 1981 to
1997, including as Chairman and Chief Executive Officer from 1988 to 1997. Mr.
Bailey is also a director of Computer Sciences Corporation.
Michael E. Gellert has been a director of the company since April 1998.
Since 1967, Mr. Gellert has served as a General Partner of Windcrest Partners, a
private investment company. Mr. Gellert is a director of Devon Energy Corp., Six
Flags, Inc., Humana Inc., Seacor Smit Inc., Smith Barney World Funds, Smith
Barney Worldwide Securities Ltd. and Smith Barney Worldwide Special Fund NV.
Robert S. Saunders, has served as Vice Chairman of the Board and a
director of the company since April 1998. Mr. Saunders has been Senior Managing
Director of Chrysalis Ventures, a private equity management firm, since 1997.
From 1993 to 1997, Mr. Saunders served as Managing Director and Chief Planning
Officer for Providian Capital Management.
George E. Willett was appointed as Chief Financial Officer of the
company in June 1998. From 1997 to 1998, Mr. Willett served as Chief Financial
Officer of American Pathology Resources,
83
Inc. and, from 1994 to 1997, as Chief Financial Officer of Regent
Communications, Inc., a radio station holding company.
Gregory G. Hodges has been Chief Operating Officer of the company since
October 2000. From 1993 to October 2000, Mr. Hodges was a financial and general
business consultant. During this time, he functioned as interim chief operating
officer and interim chief financial officer for Hardy Petroleum, Inc. and
QuickPen International Corp. He also functioned as interim chief executive
officer and interim chief financial officer of The Quest Alliance.
John G. Hundley has served as Senior Vice President - Business
Development and Assistant Secretary of the company since November 2000. Prior to
that he served as the company's Vice President, Secretary and General Counsel
from May 1998. From January 1998 to May 1998, Mr. Hundley served as General
Counsel and Vice President of Development of OPM Services, Inc. and Icelease
Partners, Ltd/Vogt Ice. From 1995 to 1997, he served as Development Officer and
General Counsel for Normal Life, Inc., a multi-state assisted living provider.
Charles E. Richardson, III, has served as Vice President, General
Counsel and Secretary of the company since December 2000. From August 2000 to
December 2000, Mr. Richardson served as General Counsel and Chief Administration
Officer of Digital Chainsaw, Inc. and from January 2000 to August 2000 he served
as Executive Vice President and General Counsel of Digital Chainsaw, Inc. From
1997 to January 2000, Mr. Richardson served as Risk Manager (1997), Assistant
General Counsel (1998) and General Counsel and Chief Legal Officer (1999-2000)
of Birmingham Steel Corporation. From 1996 to 1997, Mr. Richardson was a
Research Scholar at Yale University and Berkeley Episcopal Divinity School.
TRADING MARKET AND PRICE
The following table sets forth the high and low closing price of our
common stock for each quarter in the years 1999, 2000 and 2001 as quoted on the
Nasdaq National Market. The information has been obtained from sources believed
to be reliable, but neither its accuracy nor its completeness is guaranteed.
<Table>
<Caption>
HIGH LOW
------ ------
1999:
Second quarter (from June 3, 1999).......................... $27.75 $13.00
Third quarter............................................... 49.19 21.13
Fourth quarter.............................................. 28.75 16.25
2000:
First quarter............................................... $24.25 $12.69
Second quarter.............................................. 13.50 4.16
Third quarter .............................................. 7.13 3.47
Fourth quarter.............................................. 4.63 1.00
2001:
First quarter............................................... $ 2.47 $ 0.84
Second quarter.............................................. 2.19 0.92
Third quarter .............................................. 1.18 0.16
Fourth quarter (through November 1, 2001)................... 0.35 0.28
</Table>
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DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock
since our inception and we have no current intention to pay cash dividends for
the foreseeable future. We have not yet determined whether we will make any of
the proceeds from the asset sale available to our stockholders. In the event we
decide to make some or all of the proceeds available to our stockholders, we
cannot predict whether or not it will be as a dividend. For a description of our
plans after the asset sale, see page 64.
PRIOR PUBLIC OFFERINGS
On June 4, 1999, the company issued and sold 13,000,000 shares of
common stock in an initial public offering for an aggregate purchase price of
$169 million, or $13.00 per share, inclusive of certain discounts and
commissions paid to the underwriters.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at 10901 West Toller Drive,
Littleton, Colorado 80127. Our telephone number at that location is (502)
420-7200. Our principal operating offices are located at 1000 W. Ormsley Avenue,
Louisville, Kentucky 40210. Our telephone number at that location is (502)
515-3333.
85
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We provide high speed Internet access to residential and commercial
customers primarily via cable modems. We focus primarily on residential and
commercial end users in exurban areas, although we have begun to provide
broadband services in some urban markets. We define exurban markets as cable
systems with fewer than 100,000 homes passed. The term "homes passed" refers to
the number of homes that potentially can be served by a cable system.
Historically, we entered into long-term exclusive contracts with cable system
operators to provide a suite of services on a comprehensive "turnkey" basis as
well as on an unbundled or "Network Services" basis. These services enable a
cable system's customers to receive high speed Internet access.
Our revenue also includes international cable-based Internet service
provider infrastructure services to Kabel Nordrhein-Westfalen GmbH & Co. KG in
Germany. During 2001, international revenue has become an increasingly
significant part of our business mix, and we expect this trend to continue.
Our revenue from dial-up services, as a percentage of total revenue,
has been decreasing and, we expect, will continue to decline as we take steps to
exit from this service offering over the coming months.
RECENT DEVELOPMENTS
Since July 2001, we have taken the following actions to reduce our
operating costs:
o Exit from One-Way Cable TV Markets. We have completed our
previously announced exit from one-way cable TV markets. In the
second quarter of 2001, we recorded a $1.7 million asset
impairment charge for the write-down of equipment used in one-way
markets and a $1.1 million charge for other operating costs,
primarily non-cancelable lease obligations.
o Exit from Most Two-Way Cable TV Markets. We have commenced
negotiations to exit all of our two-way cable system agreements
except for those with Charter. As of September 30, 2001, we were
in the process of terminating service in 40 systems covering
approximately 500,000 homes passed and serving 23,000 high speed
residential customers. We will not recognize any revenue from
these subscribers subsequent to October 1, 2001, although we may
continue to provide certain services, including e-mail, personal
web pages and assistance in transitioning services to new
providers, through November 30, 2001. During the quarter ended
September 30, 2001 we expect to record an asset impairment charge
of $17.5 million for the write-down of the equipment used in
these markets, additional excess inventory used in the cable
modem business, furniture and fixtures and equipment located in
our Denver corporate headquarters and call center and other
regional offices and the write-off of the remaining goodwill
associated with the acquisition of CATV and HSAN.
o Wind Down of Digital Chainsaw; No Earnout Payment. During the
quarter ended September 30, 2001, we expect to record an asset
impairment charge of $2.2 million for
86
the write-down of the Digital Chainsaw assets, including the
write off of the remaining goodwill associated with the
acquisition of Digital Chainsaw.
In June 2000, we entered into an agreement to acquire Digital
Chainsaw, Inc. a Florida-based web hosting and systems
integration company. In August 2000, we issued 3,000,000 shares
of common stock in connection with this transaction in exchange
for all for the outstanding shares of Digital Chainsaw. The
purchase agreement requires us to issue up to $25.0 million of
our common stock to Digital Chainsaw's former shareholders if
Digital Chainsaw met certain revenue performance targets during
2000 and 2001. On September 29, 2001, we issued to the Digital
Chainsaw former shareholders' representative a report indicating
that Digital Chainsaw had not met the revenue performance targets
established for 2000 and 2001. On October 31, 2001, we sold
certain operating assets of Digital Chainsaw, including its
hosted customer web sites.
o Abandon DSL Effort. We have discontinued our efforts to enter the
DSL market and are attempting to sell our DSL equipment. For the
quarter ended September 30, 2001, we expect to record an asset
impairment charge relating to the DSL assets of $3.2 million. In
connection with the purchase of certain DSL assets, we entered
into a $1.9 million debt financing agreement with Lucent in July
2001. The debt obligation was paid in full on September 28, 2001
at a discount of $250,000. This transaction, along with prior
purchases, has fulfilled our $5.0 million purchase obligation
with Lucent.
o Write Off Unnecessary Information Systems. We expect to record an
asset impairment charge totaling approximately $4.6 million
during the quarter ended September 30, 2001 for information
systems which are not being acquired by Charter and are not
required for our continued operations.
o Exit Unnecessary Leased Space. We expect to record a charge
totaling approximately $4.0 million to $5.0 million for the
quarter ended September 30, 2001 for non-cancelable lease
obligations for office space which we currently intend to vacate.
o Prepay Certain Obligations. We expect to pay certain debt and
lease obligations immediately prior to the closing of the asset
sale. We expect to pay approximately $9.5 million related to
these obligations and record a charge of approximately $1.1
million related to the early termination of these obligations
assuming closing of the asset sale occurs on or prior to December
31, 2001.
o Terminate AOL/TimeWarner Agreement. In September 2001, our
agreement with Time Warner Cable, a unit of AOL/Time Warner,
covering the provision of high speed Internet access services
over AOL/Time Warner's cable systems terminated in accordance
with its terms. We had entered into this agreement in May 2001.
o Reduce Workforce. We have reduced our workforce to include only
those employees that Charter has agreed to hire on the closing
date, those necessary to operate any assets to be operated as a
going concern after the closing and those necessary to effect the
orderly wind-down and/or restructuring of our remaining assets.
Excluding our international operating personnel (21 employees as
of October 15, 2001), we expect to reduce our staff to 12 to 15
full time employees on or about January 1, 2002, after the
consummation of the asset sale. During the quarter ended
September 30, 2001, we incurred approximately $3.0 million in
severance and related costs relating to these
87
workforce reductions. We do not expect that we will incur
additional costs related to workforce reductions or severance in
the fourth quarter of 2001.
At the present time, with the exception of the continuing Charter
operations and the wind-down of our non-Charter turnkey and web
hosting businesses, the only assets we are operating are those
directly related to the fulfillment of our existing contractual
obligations to provide professional services to Kabel
Nordrhein-Westfalen GmbH. & Co. KG, in Germany.
We will continue to monitor the size of our workforce and the
levels of our other operating costs and cash commitments with a
view to conserving cash, thereby enhancing our ability to pursue
alternative business strategies and/or maximize a potential
distribution to our stockholders.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 COMPARED
WITH THE THREE AND SIX MONTHS ENDED JUNE 30, 2000
REVENUES
Net revenue consists of net monthly subscription fees for cable
modem-based and traditional dial-up Internet services, cable modem rental
income, international infrastructure services, monthly fees for web hosting
services and overall strategic consulting. Total net revenue for the three
months ended June 30, 2001 and 2000 was $9.3 million and $2.8 million
respectively, an increase of $6.5 million. Total net revenue for the six months
ended June 30, 2001 and 2000 was $16.3 million and $4.8 million respectively, an
increase of $11.5 million.
Revenue by product offering as a percentage of total net revenue is as
follows:
% OF NET REVENUE
---------------------------------------
Three Months Six Months
Ended June 30, Ended June 30,
--------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
Cable modem-based subscription fees - Turnkey 32% 44% 33% 46%
Cable modem-based subscription fees - Network Services 25% 7% 24% 5%
Traditional dial-up service fees 4% 16% 5% 18%
Cable modem rental fees 16% 22% 17% 23%
International Infrastructure Services 19% -- 13% --
Web hosting 3% -- 3% --
Other revenue 1% 11% 5% 8%
--- --- --- ---
100% 100% 100% 100%
=== === === ===
</Table>
COSTS AND EXPENSES
Operating. Operating costs for the three months ended June 30, 2001 and
2000 were $24.1 million and $14.8 million, respectively, an increase of $9.3
million. Operating costs for the six months ended June 30, 2001 and 2000 were
$46.1 million and $30.8 million, respectively, an increase of $15.3 million. The
increase in operating costs during 2001 resulted primarily from an increase in
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personnel and personnel related costs for additional staff in our customer care
and network operation centers, international operations and additional personnel
costs associated with the purchase of Digital Chainsaw our larger subscriber
base, additional depreciation of capital equipment from the expansion of our
network and the installation of cable modems for additional subscribers. In
addition, operating costs for the three months ended June 30, 2001 includes $2.8
million for the write-down of certain equipment and other operating costs in
one-way markets where service was terminated during this period.
Engineering. Engineering expenses for the three months ended June 30,
2001 and 2000 were $5.6 million and $5.5 million, respectively, an increase of
$0.1 million. Engineering expenses for the six months ended June 30, 2001 and
2000 were $12.9 million and $10.4 million, respectively, an increase of $2.5
million. The increase in engineering expenses resulted from the development and
support of information systems, continued network design and system testing, an
increase in personnel and personnel-related costs for additional technical staff
to support cable modem services and additional depreciation on capital
equipment. These increases were partially offset by a reduction in expenses for
the development of our billing system.
Sales and Marketing. Sales and marketing expenses for the three months
ended June 30, 2001 and 2000 were $2.8 million and $6.2 million, respectively, a
decrease of $3.4 million. Sales and marketing expenses for the six months ended
June 30, 2001 and 2000 were $7.4 million and $12.5 million, respectively, a
decrease of $5.1 million. The decrease in sales and marketing expenses resulted
primarily from lower direct advertising costs and lower marketing costs aimed at
obtaining new cable partners.
Non-Cash Compensation Expense from Stock Options, Warrants and
Restricted Stock. Non-cash compensation expense from stock options, warrants and
restricted stock for the three months ended June 30, 2001 and 2000 was $193,000
and $24,000, respectively, an increase of $169,000. Non-cash compensation
expense from stock options, warrants and restricted stock for the six months
ended June 30, 2001 and 2000 was $270,000 and $48,000, respectively, an increase
of $222,000. These expenses represent the excess of the fair market value of our
common stock over the exercise price of the stock options granted to employees
and directors amortized over the vesting period, the amortization of common
stock purchase warrants issued to contractors and the fair value of restricted
stock amortized over the restriction period. The increase in 2001 resulted from
the issuance of 1.5 million shares of restricted stock to key members of
management.
Amortization of Distribution Agreement Costs. Amortization of
distribution agreement costs for the three months ended June 30, 2001 and 2000
was $4.1 million and $0.9 million, respectively, an increase of $3.2 million.
Amortization of distribution agreement costs for the six months ended June 30,
2001 and 2000 was $4.7 million and $1.1 million, respectively, an increase of
$3.6 million. The costs consist of the amortization of the value of warrants
earned under distribution agreements for commitments of homes passed. For the
three months ended June 30, 2001, amortization of distribution agreements costs
includes $2.8 million for the amortization of warrants issued in one-way markets
where service was terminated during this period. The company had issued
2,826,714 and 1,215,623 warrants in connection with distribution agreements at
June 30, 2001 and 2000, respectively. We expect to incur additional material
non-cash charges related to further issuance of common stock purchase warrants
to our cable and strategic partners in the future. We will recognize an addition
to equity for the fair value of any warrants issued, and will recognize the
related expense over the term of the service agreement with the cable or
strategic partner to which the warrants relate. The amount of any such charges
is not determinable until the related warrants are earned. The use of warrants
in these and similar transactions may increase the volatility of our earnings in
the future.
89
In May 2000, the company and CCI entered into an amended and restated
warrant to purchase up to 12,000,000 shares of our common stock at an exercise
price of $3.23 per share. The warrant was subsequently assigned by CCI to
Charter. The restated warrant becomes exercisable at the rate of 1.55 shares for
each home passed committed to us by Charter under the distribution agreement
entered into by Charter and us in November 1998. The warrant also becomes
exercisable at the rate of .775 shares for each home passed committed to us by
Charter under the second distribution agreement entered into in May 2000 up to
5,000,000 homes passed and at a rate of 1.55 shares for each home passed in
excess of 5,000,000. Charter also has the opportunity to earn additional
warrants to purchase shares of our common stock upon any renewal of the May 2000
agreement. Such a renewal warrant will have an exercise price of $10 per share
and will be exercisable to purchase one-half of a share for each home passed in
the systems for which the May 2000 agreement is renewed. If the asset sale is
consummated, all of these warrants will be cancelled.
Other General and Administrative. Other general and administrative
expenses for the three months ended June 30, 2001 and 2000 were $6.9 million and
$5.1 million, respectively, an increase of $1.8 million. Other general and
administrative expenses for the six months ended June 30, 2001 and 2000 were
$13.4 million and $9.1 million, respectively, an increase of $4.3 million. The
increase in other general and administrative expenses resulted from severance
costs associated with the termination of certain employees, additional personnel
and personnel related costs to administer the procurement, accounting and
finance functions, additional depreciation on capital equipment and the
amortization of intangible assets associated with the purchase of Digital
Chainsaw.
Net Investment Income. Net investment income for the three months ended
June 30, 2001 and 2000 was $0.3 million and $1.3 million, respectively. Net
investment income for the six months ended June 30, 2001 and 2000 was $1.1
million and $3.0 million, respectively. The decrease in net investment income
for the three and six months ended June 30, 2001, is the result of lower
investment balances. Net investment income represents interest earned on cash,
cash equivalents, short-term investments and restricted cash.
Income Taxes. At December 31, 2000, we accumulated net operating loss
carryforwards for federal and state tax purposes of approximately $182.1 million
which will expire beginning in 2018. At December 31, 2000, we had net deferred
tax assets of $77.6 million relating principally to our accumulated net
operating losses. Our ability to realize the value of our deferred tax assets
depends on our future earnings, if any, the timing and amount of which are
uncertain. We have recorded a valuation allowance for the entire net deferred
tax asset as a result of those uncertainties. Accordingly, we did not record any
income tax benefit for net losses incurred for the three and six months ended
June 30, 2001 and 2000.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000 COMPARED WITH THE
YEAR ENDED DECEMBER 31, 1999
REVENUES
Net revenue consists of net monthly subscription fees for cable
modem-based and traditional dial-up Internet services, monthly fees for web
hosting services, cable modem rental income, fees for engineering services
provided to cable partners, installation fees and other up front fees from end
users, fees from web site and creative design, legacy systems integration and
overall strategic consulting. Total net revenue for the year ended December 31,
2000 was $14.2 million, an increase of $10.8 million over net revenue of $3.4
million for the year ended December 31, 1999. The increase in revenue reflects
the increase in subscribers during the year ended December 31, 2000.
90
Revenue by product offering as a percentage of total net revenue is as follows:
% OF NET REVENUE
----------------
2000 1999
---- ----
Cable modem-based subscription fees - Turnkey 40% 42%
Cable modem-based subscription fees - Network Services 11% --
Traditional dial-up service fees 12% 29%
Cable modem rental fees 20% 19%
Engineering services provided to cable partners 4% 7%
Web design and systems integration and related services to commercial customers 6% --
Web hosting 3% --
Other fees from end users 4% 3%
--- ---
100% 100%
=== ===
COSTS AND EXPENSES
Operating. Operating costs for the year ended December 31, 2000 were
$70.3 million, an increase of $46.3 million over operating costs of $24.0
million for the year ended December 31, 1999. The increase in operating costs
resulted primarily from an increase in personnel and personnel related costs for
additional staff in our network operations centers, customer care and field
technical support departments, as well as the additional personnel costs
associated with the purchase of Digital Chainsaw, an increase in
telecommunications expense from the rollout of our service to new markets, our
larger subscriber base, depreciation of capital equipment from the expansion of
our network and the installation of cable modems for additional subscribers.
Engineering. Engineering expenses for the year ended December 31, 2000
were $24.0 million, an increase of $14.7 million over engineering expenses of
$9.3 million for the year ended December 31, 1999. The increase in engineering
expenses resulted from the development and support of information systems,
continued network design, system testing and project management for the
evaluation of new equipment and possible new product offerings, including the
offering of service via DSL, and from personnel and personnel-related costs for
additional technical staff to support cable modem services.
Sales and Marketing. Sales and marketing expenses for the year ended
December 31, 2000 were $25.1 million, an increase of $7.0 million over sales and
increase in sales and marketing expenses resulted primarily from an increase in
direct marketing and advertising expenses as we expanded into more geographic
markets, as well as an increase in personnel and personnel related costs to
expand our residential and commercial end user sales force, new cable partner
sales force and telemarketing sales force.
Non-Cash Compensation Expense from Stock Options, Warrants and
Restricted Stock. Non-cash compensation expense from stock options, warrants and
restricted stock for the year ended December 31, 2000 was $0.2 million, a
decrease of $2.8 million from non-cash compensation expense of $3.0 million for
the year ended December 31, 1999. The expense for the year ended December 31,
2000 represents the excess of the fair market value of our common stock over the
exercise price of the stock options granted to employees and directors amortized
over the vesting
91
period, the amortization of common stock purchase warrants issued to contractors
and the fair value of 200,000 shares of restricted stock amortized over the
restriction period. The expense for the year ended December 31, 1999 is
principally related to a $1.5 million charge for 189,875 compensatory options
issued to our directors which vested upon grant, $1.1 million for 227,695
options issued under the 1998 stock option plan that vested upon execution of
our initial public offering, and $0.3 million related to accelerated vesting of
options for terminated employees.
Amortization of Distribution Agreement Costs. Amortization of
distribution agreement costs for the year ended December 31, 2000 was $2.7
million, a decrease of $1.0 million from amortization of distribution agreement
costs of $3.7 million for the year ended December 31, 1999. Amortization for the
year ended December 31, 2000 reflects the amortization of the value of 2,226,765
warrants earned by cable partners under distribution agreements for commitments
of homes passed. Amortization of $3.2 million for the year ended December 31,
1999 related primarily to the issuance of 387,500 warrants under the terms of a
non-binding letter of intent and subsequent letter agreement with Microsoft. The
remaining amount reflects the amortization of the value of warrants earned by
cable partners. We expect to incur additional material non-cash charges related
to further issuance of common stock purchase warrants to our cable and strategic
partners in the future. We will recognize an addition to equity for the fair
value of any warrants issued, and will recognize the related expense over the
term of the service agreement with the cable or strategic partner to which the
warrants relate. The amount of any such charges is not determinable until the
related warrants are earned. The use of warrants in these and similar
transactions may increase the volatility of our earnings in the future.
In May 2000, the company and CCI entered into an amended and restated
warrant to purchase up to 12,000,000 shares of our common stock at an exercise
price of $3.23 per share. The warrant was subsequently assigned by CCI to
Charter. The restated warrant becomes exercisable at the rate of 1.55 shares for
each home passed committed to us by Charter under the network services agreement
entered into by Charter and us in November 1998. The warrant also becomes
exercisable at the rate of .775 shares for each home passed committed to us by
Charter under the second network services agreement entered into in May 2000 up
to 5,000,000 homes passed and at a rate of 1.55 shares for each home passed in
excess of 5,000,000. Charter also has the opportunity to earn additional
warrants to purchase shares of our common stock upon any renewal of the May 2000
agreement. Such a renewal warrant will have an exercise price of $10 per share
and will be exercisable to purchase one-half of a share for each home passed in
the systems for which the May 2000 agreement is renewed. If the asset sale is
consummated, all of these warrants will be cancelled.
Write-Down of Intangible Assets. The company's plan to exit the
high-end web development and system integration services of Digital and the
deterioration in revenue growth prospects for the web-hosting services of
Digital during the fourth quarter of 2000 prompted a review for the possible
impairment of goodwill associated with Digital. This review indicated that
estimated undiscounted future cash flows were insufficient to recover the
carrying value of the goodwill. Accordingly, the company reduced the carrying
value of the goodwill to its estimated fair value resulting in a write-down of
$22.4 million during the year ended December 31, 2000.
Other General and Administrative. Other general and administrative
expenses were $25.1 million for the year ended December 31, 2000, an increase of
$13.2 million over other general and administrative expenses of $11.9 million
for the year ended December 31, 1999. The increase in other general and
administrative expenses resulted from additional personnel and personnel related
costs as we hired personnel to implement procedures and controls to support our
planned expansion and to administer finance, legal and human resource functions.
Other general and administrative expenses for the years ended December 31, 2000
and 1999 also included amortization of intangible assets of
92
$2.7 million and $1.0 million, respectively. Amortization of intangible assets
relates primarily to the acquisitions of CATV Inc., HSAN, and Digital.
Investment Income. Investment income for the year ended December 31,
2000 was $7.4 million, an increase of $1.2 million over investment income of
$6.2 million for the year ended December 31, 1999. Investment income represents
interest earned on cash, cash equivalents and short-term investments. The
increase in investment income is primarily the result of interest on investments
purchased using the net proceeds of both our preferred stock issuance in
December 2000 and our initial public offering in June of 1999.
Interest Expense. Interest expense for the year ended December 31, 2000
was $2.2 million, an increase of $1.7 million over interest expense of $0.5
million for the year ended December 31, 1999. Interest expense represents
interest on long-term debt and capital lease obligations. The increase in
interest expense is primarily due to $13.8 million additional capital lease
obligations entered into in 2000.
Income Taxes. At December 31, 2000 and 1999, we accumulated net
operating loss carryforwards for federal and state tax purposes of approximately
$182.1 million and $63.6 million, respectively, which will expire beginning in
2018. At December 31, 2000 and 1999, we had net deferred tax assets of $77.6
million and $26.5 million, respectively, relating principally to our accumulated
net operating losses. Our ability to realize the value of our deferred tax
assets depends on our future earnings, if any, the timing and amount of which
are uncertain. We have recorded a valuation allowance for the entire net
deferred tax asset as a result of those uncertainties. Accordingly, we did not
record any income tax benefit for net losses incurred for the years ended
December 31, 2000 and 1999.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE
PERIOD APRIL 3, 1998 (INCEPTION) TO DECEMBER 31, 1998 (INCEPTION PERIOD)
On April 3, 1998, we acquired CATV and HSAN in a transaction recorded
under the purchase method of accounting. We had no operations prior to these
acquisitions. Accordingly, the following discussion for 1998 reflects our
results of operations for the period April 3, 1998 (Inception) to December 31,
1998 ("Inception Period").
REVENUE
Total net revenue for the year ended December 31, 1999 was $3.4
million, an increase of $3.1 million over net revenue of $0.3 million for the
Inception Period.
Revenue by product offering as a percentage of total net revenue is as
follows:
<Table>
<Caption>
% OF NET REVENUE
------------------------
INCEPTION
1999 PERIOD
-------- ----------
Cable modem-based subscription fees 42% 45%
Traditional dial-up service fees 29% 35%
Cable modem rental fees 19% 10%
Engineering services provided to cablepartners 7% --
Other fees from end users 3% 10%
-------- ----------
100% 100%
======== ==========
</Table>
93
COSTS AND EXPENSES
Operating. Operating costs for the year ended December 31, 1999 were
$24.0 million, an increase of $21.9 million over operating costs of $2.1 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
departments, 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.
Engineering. Engineering expenses for the year ended December 31, 1999
were $9.3 million, an increase of $7.0 million over engineering expenses of $2.3
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 head end hardware and software in our cable
partners' systems, continued network design, system testing, development and
support of information systems, project management, and for the evaluation of
new equipment and possible new product offerings.
Sales and Marketing. Sales and marketing expenses for the year ended
December 31, 1999 were $18.1 million, an increase of $14.4 million over sales
and marketing expenses of $3.7 million for the Inception Period. The increase in
sales and marketing expenses resulted primarily from an increase in personnel
and personnel related costs to expand our residential and commercial end user
sales force, new cable partner sales force and telemarketing sales force, as
well as an increase in direct marketing and advertising expenses, as we expanded
into more geographic markets.
Non-Cash Compensation Expense from Stock Options, Warrants and
Restricted Stock. Non-cash compensation expense from stock options for the year
ended December 31, 1999 was $3.0 million which represents the excess of the fair
market value of our common stock over the exercise price of the stock options
granted to employees and directors amortized over the vesting period. This
expense is principally related to a $1.5 million charge for 189,875 options
issued to our directors which immediately vested, $1.1 million for options
issued to employees which vested upon completion of our initial public offering
and $0.3 million related to the accelerated vesting of options for terminated
employees. There was no expense of this nature during the Inception Period.
Amortization of Distribution Agreement Costs. Amortization of
distribution agreement costs for the year ended December 31, 1999 was $3.7
million, of which $3.2 million related to the issuance of 387,500 warrants under
the terms of a non-binding letter of intent and subsequent letter agreement with
Microsoft. The remaining amount reflects the amortization of the value of
198,744 warrants earned by cable partners under distribution agreements for
commitments of homes passed to us. There was no expense of this nature during
the Inception Period.
Other General and Administrative. Other general and administrative
expenses were $11.9 million for the year ended December 31, 1999, an increase of
$9.6 million over other general and administrative expenses of $2.3 million for
the Inception Period. The increase in other general and administrative expenses
resulted from additional personnel and personnel related costs as we hired
personnel to implement procedures and controls to support our planned expansion
and to administer finance, legal and human resource functions. Other general and
administrative expenses for the year ended December 31, 1999 and the Inception
Period also included amortization of intangible assets of
94
$1.0 million and $0.7 million, respectively. Amortization of intangible assets
relates primarily to the acquisitions of CATV and HSAN.
In 1999, we recorded severance and other benefit related costs of $1.2
million associated with the termination of some of our employees in the fourth
quarter of 1999 including the aforementioned $0.3 million of non-cash,
compensation expense from stock options. At December 31, 1999, approximately
$0.8 million related to the cash portion of the costs remained unpaid.
Investment Income. Investment income was $6.2 million for the year
ended December 31, 1999, compared to investment income of $0.1 million for the
Inception Period. Investment income represents interest earned on cash, cash
equivalents and short-term investments. The primary reason for the increase in
investment income relates to interest on investments purchased using the net
proceeds of our initial public offering.
Interest Expense. Interest expense was $0.5 million for the year ended
December 31, 1999, an increase of $0.4 million over interest expense of $0.1
million for the Inception Period. Interest expense represents interest on
long-term debt and capital lease obligations.
Income Taxes. At December 31, 1999 and 1998, we had accumulated net
operating loss carryforwards for federal and state tax purposes of approximately
$63.6 million and $9.0 million, respectively, which will expire beginning in
2018. At December 31, 1999 and 1998, we had net deferred tax assets of $26.5
million and $3.8 million, respectively, relating principally to our accumulated
net operating losses. Our ability to realize the value of our deferred tax
assets depends on our future earnings, if any, the timing and amount of which
are uncertain. We have recorded a valuation allowance for the entire net
deferred tax asset as a result of those uncertainties. Accordingly, we did not
record any income tax benefit for net losses incurred for the year ended
December 31, 1999 or the Inception Period.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2001, we had approximately $36.9 million
(unaudited) in cash and cash equivalents, short-term investments and restricted
cash. To preserve cash and enhance the prospects for entering into a strategic
transaction, the company has implemented a series of significant cost reduction
measures. Among the actions being taken by the company are:
o the completion of its previously announced exit from certain
one-way cable TV markets;
o the commencement of negotiations to exit all of its turnkey
contracts with cable operators other than Charter (covering
approximately 23,000 subscribers);
o scaling back the operations of Digital Chainsaw, including
reducing its workforce and eliminating all service offerings
other than web site hosting and its subsequent sale on October
31, 2001;
o ceasing entry into the DSL market and ceasing development of any
other new service and product offerings other than those that are
expected to be cash flow positive in the short term;
o pursuing the sale of the company's DSL assets;
95
o material reductions in workforce; and
o entering into a management agreement with CCI, pursuant to which
CCI is responsible for the purchase and installation of cable
modems and related equipment while sharing responsibility for
product marketing. In addition, CCI has the option to undertake
additional management responsibilities with respect to the
business related to the assets it seeks to acquire.
After these changes are completed, the company's operations will
consist of its cable Internet access cable business with Charter and our
existing international ISP infrastructure services business. The company expects
these reductions in its operations to result in future operating cost reductions
the amounts of which cannot yet be determined. However, even with these changes,
the company will continue to experience substantial negative cash flow from its
remaining operations. Although the company will continue to monitor the size of
its workforce and the levels of its other operating costs and cash commitments
with a view to conserving cash, the company will not be able to reduce costs
significantly enough to continue as a going concern without additional
financing.
The company believes that it will not be able to secure additional
financing in the current economic environment being faced by the
telecommunications industry before its cash reserves are depleted in early 2002.
In light of the difficult current financing environment, the company has entered
into the asset purchase agreement with Charter. If the asset sale to Charter is
not consummated, the company will likely file for bankruptcy.
At June 30, 2001, we had cash and cash equivalents of $26.0 million and
short-term investments of $30.5 million, compared with $114.8 million of cash
and cash equivalents and $13.2 million of short-term investments at December 31,
2000. We had significant negative cash flow from operating activities for the
six months ended June 30, 2001. Cash used in operating activities for the six
months ended June 30, 2001 was $58.6 million, caused primarily by a net loss of
$67.4 million, an increase in current and non-current assets of $6.2 million, a
net decrease in accounts payable, accrued expenses and other current liabilities
of $10.2 million, offset by non-cash expenses of $25.2 million.
Cash used in investing activities for the six months ended June 30,
2001 was $24.8 million, due to the purchase of short-term investments totaling
$31.7 million and capital expenditures of $7.4 million, partially offset by
sales and maturities of short-term investments of $14.3 million. The principal
capital expenditures incurred during this period were for the purchase of cable
modems and data center equipment.
Cash used by financing activities for the six months ended June 30,
2001 was $5.5 million, comprised of net payments on capital lease obligations
and long-term debt.
If the asset sale is not consummated, we expect to experience
substantial negative cash flow from operating activities and negative cash flow
from investing activities and would likely be unable to attract the funding we
need to continue as a going concern under such circumstances, our future cash
requirements will depend on a number of factors, including the success of our
cost reduction measures and changes in our operating expenses, such as our
personnel expense.
We expect to incur approximately $15.0 million of capital expenditures
in 2001 principally related to the purchase of cable modems, the upgrade of our
data center infrastructure and the purchase of $3.4 million of DSL assets. For
the six month period ended June 30, 2001, we incurred $7.4 million of capital
expenditures.
96
Investment Portfolio. Cash equivalents are highly liquid investments
with insignificant interest rate risk and original maturities of 90 days or less
and are stated at amounts that approximate fair value based on quoted market
prices. Cash equivalents consist principally of investments in interest-bearing
money market accounts with financial institutions and highly liquid
investment-grade debt securities of corporations and the U.S. Government.
Short-term investments are classified as available-for-sale and, as a
result, are stated at fair value. Short-term investments are principally
comprised of highly-liquid debt securities of corporations and the U.S.
Government. We record changes in the fair market value of securities held for
short-term investment as an equal adjustment to the carrying value of the
security and stockholders' equity. Restricted cash is comprised of certificates
of deposit collateralizing letters of credit backing certain leases.
Loan Facilities. The company has $3.4 million outstanding under various
loan facilities at June 30, 2001 with interest rates on draws on the facilities
ranging from 14.63% to 15.52%. No draws were made on loan facilities for the six
months ended June 30, 2001. Immediately prior to the closing of the asset sale,
we will be required to repay these obligations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), which provides that all business combinations should be accounted
for using the purchase method of accounting and establishes criteria for the
initial recognition and measurement of goodwill and other intangible assets
recorded in connection with a business combination. The provisions of SFAS 141
apply to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001, or later. The company will apply the provisions of SFAS 141
to any future business combinations.
In addition, the FASB issued Statements of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
establishes the accounting for goodwill and other intangible assets following
their recognition. SFAS 142 applies to all goodwill and other intangible assets
whether acquired singly, as part of a group, or in a business combination. SFAS
142 provides that goodwill should not be amortized but should be tested for
impairment annually using a fair-value based approach. In addition, SFAS 142
provides that other intangible assets other than goodwill should be amortized
over their useful lives and reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 142 is
effective for the company beginning on January 1, 2002.
Upon adoption, the company will be required to perform a transitional
impairment test for all goodwill recorded as of January 1, 2002. Any impairment
loss recorded as a result of completing the transitional impairment test will be
treated as a change in accounting principle. The impact of the adoption of SFAS
142 on the company's results of operations for all periods beginning on or after
January 1, 2002 will be to eliminate amortization of goodwill. Management of the
company has not performed a transitional impairment test under SFAS 142 and
accordingly cannot estimate the impact of the adoption as of January 1, 2002.
In October 2001, the FASB issued Statements of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144
97
supercedes SFAS 121. SFAS 144 applies to all long-lived assets and consequently
amends Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business" ("APB
30"). SFAS 144 develops one accounting model (based on the model in SFAS 121)
for long-lived assets that are to be disposed of by sale, as well as addresses
the principal implementation issues. SFAS 144 requires that long-lived assets
that are to be disposed of by sale be measured at the lower of book value or
fair value, less cost to sell. That requirement eliminates APB 30's requirement
that discontinued operations be measured at net realizable value or that
entities include under "discontinued operations" in the financial statements
amounts for operating losses that have not yet occurred. Additionally, SFAS 144
expands the scope of discontinued operations to include all components of an
entity with operations that (1) can be distinguished from the rest of the entity
and (2) will be eliminated from the ongoing operations of the entity in a
disposal transaction. SFAS 144 is effective for the company beginning on January
1, 2002.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our exposure to market risk is limited to interest rate sensitivity,
which is affected by changes in the general level of U.S. interest rates. Our
cash equivalents are invested with high-quality issuers and limit the amount of
credit exposure to any one issuer. Due to the short-term nature of our cash
equivalents, we believe that we are not subject to any material market risk
exposure.
We do not have any foreign currency hedging instruments.
98
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the number of shares of our two outstanding
classes of stock beneficially owned as of October 26, 2001, by each person who
is known by us to own beneficially more than 5% of either class, each of our
directors, our Chief Executive Officer, each of our four most highly compensated
executive officers other than our Chief Executive Officer, and all of our
directors and executive officers as a group:
<Table>
<Caption>
SHARES OF CLASS
BENEFICIALLY OWNED
--------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT (1)
------------------------------------ ------ -----------
PREFERRED STOCK
Vulcan Ventures Incorporated (2)..................................... 38,000 50.7%
505 Fifth Ave. South
Seattle, Washington 98104
Charter Communications Ventures, LLC (2)............................. 37,000 49.3%
12405 Powerscourt Drive
St. Louis, Missouri 63131
Paul G. Allen (2).................................................... 75,000 100.0%
505 Fifth Ave. South
Seattle, Washington 98104
COMMON STOCK
Vulcan Ventures Incorporated (3)..................................... 27,798,278 36.9%
505 Fifth Ave. South
Seattle, Washington 98104
Charter Communications Ventures, LLC (3)............................. 10,027,426 12.9%
12405 Powerscourt Drive
St. Louis, Missouri 63131
Paul G. Allen (3).................................................... 37,825,704 48.5%
505 Fifth Ave. South
Seattle, Washington 98104
Irving W. Bailey, II (4)............................................. 1,372,813 1.8%
Michael E. Gellert (5)............................................... 588,916 *
David A. Jones, Jr. (6).............................................. 957,888 1.3%
Robert S. Saunders (7)............................................... 368,265 *
Daniel J. O'Brien (8)................................................ 1,807,500 2.4%
Richard George (9)................................................... 141,777 *
Michael Mossman (10)................................................. 46,111 *
John G. Hundley (11)................................................. 40,480 *
George E. Willett (12)............................................... 206,372 *
Directors and executive officers as a group
(9 persons) (13).................................................. 5,530,122 7.2%
</Table>
---------
* Less than 1%.
(1) Based on 75,000 shares of preferred stock outstanding as of October 26,
2001, and 60,365,204 shares of common stock outstanding as of October
26, 2001. For the purpose of
99
computing the number and percentage of outstanding shares of common
stock held by each person as of October 26, 2001, the 14,952,906
shares of common stock into which the 75,000 outstanding shares of
preferred stock may be converted are deemed to be outstanding. Shares
which a person has the right to acquire pursuant to options or
warrants within sixty days after October 26, 2001, are deemed to be
outstanding for the purposes of computing the percentage for such
person but are not deemed to be outstanding for the purpose of
computing the percentage of any other person.
(2) Based on information set forth in Schedule 13D (Amendment No. 6) filed
on September 28, 2001, by Vulcan, Charter Ventures, Charter
Communications Holdings, LLC, Charter, CCI and Paul G. Allen, the sole
shareholder of Vulcan and the Chairman of CCI. Mr. Allen's reported
holdings include the shares held by both Vulcan and Charter Ventures.
(3) Based on information set forth in Schedule 13D (Amendment No. 6) filed
on September 28, 2001, by Vulcan, Charter Ventures, Charter
Communications Holdings, LLC, Charter, CCI and Paul G. Allen, the sole
shareholder of Vulcan and the Chairman of CCI. Information on the
number of warrants held by Charter and the number of shares of common
stock into which the outstanding shares of preferred stock may be
converted is based on the company's records. Vulcan's reported
holdings include 7,576,139 shares of common stock which may be
acquired upon the conversion of 38,000 shares of preferred stock held
by Vulcan. Vulcan's reported holdings do not include any shares held
by Charter Ventures or CCI. Charter Ventures' reported holdings
consist of 7,376,767 shares of common stock which may be acquired upon
the conversion of 37,000 shares of preferred stock held by Charter
Ventures and 2,650,659 shares of common stock which Charter, an
affiliate of Charter Ventures, has the right to acquire upon the
exercise of outstanding warrants. Mr. Allen's reported holdings
include the shares reported as held by both Vulcan and Charter
Ventures.
(4) Includes 4,800 shares held by Mr. Bailey's wife, 19,000 shares held by
the Beauregard Foundation, of which Mr. Bailey is President, and
43,013 shares that Mr. Bailey may acquire upon exercise of options
exercisable within 60 days of October 26, 2001.
(5) Includes 173,515 shares held by Mr. Gellert's wife and 50,375 shares
that Mr. Gellert may acquire upon exercise of options exercisable
within 60 days of October 26, 2001.
(6) Includes 164 shares held by CV Holdings, Inc., of which Mr. Jones is
the sole shareholder, 2,115 shares held by Chrysalis Ventures, LLC, a
company controlled by Mr. Jones, 1,540 shares held by Mr. Jones' wife
as custodian under the Uniform Gift to Minors' Act and 43,142 shares
that Mr. Jones may acquire upon exercise of options exercisable within
60 days of October 26, 2001.
(7) Includes 115,526 shares held by Saunders Capital, LLC, of which Mr.
Saunders is president, 91,834 shares held by Saunders Capital Profit
Sharing Plan, 400 shares held by Mr. Saunders' wife, 1,500 shares held
by Mr. Saunders' children and 43,142 shares that Mr. Saunders may
acquire upon exercise of options exercisable within 60 days of October
26, 2001.
(8) Includes 1,200,000 shares of restricted stock subject to forfeiture
and 587,500 shares that Mr. O'Brien may acquire upon exercise of
options exercisable within 60 days of October 26, 2001.
100
(9) Includes 100,000 shares of restricted stock subject to forfeiture,
39,895 shares that Mr. George may acquire upon exercise of options
exercisable within 60 days of October 26, 2001 and 1,882 shares held
in the company's 401(k) plan.
(10) Consists of 45,676 shares that Mr. Mossman may acquire upon exercise
of options exercisable within 60 days of October 26, 2001 and 435
shares held in the company's 401(k) plan. Mr. Mossman's employment
with the company was terminated on October 6, 2001.
(11) Includes 1,230 shares held by Mr. Hundley's wife, 765 shares held by
Mr. Hundley as custodian under the Uniform Gift to Minors Act, 31,905
shares that Mr. Hundley may acquire upon exercise of options
exercisable within 60 days of October 26, 2001 and 3,200 shares held
in the company's 401(k) plan.
(12) Includes 75,000 shares of restricted stock subject to forfeiture,
126,522 shares that Mr. Willett may acquire upon exercise of options
exercisable within 60 days of October 26, 2001 and 3,200 shares held
in the company's 401(k) plan.
(13) Includes shares of restricted stock and shares that the directors and
executive officers may acquire upon exercise of options exercisable
within 60 days of October 26, 2001.
101
INFORMATION ABOUT CCI, CHARTER, CHARTER VENTURES
AND VULCAN AND THE COMPANY'S RELATIONSHIP WITH CCI,
CHARTER, CHARTER VENTURES AND VULCAN
INFORMATION ABOUT CCI, CHARTER, CHARTER VENTURES AND VULCAN
CCI is a Delaware corporation whose Class A common stock trades on the
Nasdaq Stock Market under the symbol "CHTR." CCI is controlled by Mr. Paul
G. Allen, who has approximately 92% of the voting power and 2% of the
outstanding equity of CCI. CCI is the manager of Charter and Charter Ventures.
Charter is a Delaware limited liability company. Approximately 46% of
the outstanding equity of Charter and 100% of the voting power of Charter are
held by CCI. Charter is the 100% owner, indirectly, of the operating companies
that conduct Charter's cable business, including Charter Ventures.
Charter Ventures is a Delaware limited liability company that is an
indirect wholly owned subsidiary of Charter.
Vulcan is 100% owned and controlled by Mr. Allen. The Charter entities
described above and Vulcan are affiliates of each other by virtue of their
common control by Mr. Allen. In addition, they have common members of their
board of directors, as more fully described below.
Charter is the fourth largest operator of cable systems in the United
States. Through its broadband network of coaxial and fiber cable, Charter
provides video, data, interactive and private business network services to
approximately 7 million customers in 40 states.
The principal executive offices of all the Charter entities, and their
directors and officers named in this proxy statement except for Messrs. Allen
and Savoy, are located at 12405 Powerscourt Drive, St. Louis, Missouri 63131.
The telephone number at this location is (314) 965-0555. Charter expects to
obtain the cash consideration for the transactions described in this proxy
statement from its working capital.
RELATIONSHIP OF CCI, CHARTER, CHARTER VENTURES AND VULCAN WITH THE COMPANY
Charter Ventures and Vulcan own 37,000 and 38,000 shares of our
preferred stock, respectively, which represents all of the outstanding shares of
our preferred stock. In addition, Vulcan owns 20,221,139 shares of our common
stock. Accordingly, Charter Ventures and Vulcan together hold 46.7% of the votes
eligible to be cast by the combined class of our common stock and preferred
stock at the Special Meeting. All of these shares are beneficially owned by Mr.
Allen.
Until their resignation on July 30, 2001, Messrs. Jerald L. Kent,
Stephen E. Silva and William D. Savoy, each an employee and/or director of CCI,
Charter, Charter Ventures and/or Vulcan, were members of our board of directors.
Mr. Kent was President and Chief Executive Officer and a director of CCI,
Charter and Charter Ventures. (Mr. Kent resigned as officer and director of each
of the Charter entities effective September 28, 2001.) Mr. Silva was Senior Vice
President - Corporate Development and Technology of CCI, Charter and Charter
Ventures. (Mr. Silva was recently promoted and is now Executive Vice President
and Chief Technical Officer of those entities.) Mr. Savoy is a director of CCI
and Charter and is President and a director of Vulcan.
102
DIRECTORS OF CCI, CHARTER AND CHARTER VENTURES
The persons listed below are directors of CCI, Charter and/or Charter Ventures
as indicated.
<Table>
<Caption>
Directors Company
Paul G. Allen........................... CCI and Charter
Marc B. Nathanson....................... CCI
Ronald L. Nelson........................ CCI
Nancy B. Peretsman...................... CCI
William D. Savoy........................ CCI and Charter
Carl Vogel.............................. CCI, Charter and Charter Ventures
Howard L. Wood.......................... CCI
</Table>
The following sets forth certain biographical information with respect
to the directors listed above.
Paul G. Allen has been Chairman of the board of directors of CCI since
July 1999, and Chairman of the board of directors of Charter Investment, Inc. (a
predecessor to, and currently an affiliate of, CCI) since December 1998. Mr.
Allen, a co-founder of Microsoft Corporation, has been a private investor for
more than five years, with interests in over 140 companies. Mr. Allen's
investments include Vulcan Ventures Incorporated, Portland Trail Blazers NBA
team, Seattle Seahawks NFL franchise, Vulcan Programming, Inc. and Vulcan Cable
III Inc., and, in addition to his indirect investment in the company, he has
investments in USA Networks, Inc., TechTV, L.L.C., Dreamworks LLC, a multi-media
entertainment company, Wink Communications, Inc. and Oxygen Media, LLC. He is a
director of USA Networks, Inc., TechTV, L.L.C. and numerous privately held
companies.
Marc B. Nathanson has been a director of CCI since January 2000. Mr.
Nathanson is the chairman of Mapleton Investments LLC, an investment vehicle
formed in 1999. He also founded and served as chairman and chief executive
officer of Falcon Holding Group, Inc., a cable operator, and its predecessors,
from 1975 until 1999. He served as chairman and chief executive officer of
Enstar Communications Corporation, a cable operator, from 1988 until November
1999. Prior to 1975, Mr. Nathanson held executive positions with Teleprompter
Corporation, Warner Cable and Cypress Communications Corporation. In 1995, he
was appointed by the President of the United States, and since 1998 has served
as chairman of The Broadcasting Board of Governors.
Ronald L. Nelson has been a director of CCI since November 1999. Mr.
Nelson is a founding member of DreamWorks LLC, where he has served in executive
management since 1994. Prior to that time, during his 15 years at Paramount
Communications Inc., he served in a variety of operating and executive
positions. He currently serves as a member of the board of directors of Advanced
Tissue Sciences, Inc. and Centre Pacific, L.L.C., a registered investment
advisor.
Nancy B. Peretsman has been a director of CCI since November 1999. Ms.
Peretsman has been a managing director and executive vice president of Allen &
Company Incorporated, an investment bank unrelated to Paul G. Allen, since 1995.
From 1983 to 1995, she was an investment banker at Salomon Brothers Inc., where
she was a managing director since 1990. She is a director of Priceline.com
Incorporated and several privately held companies.
103
William D. Savoy has been a director of CCI since July 1999 and a
director of Charter Investment since December 1998. Since 1990, Mr. Savoy has
been an officer and a director of many affiliates of Mr. Allen, including vice
president and a director of Vulcan Ventures Incorporated, president of Vulcan
Northwest, Inc., and president and a director of Vulcan Programming, Inc. and
Vulcan Cable III Inc. Mr. Savoy also serves on the advisory board of Dreamworks
LLC and as a director of drugstore.com, Metricom, Inc., Peregrine Systems, Inc.,
RCN Corporation, Telescan, Inc., USA Networks, Inc., TechTV, L.L.C. and Digeo
Broadband, Inc.
Carl Vogel has been the President, Chief Executive Officer and a
director of CCI since October 2001. Mr. Vogel has more than 20 years experience
in telecommunications and the subscription television business. Prior to joining
Charter in October 2001, he was a senior vice president of Liberty Media Corp.,
and chief executive officer of Liberty Satellite and Technology. Prior to
joining Liberty, Mr. Vogel was an executive vice president and chief operating
officer of Field Operations for AT&T Broadband and Internet Services with
responsibility for managing operations of all AT&T's cable properties. Mr. Vogel
also previously served as chief executive officer of Primestar and Star Choice,
and was chief operating officer and later president of EchoStar Communications.
He began his telecommunications career at Jones Intercable.
Howard L. Wood has been a director of CCI since January 2000. Mr. Wood
co-founded Charter Investment in 1993 and served in various executive capacities
there until November 1999, when he became a consultant to CCI. Prior to 1993,
Mr. Wood, a certified public accountant, was chief executive officer of Cencom
Cable Associates, Inc., where he also served in various other executive
positions. Earlier he was partner-in-charge of the St. Louis Tax Division of
Arthur Andersen LLP. He is a director of First State Community Bank, Gaylord
Entertainment Company and Data Research, Inc.
EXECUTIVE OFFICERS OF CCI, CHARTER AND CHARTER VENTURES
The following persons are executive officers of CCI and Charter:
<Table>
<Caption>
Executive Officers Position
Carl Vogel..................... President and Chief Executive Officer
David C. Andersen.............. Senior Vice President - Communications
David G. Barford............... Executive Vice President and Chief Operating Officer
Eric A. Freesmeier............. Senior Vice President - Administration
Thomas R. Jokerst.............. Senior Vice President - Advanced Technology Development
Kent D. Kalkwarf............... Executive Vice President and Chief Financial Officer
Ralph G. Kelly................. Senior Vice President - Treasurer
David L. McCall................ Senior Vice President of Operations - Eastern Division
Majid R. Mir................... Senior Vice President - Telephony and Advanced Services
John C. Pietri................. Senior Vice President - Engineering
Michael E. Riddle.............. Senior Vice President and Chief Information Officer
Steven A. Schumm............... Executive Vice President, Assistant to the President
Curtis S. Shaw................. Senior Vice President, General Counsel and Secretary
Stephen E. Silva............... Executive Vice President and Chief Technical Officer
James (Trey) H. Smith, III..... Senior Vice President of Operations - Western Division
</Table>
Information regarding these executive officers is set forth below.
104
David C. Andersen, Senior Vice President - Communications. Prior to CCI
in May 2000, Mr. Andersen served as vice president of Communications for CNBC,
the worldwide cable and satellite business news network subsidiary of NBC.
Before that, starting in 1982 when he established their public relations
department, Mr. Andersen served in various management positions at Cox
Communications, Inc., most recently as vice president of Public Affairs. Mr.
Andersen serves on the board of KIDSNET, and is a former chairman of the
National Captioning Institute's Cable Advisory Board.
David G. Barford, Executive Vice President and Chief Operating Officer.
Mr. Barford was promoted to his current position in July 2000, having previously
served as Senior Vice President of Operations - Western Division. Prior to
joining Charter Investment in 1995, Mr. Barford held various senior marketing
and operating roles during nine years at Comcast Cable Communications, Inc. He
received a B.A. degree from California State University, Fullerton, and an
M.B.A. degree from National University.
Eric A. Freesmeier, Senior Vice President - Administration. From 1986
until joining Charter Investment in 1998, Mr. Freesmeier served in various
executive management positions at Edison Brothers Stores, Inc. Earlier he held
management and executive positions at Montgomery Ward.
Thomas R. Jokerst, Senior Vice President - Advanced Technology
Development. Mr. Jokerst joined Charter Investment in 1994. Previously he served
as a vice president of Cable Television Laboratories and as a regional director
of engineering for Continental Cablevision.
Kent D. Kalkwarf, Executive Vice President and Chief Financial Officer.
Mr. Kalkwarf was promoted to the position of Executive Vice President in July
2000, having previously served as Senior Vice President. Prior to joining
Charter Investment in 1995, Mr. Kalkwarf was employed for 13 years by Arthur
Andersen LLP, where he attained the position of senior tax manager. He has
extensive experience in cable, real estate and international tax issues.
Ralph G. Kelly, Senior Vice President - Treasurer. Prior to joining
Charter Investment in 1993, Mr. Kelly was controller and then treasurer of
Cencom Cable Associates between 1984 and 1992. He left Charter Investment in
1994, to become chief financial officer of CableMaxx, Inc., and returned in
1996. Mr. Kelly is a certified public accountant.
David L. McCall, Senior Vice President - Operations - Eastern Division.
Prior to joining Charter Investment in 1995, Mr. McCall was associated with
Crown Cable and its predecessor company, Cencom Cable Associates, Inc., from
1983 to 1994. Mr. McCall is a member of the Southern Cable Association's Tower
Club.
Majid R. Mir, Senior Vice President - Telephony and Advanced Services.
From 1999 until CCI in April 2001, Mr. Mir was employed by Genuity, Inc. where
he was vice president for local fiber engineering. Prior to that, he was
assistant vice president of global network infrastructure for GTE
Internetworking. Mr. Mir has been working in the field of telephony since 1979.
John C. Pietri, Senior Vice President - Engineering. Prior to joining
Charter Investment in 1998, Mr. Pietri was with Marcus Cable for nine years,
most recently serving as senior vice president and chief technical officer.
Earlier he was in operations with West Marc Communications and Minnesota Utility
Contracting.
105
Michael E. Riddle, Senior Vice President and Chief Information Officer.
Prior to joining CCI in December 1999, Mr. Riddle was director, applied
technologies of Cox Communications for four years. Prior to that, he held
technical and management positions during 17 years at Southwestern Bell and its
subsidiaries.
Steven A. Schumm, Executive Vice President and Assistant to the
President. Prior to joining Charter Investment in 1998, Mr. Schumm was managing
partner of the St. Louis office of Ernst & Young LLP for 14 years. He had joined
Ernst & Young in 1974. He served as one of 10 members of the firm's National Tax
Committee.
Curtis S. Shaw, Senior Vice President, General Counsel and Secretary.
From 1988 until he joined Charter Investment in 1997, Mr. Shaw served as
corporate counsel to NYNEX. Since 1973, Mr. Shaw has practiced as a corporate
lawyer, specializing in mergers and acquisitions, joint ventures, public
offerings, financings, and federal securities and antitrust law.
Stephen E. Silva, Executive Vice President and Chief Technical Officer.
Mr. Silva joined Charter Investment in 1995 and has also served as vice
president responsible for billing services and new product development and Vice
President - Corporate Development and Technology. Mr. Silva previously served in
various management positions at U.S. Computer Services, Inc., a billing service
provider specializing in the cable industry. He is a member of the board of
directors of Diva Systems Corporation.
James H. (Trey) Smith, III, Senior Vice President of Operations -
Western Division. Mr. Smith was appointed to his current position in September
2000, previously serving as a division president of AT&T Broadband. Before that,
he was president and chief executive officer of Rogers Cablesystems Ltd., senior
vice president of the Western Region for MediaOne/Continental Cable and
executive vice president of operations for Times Mirror Cable TV, Inc. He is a
certified public accountant.
Carl Vogel, President, Chief Executive Officer and Director. Mr. Vogel
has held these positions with CCI since October 2001. Mr. Vogel has more than 20
years experience in telecommunications and the subscription television business.
Prior to joining Charter in October 2001, he was a senior vice president of
Liberty Media Corp., and chief executive officer of Liberty Satellite and
Technology. Prior to joining Liberty, Mr. Vogel was an executive vice president
and chief operating officer of Field Operations for AT&T Broadband and Internet
Services with responsibility for managing operations of all AT&T's cable
properties. Mr. Vogel also previously served as chief executive officer of
Primestar and Star Choice, and was chief operating officer and later president
of EchoStar Communications. He began his telecommunications career at Jones
Intercable.
MERRILL LYNCH FAIRNESS OPINION
Merrill Lynch has provided the CCI board of directors with its opinion
dated September 7, 2001 to the effect that, as of that date, and based upon the
assumptions made, matters considered and limits of review set forth in its
opinion, (i) the proposed consideration to be paid by CCI and Charter in the
asset purchase transaction with the company and in the preferred stock purchase
transaction with Vulcan, taken together, was fair, from a financial point of
view, preferred to CCI, and (ii) the proposed consideration to be paid by CCI
and Charter in the preferred stock purchase transaction with Vulcan was fair,
from a financial point of view, to CCI when viewed in the context of the asset
purchase transaction and the preferred stock purchase transaction, taken
together.
106
Merrill Lynch's opinion sets forth the assumptions made, matters
considered and certain limitations on the scope of review undertaken by Merrill
Lynch. Each holder of the company's common stock is urged to read Merrill
Lynch's opinion in its entirety. This summary of Merrill Lynch's opinion is
qualified in its entirety by reference to the full text of the opinion attached
as Annex D. Merrill Lynch's opinion was intended for the use and benefit of the
CCI board of directors, was directed only to the fairness, from a financial
point of view, to CCI, of (i) the proposed consideration to be paid by CCI and
Charter in the asset purchase transaction with the company and in the preferred
stock purchase transaction with Vulcan, taken together, and (ii) the proposed
consideration to be paid by CCI and Charter in the preferred stock purchase
transaction with Vulcan, when viewed in the context of the asset purchase
transaction and the preferred stock purchase transaction, taken together.
Merrill Lynch's opinion did not address the merits of the underlying
decision by CCI to engage in the transactions and does not constitute a
recommendation to any stockholder as to how that stockholder should vote on the
proposed transactions or any related matter. The consideration to be paid by CCI
and Charter in the asset purchase transaction and the preferred stock purchase
transaction was determined on the basis of negotiations between CCI, Charter,
the company and Vulcan, as the case may be, and was approved by the CCI board of
directors.
In arriving at its opinion, Merrill Lynch, among other things:
o Reviewed certain publicly available business and financial
information relating to the company and the company's cable modem
business that Merrill Lynch deemed to be relevant;
o Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets,
liabilities and prospects of the company's cable modem business
and the company, as well as the amount and timing of the cost
savings expected to result from the asset purchase, furnished to
Merrill Lynch by the company and CCI, respectively;
o Conducted discussions with members of senior management and
representatives of CCI and the company concerning the matters
described in the previous two bullets, as well as their
respective businesses and prospects before and after giving
effect to the transactions and the cost savings expected to
result from the transactions;
o Reviewed the market prices and valuation multiples for the
company's common stock;
o Reviewed the results of operations of the company's cable modem
business and the company and compared them with those of certain
publicly traded companies that Merrill Lynch deemed to be
relevant;
o Compared the proposed financial terms of the asset purchase
transaction with the financial terms of certain other
transactions that Merrill Lynch deemed to be relevant;
o Participated in certain discussions and negotiations among
representatives of the company and CCI and their financial and
legal advisors regarding the proposed asset purchase from the
company;
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o Reviewed the potential pro forma impact of the transactions on
CCI and Charter and considered the potential adverse impact to
CCI and Charter of customer loss and increased customer churn in
the event the asset purchase transaction is not consummated;
o Reviewed a draft dated September 7, 2001 of the asset purchase
agreement, a draft dated September 7, 2001 of the stock purchase
agreement between Charter and Vulcan, a draft dated September 7,
2001 of the services and management agreement between the company
and CCI and a draft dated September 7, 2001 of the Voting
Agreement among the company, Charter Ventures, Vulcan, and the
directors and former directors of the company listed on the
signature pages thereof;
o Reviewed the terms of our preferred stock as set forth in the
certificate of designations, including, without limitation, the
voting rights and the liquidation preferences of our preferred
stock; and
o Reviewed such other financial studies and analyses and took into
account such other matters as Merrill Lynch deemed necessary,
including Merrill Lynch's assessment of general economic, market
and monetary conditions.
In preparing its opinion, Merrill Lynch assumed and relied on the
accuracy and completeness of all information supplied or otherwise made
available to Merrill Lynch, discussed with or reviewed by or for Merrill Lynch,
or made publicly available. Merrill Lynch did not assume any responsibility for
independently verifying that information or for undertaking an independent
evaluation or appraisal of any of the assets or liabilities of the company's
cable modem business or the company. Merrill Lynch was not furnished with any
such evaluation or appraisal. In addition, Merrill Lynch did not assume any
obligation to conduct any physical inspection of the properties or facilities of
the company's cable modem business or the company. With respect to the financial
forecast information and the cost savings information furnished to or discussed
with Merrill Lynch by CCI or the company, Merrill Lynch assumed that such
information was reasonably prepared and reflected the best currently available
estimates and judgment of CCI's or the company's management as to the expected
future financial performance of CCI or the company, as the case may be, and the
cost savings expected to result from the asset purchase. In preparing its
opinion, Merrill Lynch also considered that the holders of two-thirds of the
outstanding shares of the our preferred stock, voting as a separate class, are
required to approve the asset purchase transaction and that Vulcan owns a
majority of such shares. Merrill Lynch also assumed that the final form of the
asset purchase agreement, the preferred stock purchase agreement, the services
and management agreement and the voting agreement would be substantially similar
to the last drafts reviewed by Merrill Lynch.
Merrill Lynch's opinion was necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of, the date of its opinion.
Merrill Lynch assumed that in the course of obtaining the necessary regulatory
or other consents or approvals (contractual or otherwise) for the transactions,
no restrictions, including any divestiture requirements or amendments or
modifications, would be imposed that would have a material adverse effect on the
contemplated benefits of the transactions. In addition, Merrill Lynch expressed
no opinion as to the prices at which shares of CCI common stock would trade
following the announcement or completion of the transactions, as the case may
be.
Merrill Lynch did not participate in negotiations with respect to the
terms of the preferred stock purchase transaction, and it was not requested to
and did not provide advice concerning the
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structure, the specific amount of the consideration to be paid in the preferred
stock purchase transaction, or any other aspect of the preferred stock purchase
transaction, or to provide services other than the delivery of its opinion. In
addition, in rendering its opinion, Merrill Lynch did not take into
consideration the terms of any earlier transaction between CCI or Charter, on
the one hand, and the company, on the other, including but not limited to, the
terms upon which an affiliate of CCI purchased from the company shares of the
company's preferred stock.
The following is a summary of the material portions of the financial
and comparative analyses performed by Merrill Lynch that were presented to CCI's
board of directors in connection with the opinion delivered to CCI's board of
directors on September 7, 2001. The financial analyses summarized below include
information presented in tabular format. In order to understand fully Merrill
Lynch's financial analyses, the tables must be read together with the text of
each summary. The tables alone do not constitute a complete description of the
financial analyses. Considering the data described below without considering the
full narrative description of the financial analyses, including the
methodologies and assumptions underlying the analyses, could create a misleading
or incomplete view of Merrill Lynch's financial analyses.
Transaction Valuation
Overview of Valuation Methodologies. Merrill Lynch employed several
different valuation methodologies to evaluate the value of the company's assets
to be acquired by CCI. Merrill Lynch noted that where it estimated valuations
for the company as a whole, Merrill Lynch adjusted these figures to arrive at
the value of the company's cable modem assets being acquired by CCI. In making
these adjustments, Merrill Lynch assumed that non-cable modem business lines
have negligible value. Merrill Lynch also noted that the assets Charter is
acquiring from the company account for a portion of the company's subscribers,
and therefore adjusted the implied valuations for the company as a whole.
Stock Trading History. Merrill Lynch reviewed the stock trading
performance of the company's common stock for the period from its initial public
offering on June 4, 1999 through September 6, 2001. In addition, Merrill Lynch
examined, based on the 52-week high and low share price for the period beginning
September 6, 2000 and ending September 6, 2001, the implied aggregate value of
the assets of the company to be acquired by CCI. Based upon the foregoing,
Merrill Lynch estimated the implied value of the company's assets to be acquired
by CCI to range from $0.0 million to $190.9 million.
Comparable Public Company Analysis. Using publicly available
information, including analyst estimates of anticipated revenues, Merrill Lynch
compared the market capitalization of selected publicly traded companies to 2001
revenue estimates. The companies reviewed in the analysis include the following:
Network-Based Internet Service Providers (ISPs):
o AppliedTheory Corporation
o iBasis, Inc.
o Genuity Inc.
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Consumer-Based Internet Service Providers:
o EarthLink, Inc.
o At Home Corporation
o Prodigy Communications Corporation
Digital Subscriber Line (DSL) Companies:
o DSL.net, Inc.
o Network Access Solutions Corporation
The results of this analysis was as follows:
Market Capitalization as a Multiple of 2001 Estimated Revenue
<Table>
<Caption>
High Low Median
---- --- ------
Network-Based ISPs 2.0x 0.4x 0.5x
Consumer-Based ISPs 1.8x 0.3x 1.5x
DSL Companies (1) 2.4x 2.4x 2.4x
</Table>
(1) Data only meaningful for one company.
On the basis of this analysis and using a multiple range of 1.0x to
2.0x, Merrill Lynch estimated the implied value of the company's assets to be
acquired by Charter to range from $29.2 million to $58.4 million.
Comparable Acquisitions Analysis. Merrill Lynch reviewed certain
publicly available information regarding 13 selected business acquisitions since
January 1998 involving internet related businesses. These acquisitions are
referred to as the Comparable Acquisition Transactions. The Comparable
Acquisition Transactions reviewed are as follows:
Acquiror/Target (Announced Date of Transaction)
o RCN Corporation/Erols Internet, Inc. (January 1998)
o Excite, Inc./At Home Corporation (January 1999)
o MindSpring Enterprises, Inc./EarthLink Network, Inc. (September
1999)
o Pacific Century Cyberworks Limited/Softnet Systems, Inc. (October
1999)
o Prodigy Communications Corporation/Flashnet Communications, Inc.
(November 1999)
o NEXTLINK Communications, Inc./Concentric Network Corporation
(January 2000)
o CoreComm Limited/Voyager.net, Inc. (March 2000)
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o Mpower Communications Corp./Primary Networks Holdings (April
2000)
o NTT Communications Corp./Verio Inc. (May 2000)
o EarthLink, Inc./OneMain.com, Inc. (June 2000)
o Hughes Electronics Corporation/Telocity Delaware, Inc. (December
2000)
o NetZero, Inc./Juno Online Services, Inc. (June 2001)
o Cable and Wireless Public Limited Company/Digital Island, Inc.
(June 2001)
With respect to these transactions, Merrill Lynch compared the value of
each such transaction as a multiple of estimated current year revenue of the
acquired company at the time of announcement. The results of these analyses were
a high, low and median multiple of transaction value to estimated current year
revenue of 39.8x, 0.2x and 5.8x, respectively.
On the basis of this analysis and using a multiple range of 2.0x to
5.0x, Merrill Lynch estimated the implied value of the company's assets to be
acquired by Charter to range from $58.4 million to $146.0 million.
Break-Up Valuation. Using publicly available information, Merrill Lynch
performed a break-up valuation analysis. Merrill Lynch estimated the transaction
value to net property plant and equipment, or "Net PP&E," for 12 selected
acquisition transactions announced between August, 1996 and March, 2001. The
acquisition transactions reviewed are as follows:
Acquiror/Target (Announced Date of Transaction)
o WorldCom, Inc./MFS Communications Company Inc. (August 1996)
o Brooks Fiber Properties, Inc./Metro Access Networks, Inc. (March
1997)
o WorldCom, Inc./Brooks Fiber Properties, Inc. (September 1997)
o AT&T Corp./Teleport Communications Group Inc. (January 1998)
o McLeodUSA Incorporated/Ovation Communications, Inc. (January
1999)
o AT&T Canada Inc./MetroNet Communications Corp. (March 1999)
o Choice One Communications Inc./US Xchange, L.L.C. (May 2000)
o Time Warner Telecom Inc./GST Telecommunications, Inc. (August
2000)
o WorldCom, Inc./Intermedia Communications Inc. (September 2000)
o McLeodUSA Incorporated/CapRock Communications Corp. (October
2000)
o GT Group Telecom Inc./C1 Communications Inc. (October 2000)
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o AT&T Corp./NorthPoint Communications Group, Inc. (March 2001)
With respect to these transactions, Merrill Lynch compared the value of
each such transaction as a multiple of Net PP&E of the acquired assets at the
time of announcement. The results of this analysis were a high, low and median
multiple of transaction value to Net PP&E of 8.3x, 0.3x and 3.4x, respectively.
On the basis of this analysis and using a multiple range of 1.0x to
3.0x, Merrill Lynch estimated the implied value for the company's assets to be
acquired by Charter to range from $47.9 million to $143.6 million.
Discounted Cash Flow Analysis. Merrill Lynch performed a discounted
cash flow, or "DCF," analysis for the company using projections for the years
2001 through 2010, provided by the management of the company, which assumed that
the company did not enter into new lines of business.
The DCF analysis for the company's assets utilized discount rates
ranging from 27.0% to 33.0% (based on an estimated weighted average cost of
capital analysis for the company) and was comprised of the sum of the present
values of:
1. the projected cash flows for the years 2001 through 2010; and
2. the 2010 terminal value based upon a range of multiples of
estimated 2010 EBITDA from 8.0x to 9.0x.
Based upon the foregoing, Merrill Lynch estimated the implied value for
the company's assets to be acquired by Charter to range from $67.0 million to
$136.2 million.
Merrill Lynch also performed a DCF analysis for the company's assets to
be acquired by Charter assuming such assets were owned by Charter. This analysis
utilized projections for the years 2001 through 2008 provided by the management
of CCI and the same discount rates and terminal multiples described above. Based
on the foregoing, Merrill Lynch estimated the implied value for the company's
assets to be acquired by Charter to range from $81.2 million to $143.1 million.
Cost-to-Build Analysis. Using capital expenditure and other cost
estimates provided by the management of CCI for the period from 2001 to 2006,
Merrill Lynch estimated the present value of the cost to Charter to build the
assets that Charter is purchasing from the company. Based on these estimates and
discount rates for Charter ranging from 10.0% to 15.0%, Merrill Lynch estimated
the present value of building assets similar to those to be acquired from the
company to range from $59.9 million to $88.4 million.
Merrill Lynch noted that its cost-to-build analysis did not include
such unquantifiable costs as senior management time and possible interruption of
service and therefore understates the true cost of replicating the assets to be
acquired from the company.
Series D Preferred Stock Analysis. As part of the transaction, Charter
agreed to purchase from Vulcan 38,000 shares of the company's preferred stock.
Merrill Lynch noted that in estimating the value ranges for the 38,000 shares of
the company's preferred stock as described below, the lower-end of the implied
value ranges were based upon the implied values for the company's common stock
(treating the company's preferred stock on an as-converted basis), and the
upper-end
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of the implied value ranges included the estimated theoretical value of the
optionality and liquidation preference inherent in the company's preferred
stock.
Stock Trading History. Merrill Lynch compared, for the period beginning
September 6, 2000 and ending September 6, 2001, the 52 week high of $5.38 per
share and low of $0.26 per share price of the company's common stock to estimate
a range of implied values for the company's preferred stock. Based upon the
foregoing, Merrill Lynch estimated the implied value of the company's preferred
stock to be acquired from Vulcan to range from $2.0 million to $40.9 million
Current Share Price Analysis. Merrill Lynch utilized the closing price
on September 6, 2001 of $0.26 per share of the company's common stock to
estimate a range of implied values for the company's preferred stock. Based upon
the foregoing, Merrill Lynch estimated the implied value of our preferred stock
to be acquired from Vulcan to range from $2.0 million to $3.0 million.
Comparable Public Company Analysis. Using the same group of companies
and multiple ranges described above in the Comparable Public Company Analysis,
Merrill Lynch estimated a range of implied values for the company's preferred
stock. Based upon the foregoing, Merrill Lynch estimated the implied value of
the company's preferred stock to be acquired from Vulcan to range from $5.2
million to $9.5 million.
Comparable Acquisition Analysis. Using the same group of acquisitions
and multiple ranges described above in the Comparable Acquisition Analysis,
Merrill Lynch estimated a range of implied values for the company's preferred
stock. Based upon the foregoing, Merrill Lynch estimated the implied value of
the company's preferred stock to be acquired from Vulcan to range from $8.7
million to $19.9 million.
Discounted Cash Flow Analysis. Using the same company management
projections, discount rates and terminal multiples described above in the DCF
Analysis, Merrill Lynch estimated a range of implied values for the company's
preferred stock. Based upon the foregoing, Merrill Lynch estimated the implied
value of the company's preferred stock to be acquired from Vulcan to range from
$10.6 million to $19.9 million.
Estimated Liquidation Proceeds Analysis. Using estimates provided by
the management of the company and CCI, Merrill Lynch estimated the range of
implied values for the company's preferred stock based on the estimated
liquidation of the company's remaining assets following the sale of the
company's assets to Charter. Merrill Lynch assumed a cash distribution is made
following the satisfaction of net liabilities and payment of shutdown costs,
including estimated severance costs, contract termination fees and other costs
of ceasing operations. Merrill Lynch also assumed that the holders of the
company's preferred stock would receive per share proceeds equal to holders of
the company's common stock. Based upon the foregoing, Merrill Lynch estimated
the implied value of the company's preferred stock to be acquired from Vulcan to
range from $3.9 million to $6.8 million.
Liquidation Value Analysis. Using the face value of the company's
preferred stock, Merrill Lynch estimated a range of implied values for the
company's preferred stock using 50% of the face value of the company's preferred
stock as the low end of the range and 100% of the face value of the company's
preferred stock as the high end of the range. Based upon the foregoing, Merrill
Lynch estimated the implied value of the company's preferred stock to be
acquired from Vulcan to range from $19.0 million to $38.0 million.
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The summary of analyses performed by Merrill Lynch set forth above does
not purport to be a complete description of the analyses performed by Merrill
Lynch in arriving at its opinion. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial or summary
description. Accordingly, Merrill Lynch believes that its analyses must be
considered as a whole and that selecting portions of its analyses and the
factors considered by Merrill Lynch, without considering all analyses and
factors, could create an incomplete view of the processes underlying the Merrill
Lynch opinion. Merrill Lynch did not assign relative weights to any of its
analyses in preparing its opinion. The matters considered by Merrill Lynch in
its analyses were based on numerous macroeconomic, operating and financial
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond CCI's and Merrill Lynch's
control and involve the application of complex methodologies and educated
judgment. Any estimates contained in the Merrill Lynch analyses are not
necessarily indicative of actual past or future results or values, which may be
significantly more or less favorable than the estimates. Estimated values do not
purport to be appraisals and do not necessarily reflect the prices at which
businesses or companies may be sold in the future. The estimates are inherently
subject to uncertainty.
No company used as a comparison in the analyses described above is
identical to the company and none of the comparable transactions utilized as a
comparison is identical to the proposed transactions. In addition, various
analyses performed by Merrill Lynch incorporate projections prepared by research
analysts using only publicly available information. These estimates may or may
not prove to be accurate. An analysis of publicly traded comparable companies is
not mathematical; rather it involves complex considerations and judgments
concerning differences in financial and operating characteristics of the
comparable companies and other factors that could affect the public trading
value of the comparable companies to which they are being compared.
The CCI board of directors selected Merrill Lynch to act as its
financial advisor because of Merrill Lynch's reputation as an internationally
recognized investment banking firm with substantial experience in transactions
similar to the transactions and because Merrill Lynch is familiar with CCI and
its businesses. As part of Merrill Lynch's investment banking business, Merrill
Lynch is continually engaged in the valuation of businesses and their securities
in connection with mergers and acquisitions, leveraged buyouts, negotiated
underwritings, secondary distributions of listed and unlisted securities and
private placements.
Pursuant to the terms of a letter agreement between CCI and Merrill
Lynch dated as of May 1, 2001, CCI agreed to pay Merrill Lynch a fee in the
amount of $1 million. CCI further agreed to reimburse Merrill Lynch for its
reasonable out-of-pocket expenses incurred in connection with its engagement
(including certain fees and disbursements of legal counsel) and to indemnify
Merrill Lynch and related parties from and against specified liabilities,
including liabilities under the federal securities laws, arising out of its
engagement.
Merrill Lynch has, in the past, provided financial advisory and
financing services to CCI and/or its affiliates and has received, and may
receive additional fees for the rendering of those services. In addition, in the
ordinary course of Merrill Lynch's business, Merrill Lynch and its affiliates
may actively trade securities of CCI and certain of its direct and indirect
subsidiaries, as well as the company's common stock and other securities of the
company, for their own accounts and for the accounts of customers. Accordingly,
Merrill Lynch and its affiliates may at any time hold a long or short position
in such securities.
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The full text of Merrill Lynch's presentation to the CCI board of
directors on September 7, 2001 has been included as Exhibit C(6) to the Schedule
13E-3 filed with the SEC by Charter and the company in connection with the
transaction, and the foregoing summary is qualified by reference to this
exhibit.
OUR AGREEMENTS WITH CCI, CHARTER, CHARTER VENTURES AND VULCAN
We have entered into a number of agreements with CCI, Charter, Charter
Ventures and/or Vulcan. Certain of these agreements relate to the proposed asset
sale, including the asset purchase agreement, the management agreement, the
voting agreement, the license agreement, the billing letter agreement and the
termination agreement. In connection with the asset purchase agreement, Charter,
Vulcan and our directors have entered into an agreement with us to vote all of
their shares in favor of the sale of substantially all of our assets to Charter.
This assures that we will obtain the vote required under Delaware law and our
organizational documents. In addition, as a condition to the closing of the
asset sale, the asset purchase agreement requires the approval of a majority of
the votes actually cast at the Special Meeting by holders of our common stock
other than Charter, Vulcan, their respective affiliates and certain of our
executive officers. For a more detailed description of the agreements we have
entered into with CCI, Charter, Charter Ventures and/or Vulcan that relate to
the asset sale, see page 17.
In addition to the agreements related to the asset sale, we are party
to certain other agreements with CCI, Charter, Charter Ventures and/or Vulcan as
described below.
PREFERRED STOCK PURCHASE AGREEMENT
In October 2000, we entered into a preferred stock purchase agreement
with Vulcan and Charter Ventures for the sale of 75,000 shares of our Series D
Senior Convertible Preferred Stock. Vulcan purchased 38,000 shares for a
purchase price of $38.0 million and Charter Ventures purchased 37,000 shares for
a purchase price of $37.0 million. Each share of preferred stock has a
liquidation preference of $1,000 plus the amount of all declared but unpaid
dividends on the preferred stock. Each share of preferred stock may be converted
into that number of shares of our common stock as calculated by dividing the
liquidation preference by the conversion price per share. The conversion price
per share is subject to adjustment in the event of dividends, distributions or
certain other corporate events. With respect to matters submitted to a vote of
the stockholders, the holders of the preferred stock have the right to one vote
for each share of common stock into which their preferred stock may be
converted. Under the preferred stock purchase agreement and related documents,
Charter Ventures and Vulcan obtained various rights, including rights of first
refusal on subsequent issuances, rights to technology products and services on a
most favored nation basis and certain registration rights. In addition, so long
as Charter Ventures and Vulcan beneficially own a certain percentage of the
preferred stock and the common stock, they have the right to elect, voting as a
separate class, that number of directors equal to the product of the total
number of directors on our board of directors multiplied by the percentage of
the common stock equivalents owned by Charter Ventures and Vulcan collectively.
On July 30, 2001, the three members of our board elected by Charter
Ventures and Vulcan (Messrs. Kent, Silva and Savoy) resigned. To date, Charter
Ventures and Vulcan have not sought to elect replacements to these vacancies. If
the asset sale is not consummated, Charter Ventures and Vulcan may seek to elect
such replacements as is their right under the preferred stock purchase
agreement. If the asset sale is consummated, the rights associated with the
preferred stock will
115
terminate upon the cancellation of the preferred shares as provided in the asset
purchase agreement. For additional details about the asset purchase agreement,
see page 17.
COMMON STOCK PURCHASE AGREEMENT
We and Vulcan have entered into a stock purchase agreement, dated as of
November 1, 2001, pursuant to which we have agreed to acquire 20,222,139 shares
of our common stock from Vulcan for an aggregate purchase price of $4,448,870,
or $.22 per share. This purchase price represents a discount of 26% to our
common stock's 20-day trailing average closing price as of October 26, 2001 and
a discount of 77% of 81% to our estimated per share net cash value after taking
into account the accretion in value from the purchase of our common stock from
Vulcan. The shares of common stock subject to this agreement represent all of
the shares of common stock held by Vulcan. In addition, we have confirmed with
Vulcan that our prior discussions concerning our possible acquisitions of an
ownership interest in Digeo Broadband, Inc., and the provision of services by us
to Digeo, had never been finalized. We have also agreed to release each other
from any other rights or obligations relating to Digeo. It is a condition
precedent to the closing of the purchase of our common stock from Vulcan that
the transactions contemplated by the asset purchase agreement with Charter have
been consummated. Furthermore, the stock purchase agreement contemplates that
the closing of the stock purchase agreement will occur concurrently with the
closing of the asset purchase agreement, but in no event later than March 31,
2002.
OPERATING AGREEMENTS
We have entered into certain commercial agreements with CCI (which were
assigned to Charter) and Vulcan. These agreements, and the assets we employ to
fulfill our obligations under these agreements, constitute the assets Charter
proposes to acquire pursuant to the asset purchase agreement. Accordingly, we
have entered into an agreement with Charter, Vulcan and Marcus Cable, Inc., an
affiliate of Charter, pursuant to which each of these agreements will terminate
as of the closing of the asset purchase agreement. Additionally our obligations
under these agreements is subject to the terms of the management agreement we
entered into with CCI as part of the transactions contemplated by the asset
purchase agreement. For a description of the management agreement, see page 25.
In November 1998, we entered into a systems access and investment
agreement with CCI (which was assigned to Charter) and Vulcan, a programming
content agreement with Vulcan and related network services agreement with CCI
(which was assigned to Charter). Under the agreements, we agreed to pay Charter
50% of our gross revenues for cable modem access services provided in Charter
cable systems, 15% of gross revenues for dial up access services and 50% of
gross revenues for all other optional services. In addition, if we sell
equipment to a subscriber, we pay Charter 50% of the gross profit we receive
from the sale. In 2000, we paid Charter $2.6 million under these agreements.
On May 12, 2000, we entered into a separate agreement with CCI, which
was assigned by CCI to Charter on August 1, 2000. Under the agreement, homes
passed by Charter's cable television systems will be committed to us for which
we provide residential Tier 2 and above technical support and network operations
center support. Such systems will be in locations where we have launched or
intend to launch cable modem-based Internet access to residential customers.
Tier 2 support is customer service support beyond the initial screening of a
problem.
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Charter has agreed to commit a total of 5,000,000 homes passed,
including all homes passed in systems previously committed by Charter, to us
(other than full turnkey systems), on or prior to May 12, 2003. Charter may also
commit additional homes passed in excess of the initial 5,000,000. With respect
to each system launched or intended to be launched, Charter will pay a per
customer fee to us according to agreed pricing terms. In addition, Charter will
also compensate us for services that exceed certain minimum thresholds.
The agreement governing the services to be provided by us has a term of
five years starting in May 2000. Charter has the option to renew the agreement
for additional successive five-year terms on similar terms. On each renewal
date, we will issue Charter an additional warrant for each renewal term. These
renewal warrants will grant Charter the right to purchase additional shares of
common stock at a price of $10.00 per share. The number of shares of common
stock subject to a renewal warrant will be determined based upon 0.50 shares of
common stock for every home passed in each system committed to us during the
initial five-year term and each five-year renewal term.
Either party may terminate the agreement, in whole or in part, if the
other party defaults, becomes insolvent or files for bankruptcy. Charter may
terminate the agreement if we merge with another party or experience a change of
control. If Charter terminates the agreement, it may, in certain circumstances,
be required to pay a termination fee.
In 2000, we received payments totaling $1.0 million under that
agreement. With respect to each home passed, launched or intended to be launched
on or before the second anniversary date of the May 2000 network services
agreement, we will pay Charter, at Charter's option, a launch fee of $3.00 per
home passed committed. In 2000, we paid $3.8 million in launch fees to Charter.
Charter, as the assignee of Vulcan, now holds warrants that were
amended and restated on May 12, 2000, giving Charter the right to purchase up to
12,000,000 shares of our common stock at an exercise price of $3.23 per share. A
portion of the warrants may be earned under the November 1998 network services
agreement and a portion relates to warrants that may be earned under the May
2000 network services agreement. Warrants earned under the 1998 network services
agreement become vested at the time systems are committed by us and are based
upon the number of homes passed. Warrants under these agreements can only be
earned until July 31, 2003, are earned at the rate of 1.55 shares of common
stock for each home passed in excess of 750,000, and are exercisable until May
25, 2006. Such warrants may be forfeited in certain circumstances, generally if
we withdraw a committed system. As of December 31, 2000, Charter had earned
1,932,931 warrants under the agreements described above.
Warrants that may be earned under the May 2000 network services
agreement become vested at the time Charter authorizes us to proceed with
respect to a system, and will be based upon the number of homes passed in such
system. With respect to the initial total 5,000,000 homes passed, the warrant
provides that Charter will have the right to purchase 0.775 shares of common
stock for every home passed. With respect to any additional homes passed in
excess of 5,000,000, the warrant provides that Charter will have the right to
purchase 1.55 shares of common stock for every home passed. Warrants earned
under the agreement are exercisable until 7 1/2 years from the date they are
earned. Such warrants are generally not subject to forfeiture, even if the
agreement is terminated. We agreed to increase the number of shares of common
stock subject to the amended and restated warrants, upon Charter's request, if
the number of warrants earned exceeds 11,500,000. We also granted Charter
certain registration rights with respect to shares of common stock held by
Charter and its direct and indirect subsidiaries, including shares of common
stock issuable upon exercise of the amended and restated warrant.
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The agreement governing the services to be provided by us has a term of
five years starting in May 2000. Charter has the option to renew the agreement
for additional successive five-year terms on similar terms. On each renewal
date, we will issue Charter an additional warrant for each renewal term. These
renewal warrants will grant Charter the right to purchase additional shares of
common stock at a price of $10.00 per share. The number of shares of common
stock subject to a renewal warrant will be determined based upon 0.50 shares of
common stock for every home passed in each system committed to us during the
initial five-year term and each five-year renewal term.
Either party may terminate the agreement, in whole or in part, if the
other party defaults, becomes insolvent or files for bankruptcy. Charter may
terminate the agreement if we merge with another party or experience a change of
control. If Charter terminates the agreement, it may, in certain, circumstances,
be required to pay a termination fee.
Pursuant to the programming content agreement with Vulcan, Vulcan has
the right to require us to carry, on an exclusive basis in all cable systems we
serve, the content it designates. Vulcan content may include start-up and
related web pages, electronic programming guides, other multimedia information
and telephony services. We will not share in any revenues Vulcan may earn
through the content or telephony services it provides. Vulcan has the right to
prohibit us from providing content or telephony services that compete with
Vulcan content. 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.
Vulcan owns 20,222,139 shares of common stock and 38,000 shares of our
preferred stock. Charter Ventures owns 37,000 shares of our preferred stock. If
all shares of preferred stock owned by affiliates of Mr. Allen were converted
into common stock, then Mr. Allen, through such affiliates, would beneficially
own 47.8% of our common stock.
Each of these agreements will terminate as of the closing of the asset
sale. For a more detailed description of the asset purchase agreement and the
related termination agreement, see pages 17 and 30.
STOCKHOLDER PROPOSALS
We currently expect to hold an annual meeting of stockholders for the
year 2002. We will publicly disclose the date of the annual meeting as soon as
we make a decision regarding the date of such meeting and our anticipated date
of mailing. In order for stockholder proposals otherwise satisfying the
eligibility requirements of Rule 14a-8 under the Securities Exchange Act, to be
considered for inclusion in our proxy statement for the annual meeting, the
proposals must be received at our principal executive office, High Speed Access
Corp., 10901 West Toller Drive, Littleton, Colorado 80127, Attention: Charles E.
Richardson III, Vice President and Secretary, a reasonable time before we begin
to print and mail our proxy materials.
In addition, if a stockholder desires to bring business at the annual
meeting that is or is not the subject of a proposal timely submitted for
inclusion in our proxy statement, written notice of such business, as prescribed
in the bylaws, must be received by our secretary not earlier than 120 days
before the annual meeting and not later than the later of 90 days before the
annual meeting or the tenth day following the first public announcement of the
date of mailing of the notice of the annual meeting. For additional
requirements, a stockholder may refer to our bylaws, a copy of which may be
obtained from our secretary. If we do not receive timely notice pursuant to our
bylaws, the proposal can be excluded from consideration at the meeting.
118
INDEPENDENT ACCOUNTANTS
Our board has selected PricewaterhouseCoopers LLP to serve as our
independent accountants for the year ended December 31, 2001. Representatives of
PricewaterhouseCoopers are expected to be present at the Special Meeting with an
opportunity to make a statement if they desire to do so, and will be available
to respond to appropriate questions.
The prospective financial information included in this proxy statement
has been prepared by, and is the responsibility of, the Company's management.
PricewaterhouseCoopers LLP has neither examined nor compiled the accompanying
prospective financial information and, accordingly, PricewaterhouseCoopers LLP
does not express an opinion or any other form of assurance with respect thereto.
The PricewaterhouseCoopers LLP report included in this proxy statement relates
to the Company's historical financial information. It does not extend to the
prospective financial information and should not be read to do so. The
prospective financial information was not prepared with a view toward compliance
with published guidelines of the Securities and Exchange Commission or the
guidelines established by the American Institute of Certified Public Accountants
for preparation and presentation of prospective financial information.
OTHER MATTERS
Our board knows of no other business to be presented at the Special
Meeting, but if any other matters should properly come before the Special
Meeting, it is intended that the persons named in the accompanying proxy card
will vote the same in accordance with their own judgment and discretion, and
authority to do so is included in the proxy.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement contains forward-looking statements with respect
to our plans and objectives, distributions resulting from the asset sale and
other matters. Those statements include statements regarding our intent, belief,
or current expectations, as well as the assumptions on which such statements are
based. Such forward-looking statements are not guarantees of future performance
and involve risks and uncertainties, and actual results may differ materially
from those contemplated by such forward-looking statements. Important factors
currently known to us that could cause the results to differ materially from
those in forward-looking statements include, but are not limited to: (i) general
economic conditions, (ii) the fees and expenses associated with consummating the
transaction with Charter, (iii) the amount of our liabilities which must be
satisfied or reserved against in connection with the winding down of our
operations (other than our international business), (iv) the amount and nature
of any unknown or contingent liabilities, (v) the market value of our remaining
assets and the time required to sell such assets (other than our international
business) and (vi) the continued viability of our international business on a
stand-alone basis.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly, and current reports, proxy statements, and
other information with the commission. You may read and copy any reports,
statements, or other information that we file at the commission's public
reference rooms in Washington, D.C., New York, New York, and Chicago, Illinois.
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms. Our public filings are also available to the public from
commercial document retrieval services and at the Internet World Wide Web site
maintained by the commission at http:/www.sec.gov. Reports, proxy statements,
and other information concerning us also may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, NW, Washington,
D.C. 20006.
119
Stockholders are urged to sign the enclosed proxy, which is solicited
on behalf of the board of directors, and to return it at once in the enclosed
envelope.
By order of the Board of Directors,
/s/ CHARLES E. RICHARDSON, III
Charles E. Richardson, III
Vice President and Secretary
Littleton, Colorado
November , 2001
120
INDEX TO FINANCIAL STATEMENTS
<Table>
<Caption>
PAGE
----
UNAUDITED
Unaudited Pro Forma Condensed Consolidated Financial Information............................. F-2
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information.................... F-6
Unaudited Financial Statements of Business Disposition....................................... F-8
Notes to Unaudited Financial Statements of Business Disposition ............................. F-12
AUDITED
Report of Independent Accountants............................................................ F-17
Consolidated Balance Sheets as of December 31, 2000 and 1999................................. F-18
Consolidated Statements of Operations for the years ended December 31, 2000 and 1999
and the period April 3,1998 (Inception) to December 31, 1998................................. F-19
Consolidated Statements of Comprehensive Loss for the years ended December 31, 2000
and 1999 and the period April 3,1998 (Inception) to December 31, 1998........................ F-19
Consolidated Statement of Stockholders' Equity (Deficit) for the period April 3, 1998
(Inception) to December 31, 1998 and the years ended December 31, 1999 and 2000.............. F-20
Consolidated Statements of Cash Flows for the years ended December 31, 2000 and 1999
and the period April 3,1998 (Inception) to December 31, 1998................................. F-21
Notes to Consolidated Financial Statements................................................... F-22
UNAUDITED
Condensed Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000.............. F-36
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 2001 and 2000....................................................................... F-37
Condensed Consolidated Statements of Cash Flows for the six months ended June 30,
2001 and 2000................................................................................ F-38
Notes to Condensed Consolidated Financial Statements......................................... F-39
</Table>
F-1
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
SALE OF CHARTER CABLE MODEM BUSINESS
On September 28, 2001 the Company entered into an Asset Purchase
Agreement (the "Agreement") with Charter Communications Inc. ("Charter") for the
sale of all of the assets used by the Company to serve Charter's high-speed data
customers. At the closing of the transaction contemplated by the Agreement,
which is subject to the receipt of the approval of the Company's shareholders,
(i) Charter will pay the Company $81.1 million in cash, subject to certain
closing adjustments and indemnity reserves, and the assumption of certain
liabilities related to the purchased assets, (ii) all 75,000 shares of the
Company's Series D Senior Convertible Preferred Stock currently held by Charter
and its affiliate, Vulcan Ventures Incorporated ("Vulcan"), will be canceled,
and (iii) all warrants currently held by Charter to purchase shares of the
Company's common stock will also be canceled.
The following unaudited pro forma condensed consolidated balance sheet
as of June 30, 2001 and the unaudited pro forma condensed consolidated
statements of operations for the six months ended June 30, 2001 and the year
ended December 31, 2000 illustrate (i) the effect of the sale as if it had been
consummated on June 30, 2001 for the unaudited pro forma balance sheet, (ii) the
effect of the sale as if it had been consummated on January 1, 2000 for the
unaudited pro forma condensed consolidated statements of operations for the six
months ended June 30, 2001 and the year ended December 31, 2000. The "as
adjusted" amounts in the following statements give effect to (i) the planned
curtailment of other activities including the exit of non-Charter system
agreements, the disposal of Digital Chainsaw, and the discontinuance of efforts
to enter the DSL market, and (ii) the purchase of 20,22,139 shares of our common
stock from Vulcan.
The unaudited pro forma condensed consolidated financial information
should be read in conjunction with our historical consolidated financial
statements and accompanying notes. The unaudited pro forma condensed
consolidated financial information is presented for comparative purposes only
and is not intended to be indicative of actual consolidated results of
operations or consolidated financial position that would have been achieved had
the sale been consummated as of the dates indicated above nor do they purport to
indicate results which may be attained in the future.
F-2
HIGH SPEED ACCESS CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
ADJUSTMENTS
HIGH SPEED RELATING TO
ACCESS CORP. BUSINESS BUSINESS
(HISTORICAL) DISPOSITION DISPOSITION PRO FORMA
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 25,977 $ 69,196 (a) $ (12,768)(c) $ 82,405
Short-term investments 30,489 30,489
Restricted cash 2,404 2,404
Accounts receivable, net 4,561 (2,203)(a) 2,358
Indemnity Holdback - Charter -- 4,750 (a) -- 4,750
Prepaid expenses and other current assets 5,747 (2,487)(a) 3,260
------------ ------------ ------------ ------------
Total current assets 69,178 69,256 (12,768) 125,666
Property, equipment and improvements, net 55,662 (30,385)(a) 25,277
Intangible assets, net 3,444 3,444
Deferred distribution agreement costs, net 9,724 (9,724)(a) --
Other non-current assets 6,171 (5,698)(a) 473
------------ ------------ ------------ ------------
Total assets $ 144,179 $ 23,449 $ (12,768) $ 154,860
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,836 $ 7,836
Accrued compensation and related expenses 5,843 $ (943)(a) 4,900
Other current liabilities 10,777 10,777
Long-term debt, current portion 2,345 $ (2,336)(c) 9
Capital lease obligations, current portion 8,223 (1,762)(a) (5,014)(c) 1,447
------------ ------------ ------------ ------------
Total current liabilities 35,024 (2,705) (7,350) 24,969
Long-term debt 1,072 (1,065)(c) 7
Capital lease obligations 7,333 (1,911)(a) (2,976)(c) 2,446
Other liabilities 617 617
------------ ------------ ------------ ------------
Total liabilities 44,046 (4,616) (11,391) 28,039
------------ ------------ ------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value 1 (1)(d) --
Common stock, $.01 par value 588 588
Additional paid-in-capital 742,063 (3,662)(d) 738,401
Treasury stock, at cost -- (3,663)(d) 3,663 (d) --
Deferred compensation (2,296) (2,296)
Accumulated deficit (640,616) 31,728 (b) (1,377)(c) (610,265)
Accumulated other comprehensive income 393 393
------------ ------------ ------------ ------------
Total stockholders' equity 100,133 28,065 (1,377) 126,821
------------ ------------ ------------ ------------
Total liabilities and stockholders' equity $ 144,179 $ 23,449 $ (12,768) $ 154,860
============ ============ ============ ============
</Table>
<Table>
<Caption>
ADJUSTMENTS
RELATING TO PURCHASE OF
OTHER VULCAN
CURTAILMENT COMMON
ACTIVITIES SHARES AS ADJUSTED
------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ (4,449)(f) $ 77,956
Short-term investments 30,489
Restricted cash 2,404
Accounts receivable, net 2,358
Indemnity Holdback - Charter 4,750
Prepaid expenses and other current assets 3,260
------------ ------------ ------------
Total current assets (4,449) 121,217
Property, equipment and improvements, net $ (23,627)(e) 1,650
Intangible assets, net (3,444)(e) --
Deferred distribution agreement costs, net --
Other non-current assets 473
------------ ------------ ------------
Total assets $ (27,071) $ (4,449) $ 123,340
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,836
Accrued compensation and related expenses $ 3,189 (e) 8,089
Other current liabilities 4,021 (e) 14,798
Long-term debt, current portion 9
Capital lease obligations, current portion 1,447
------------ ------------ ------------
Total current liabilities 7,210 32,179
Long-term debt 7
Capital lease obligations 2,446
Other liabilities 617
------------ ------------ ------------
Total liabilities 7,210 35,249
------------ ------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value --
Common stock, $.01 par value $ (202)(f) 386
Additional paid-in-capital 738,401
Treasury stock, at cost (4,247)(f) (4,247)
Deferred compensation (2,296)
Accumulated deficit (34,281)(e) (644,546)
Accumulated other comprehensive income 393
------------ ------------ ------------
Total stockholders' equity (34,281) (4,449) 88,091
------------ ------------ ------------
Total liabilities and stockholders' equity $ (27,071) $ (4,449) $ 123,340
============ ============ ============
</Table>
The accompanying notes are an integral part of these pro forma
condensed consolidated financial statements.
F-3
HIGH SPEED ACCESS CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
UNAUDITED ADJUSTMENTS
INCOME ADJUSTMENTS RELATING TO
HIGH SPEED STATEMENT OF RELATING TO OTHER
ACCESS CORP. BUSINESS BUSINESS CURTAILMENT
HISTORICAL DISPOSITION DISPOSITION PRO FORMA ACTIVITIES AS ADJUSTED
------------ ------------ ----------- --------- ----------- -----------
Net revenue $ 16,304 $ 9,684 $ 6,620 $ 4,543(b) $ 2,077
------------ ------------ ----------- --------- ----------- -----------
Costs and expenses:
Operating 46,147 22,051 24,096 23,073(b) 1,023
Engineering 12,840 7,240 5,600 5,180(b) 420
Sales and marketing 7,440 3,887 3,553 2,978(b) 575
General and administrative:
Amortization of distribution
agreement costs 4,679 1,455 3,224 3,224(b) --
Other general and
administrative expenses 13,669 8,434 5,235 2,618(b) 2,617
------------ ------------ ----------- --------- ----------- -----------
Total general and
administrative 18,348 9,889 8,459 5,842 2,617
------------ ------------ ----------- --------- ----------- -----------
Total costs and expenses 84,775 43,067 41,708 37,073 4,635
------------ ------------ ----------- --------- ----------- -----------
Loss from operations (68,471) (33,383) (35,088) (32,530) (2,558)
Interest income 2,299 2,299 2,299
Interest expense (1,227) (665) $ (414) (148) (148)
------------ ------------ ----------- --------- ----------- -----------
Net loss $ (67,399) $ (34,048) $ (414) $ (32,937) $ (32,530) $ (407)
============ ============ =========== ========= =========== ===========
Basic and diluted net loss per
share applicable to common
stockholders $ (1.15) $ (0.56) $ (0.01)
============ ========= ===========
Shares used in the calculation of
basic and diluted net loss per
share applicable to common
stockholders 58,726,179 58,726,179 38,504,040(f)
</Table>
The accompanying notes are an integral part of these pro forma
condensed consolidated financial statements.
F-4
HIGH SPEED ACCESS CORP.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
UNAUDITED ADJUSTMENTS
INCOME ADJUSTMENTS RELATING TO
HIGH SPEED STATEMENT OF RELATING TO OTHER
ACCESS CORP. BUSINESS BUSINESS CURTAILMENT
HISTORICAL DISPOSITION DISPOSITION PRO FORMA ACTIVITIES AS ADJUSTED
------------ ------------ ------------ ------------ ------------ -----------
Net revenue $ 14,200 $ 7,887 $ 6,313 $ 6,313(b)
------------ ------------ ------------ ------------ ------------ -----------
Costs and expenses:
Operating 70,289 32,781 37,508 37,508(b)
Engineering 23,960 12,351 11,609 10,769(b) $ 840
Sales and marketing 25,147 13,958 11,189 10,022(b) 1,167
General and administrative:
Amortization of distribution
agreement costs 2,674 1,578 1,096 1,096(b)
Write-down of intangible assets 22,444 22,444 22,444(b)
Other general and
administrative expenses 25,309 15,197 10,112 4,550(b) 5,562
------------ ------------ ------------ ------------ ------------ -----------
Total general and
administrative 50,427 16,775 33,652 28,090 5,562
------------ ------------ ------------ ------------ ------------ -----------
Total costs and expenses 169,823 75,865 93,958 86,389 7,569
------------ ------------ ------------ ------------ ------------ -----------
Loss from operations (155,623) (67,978) (87,645) (80,076) (7,569)
------------ ------------ ------------ ------------ ------------ -----------
Interest income 7,371 7,371 7,371
Interest expense (2,158) (1,015) $ (907)(a) (236) (236)
------------ ------------ ------------ ------------ ------------ -----------
Net loss $ (150,410) $ (68,993) $ (907) $ (80,510) $ (80,076) $ (434)
============ ============ ============ ============ ============ ===========
Basic and diluted net loss per
share applicable to common
stockholders $ (2.67) $ (1.43) $ (0.01)
============ ============ ===========
Shares used in the calculation of
basic and diluted net loss per
share applicable to common
stockholders 56,347,891 56,347,891 36,125,752(f)
</Table>
The accompanying notes are an integral part of these pro forma
condensed consolidated financial statements.
F-5
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Pro forma adjustments giving effect to the sale of the assets of the
Charter cable modem business in the unaudited pro forma condensed consolidated
balance sheet at June 30, 2001 reflect the following:
a. Reflects the net cash received from Charter and the
elimination of the assets sold to and the liabilities assumed
by Charter as a result of the Agreement. The cash received is
calculated as follows at June 30, 2001 (in millions):
<Table>
Cash purchase price per Agreement $ 81.1
------
Adjustments:
Current assets to be acquired by Charter, net
of payments due under Sections 4.02(a)
and 4.03(b) of the Agreement 2.5
Capital leases and other current liabilities
assumed by Charter (4.6)
Indemnity holdbacks (4.8)
Transaction expenses (5.0)
------
Total adjustments (11.9)
------
Net cash proceeds from sale to Charter $ 69.2
======
</Table>
Actual cash proceeds from the sale will vary from the amount
calculated as of June 30, 2001 above.
b. Reflects the gain on the sale of assets sold to and the
liabilities assumed by Charter. The gain on the sale of assets
will change to the extent that the estimated cash proceeds
from the sale and the amount of the liabilities assumed by
Charter change.
<Table>
Net cash proceeds from sale to Charter $ 69.2
Fair value of preferred stock 3.7
Liabilities assumed by Charter 4.6
Book value of current assets acquired by Charter (50.6)
Indemnity holdbacks 4.8
------
Gain on Sale $ 31.7
======
</Table>
Capital tax losses brought forward will be utilized to offset
the capital tax gain that results from this transaction.
c. Reflects the use of cash to pay off certain outstanding
capital leases and debt as of June 30, 2001, which will result
in the recognition of a loss on the extinguishment of these
liabilities.
d. Reflects the fair value of 75,000 shares of the Company's
Series D Senior Convertible Preferred Stock currently held by
Charter and its affiliate, Vulcan, received by the Company as
consideration for assets sold and subsequently cancelled as a
result of the Agreement. Fair value was based on the value of
the company's common stock into which the preferred stock is
convertible. Reference was made to market values of the common
stock two trading days before and two trading days after
September 28, 2001.
e. Reflects the impairment of assets and lease termination and
other liabilities in connection with the planned curtailment
of other activities, including the exit of non-Charter
systems, the disposal of Digital Chainsaw, and the
discontinuance of efforts to enter the DSL market.
f. Reflect the purchase of 20,222,139 shares of our common stock
from Vulcan for an aggregate purchase price of $4.5 million or
$0.22 per share.
F-6
Pro forma adjustments giving effect to the sale of assets of the
Charter cable modem business in the unaudited pro forma condensed consolidated
statements of operations for the six months ended June 30, 2001 and the year
ended December 31, 2000, reflect the following, as if the sale had occurred on
January 1, 2000.
a. Reflects the elimination of interest expense on capital leases
and debt of the Company that would not have been incurred
during the years ended December 31, 2001 and 2000, if the
capital leases and debt were paid down at January 1, 2000.
b. Reflect the planned curtailment of other activities, including
the exit from non-Charter systems, the disposal of Digital
Chainsaw, and the discontinuance of efforts to enter the
DSL market.
F-7
UNAUDITED FINANCIAL STATEMENTS OF BUSINESS DISPOSITION
HIGH SPEED ACCESS CORP.
UNAUDITED BALANCE SHEETS OF BUSINESS DISPOSITION
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31,
-------------------
JUNE 30, 2001 2000 1999
------------- -------- --------
ASSETS
Accounts receivable, net $ 2,203 $ 1,199 $ 260
Prepaid expenses and other current assets 2,487 1,603 106
Property, equipment and improvements, net 30,385 31,201 15,723
Deferred distribution agreement costs, net 9,724 8,581 626
Other non-current assets 5,698 4,130 --
------------- -------- --------
Total assets $ 50,497 $ 46,714 $ 16,715
============= ======== ========
LIABILITIES AND EQUITY ACCOUNT WITH PRINCIPAL BUSINESS
Accrued compensation and related expenses $ 943 $ 563 $ 188
Capital lease obligations 3,673 4,363 --
------------- -------- --------
Total liabilities 4,616 4,926 188
EQUITY ACCOUNT WITH PRINCIPAL BUSINESS 45,881 41,788 16,527
------------- -------- --------
Total liabilities and equity account with principal business $ 50,497 $ 46,714 $ 16,715
============= ======== ========
</Table>
The accompanying notes are an integral part of these financial statements.
F-8
HIGH SPEED ACCESS CORP.
UNAUDITED STATEMENTS OF OPERATIONS OF BUSINESS DISPOSITION
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------
2001 2000 2000 1999
---------- ---------- ---------- ----------
Net revenue $ 9,684 $ 2,925 $ 7,887 $ 1,765
---------- ---------- ---------- ----------
Costs and expenses:
Operating 22,051 14,383 32,781 11,491
Engineering 7,240 4,770 12,351 4,422
Sales and marketing 3,887 6,694 13,958 7,153
General and administrative:
Amortization of distribution agreement costs 1,455 781 1,578 154
Other general and administrative expenses 8,434 4,795 15,197 5,827
---------- ---------- ---------- ----------
Total general and administrative 9,889 5,576 16,775 5,981
---------- ---------- ---------- ----------
Total costs and expenses 43,067 31,423 75,865 29,047
---------- ---------- ---------- ----------
Loss from operations (33,383) (28,498) (67,978) (27,282)
Interest expense (665) (445) (1,015) (190)
---------- ---------- ---------- ----------
Net loss $ (34,048) $ (28,943) $ (68,993) $ (27,472)
========== ========== ========== ==========
</Table>
The accompanying notes are an integral part of these financial statements.
F-9
HIGH SPEED ACCESS CORP.
UNAUDITED STATEMENTS OF CHANGES IN EQUITY ACCOUNT WITH PRINCIPAL BUSINESS
(IN THOUSANDS)
<Table>
Balance, January 1, 1999 $ 1,899
Change in equity account with principal business 42,100
Net loss (27,472)
--------
Balance, December 31, 1999 16,527
Change in equity account with principal business 94,254
Net loss (68,993)
--------
Balance, December 31, 2000 41,788
Change in equity account with principal business 38,141
Net loss (34,048)
--------
Balance, June 30, 2001 $ 45,881
========
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-10
HIGH SPEED ACCESS CORP.
UNAUDITED STATEMENTS OF CASH FLOWS OF BUSINESS DISPOSITION
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ------------------------
2001 2000 2000 1999
---------- ---------- ---------- ----------
OPERATING ACTIVITIES
Net loss $ (34,048) $ (28,943) $ (68,993) $ (27,472)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 7,249 3,542 8,697 2,332
Amortization of distribution agreement costs 1,455 781 1,578 154
Changes in operating assets and liabilities:
Accounts receivable (1,004) (311) (939) (258)
Prepaid expenses and other current assets (884) (346) (1,497) (96)
Other non-current assets (1,568) -- (4,130) --
Accrued compensation and related expenses 380 187 375 75
---------- ---------- ---------- ----------
Net cash used in operating activities (28,420) (25,090) (64,909) (25,265)
---------- ---------- ---------- ----------
INVESTING ACTIVITIES
Purchases of property, equipment and improvements,
net of leases (5,597) (11,142) (18,820) (16,055)
---------- ---------- ---------- ----------
Net cash used in investing activities (5,597) (11,142) (18,820) (16,055)
---------- ---------- ---------- ----------
FINANCING ACTIVITIES
Payments on capital lease obligations (1,526) (4) (992) --
Equity account with principle business 35,543 36,236 84,721 41,320
---------- ---------- ---------- ----------
Net cash used in financing activities 34,017 36,232 83,729 41,320
---------- ---------- ---------- ----------
Net change in cash and cash equivalents -- -- -- --
Cash and cash equivalents, beginning of period -- -- -- --
---------- ---------- ---------- ----------
Cash and cash equivalents, end of period $ -- $ -- $ -- $ --
========== ========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 836 $ 139 $ 5,355 --
Warrants earned in connection with distribution
agreements $ 2,598 $ 6,514 $ 9,533 $ 780
</Table>
The accompanying notes are an integral part of these
consolidated financial statements.
F-11
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS OF BUSINESS DISPOSITION
SIX MONTHS ENDED JUNE 30, 2001 AND YEARS ENDED DECEMBER 31, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND AND OPERATIONS
The Business Disposition (the "Business") is primarily engaged in
providing high speed Internet access to cable customers of Charter
Communications, Inc. ("Charter"). The Business is part of High Speed Access
Corp. (the "Company") which began operations in 1999.
On September 28, 2001 the Company entered into an Asset Purchase
Agreement (the "Agreement") with an affiliate of Charter for the sale of
substantially all of the assets used by the company to serve Charter's
high-speed data customers. At the closing of the transaction contemplated by the
Agreement, which is subject to the receipt of the approval of the Company's
stockholders, (i) Charter will pay the $81.1 million in cash, subject to,
among other things, certain closing adjustments and indemnity reserves, and will
assume certain liabilities related to the purchased assets, (ii) all 75,000
shares of the Company's Series D Senior Convertible Preferred Stock currently
held by Charter and its affiliate, Vulcan Ventures Incorporated ("Vulcan"),
will be canceled, and (iii) all warrants currently held by Charter to purchase
shares of the Company's common stock will also be canceled.
Certain allocations and estimates have been made by management in the
accompanying financial statements to present the financial position, results of
operations and cash flows of the Business as an independent entity. Costs
allocated to the Business by the Company include (i) specifically identified
system expenses such as salaries and telecommunications expenses, including
charges for Internet backbone and telecommunications circuitry, and (ii)
estimated salaries and related personnel expenses for customer care, field
technical and engineering support, network operations center, sales and
marketing, administrative and finance personnel. The allocation of these
estimated expenditures was based primarily on ratios of certain subscriber and
system metrics. Management believes that the allocation methods and assumptions
are reasonable.
REVENUE RECOGNITION
Monthly customer subscription revenue, consisting of fees for cable
modem Internet access services and traditional dial-up services, is reported net
of the contractual share paid to cable system operators and is recognized as
services are provided. Included in subscription revenues are revenues related to
the rental of cable modems to customers in connection with subscription
contracts. Rental revenue under such agreements is directly related to the
customer's subscription agreement and is recognized ratably over the rental
period.
LONG-LIVED ASSETS
Property, equipment and improvements are recorded at cost less
accumulated depreciation and amortization. The components of property, equipment
and improvements consist primarily of system headend equipment, modems, data
center and other computer equipment and furniture and fixtures. Depreciation and
amortization are computed using the straight-line method over the estimated
useful lives of the assets for equipment and software (3 years) and furniture
and fixtures (5 years), or the shorter of useful life or lease term for
leasehold improvements or capital leases. The Company capitalizes costs
associated with the design and implementation of internal-use software,
including internally and externally developed software, in accordance with
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". Capitalized external software costs
include the actual costs to purchase existing software from vendors. Capitalized
internal software costs generally include personnel costs incurred in the
enhancement and implementation of purchased software packages. Retirements,
sales and disposals of assets are recorded by removing the cost and accumulated
depreciation from the accounts with any resulting gain or loss recognized in
results of operations.
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
is recognized when estimated undiscounted future cash flows expected to result
from the use of the
F-12
asset and its eventual disposition is less than its carrying amount. In
addition, the estimated useful lives of all long-lived assets are periodically
reviewed by management for reasonableness.
WARRANTS ISSUED IN CONNECTION WITH DISTRIBUTION AGREEMENTS
As an inducement to Charter to commit systems, the Company issues
warrants to purchase its common stock in connection with Network Service
agreements and other agreements, collectively referred to as distribution
agreements. The Company values warrants to purchase its common stock using an
accepted options pricing model based on the value of the stock when the options
are earned. The Business has recognized an addition to the equity account with
principal business for the fair value of any warrants issued, and recognizes the
related expense over the term of the agreement with the respective cable system,
generally four to five years, in accordance with Emerging Issues Task Force
Issue No. 96-18, "Accounting for Equity Instruments that are Issued to Other
than Employees for Acquiring or in Conjunction with Selling, Goods or Services."
ENGINEERING
Engineering costs are expensed as incurred.
COMPREHENSIVE EARNINGS
The Company has no components of other comprehensive earnings, and
accordingly, comprehensive earnings are the same as net loss in the accompanying
statement of operations.
CONCENTRATION OF CREDIT RISK
The Business's customers consist of residential and commercial
customers in the various markets served by the Business. As such, no single
customer accounted for greater than 10% of revenue or accounts receivable
balances for any periods presented. The Business maintains an allowance for
doubtful accounts receivable based upon its historical experience and the
expected collectibility of all accounts receivable.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
These estimates are based on knowledge of current events and anticipated future
events. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), which provides that all business combinations should be accounted
for using the purchase method of accounting and establishes criteria for the
initial recognition and measurement of goodwill and other intangible assets
recorded in connection with a business combination. The provisions of SFAS 141
apply to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001, or later. The Company will apply the provisions of SFAS 141
to any future business combinations.
In addition, the FASB issued Statements of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
establishes the accounting for goodwill and other intangible assets following
their recognition. SFAS 142 applies to all goodwill and other intangible assets
whether acquired singly, as part of a group, or in a business combination. SFAS
142 provides that goodwill should not be amortized but should be tested for
impairment annually using a fair-value based approach. In addition, SFAS 142
provides that other intangible assets other than goodwill should be amortized
over their useful lives and reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for
F-13
Long-Lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 142 is effective for the
Company beginning on January 1, 2002.
Upon adoption, the Company will be required to perform a transitional
impairment test for all goodwill recorded as of January 1, 2002. Any impairment
loss recorded as a result of completing the transitional impairment test will be
treated as a change in accounting principle. The impact of the adoption of SFAS
142 on the Company's results of operations for all periods beginning on or after
January 1, 2002 will be to eliminate amortization of goodwill. Management of the
Company has not performed a transitional impairment test under SFAS 142 and
accordingly cannot estimate the impact of the adoption as of January 1, 2002.
In October 2001, the FASB issued Statements of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 supercedes SEAS 121. SFAS 144 applies to all
long-lived assets and consequently amends Accounting Principles Board Opinion
No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business" ("APB 30"). SFAS 144 develops one accounting model
(based on the model in SFAS 121) for long-lived assets that are to be disposed
of by sale, as well as addresses the principal implementation issues. SFAS 144
requires that long-lived assets that are to be disposed of by sale be measured
at the lower of book value or fair value, less cost to sell. That requirement
eliminates APB 30's requirement that discontinued operations be measured at net
realizable value or that entities include under "discontinued operations" in the
financial statements amounts for operating losses that have not yet occurred.
Additionally, SFAS 144 expands the scope of discontinued operations to include
all components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing operations of
the entity in a disposal transaction. SFAS 144 is effective for the Company
beginning on January 1, 2002.
2. LEASE OBLIGATIONS
The Business leases certain facilities under non-cancelable operating
leases that expire at various dates through 2007, and which require the Company
to pay operating costs, including property taxes, insurance and maintenance.
Rent expense was $0.1 million for the six months ended June 30, 2001, and $0.2
million for each of the years ended December 31, 2000 and 1999.
The Business also has obligations under capital equipment leases.
Future minimum lease payments under non-cancelable operating and capital leases
having original terms in excess of one year as of June 30, 2001 are as follows
(in thousands):
<Table>
<Caption>
OPERATING LEASES CAPITAL LEASES
---------------- ----------------
Year Ended December 31,
2001 ................................................. $ 1,091 $ 2,220
2002 ................................................. 2,121 2,149
2003 ................................................. 1,701 499
2004 ................................................. 869 --
2005 ................................................. 902 --
Thereafter ........................................... 2,959 --
---------------- ----------------
Total minimum lease payments ......................... $ 9,643 4,868
================
Less amounts representing interest ................... 1,195
----------------
Present value of minimum capital lease obligations ... $ 3,673
================
</Table>
3. ACCOUNT WITH PRINCIPAL BUSINESS
This account represents the company's equity in the Business. The
balance is composed of expenses incurred by the Company and charged to the
Business, the accumulated deficit of the Business and the net effect of cash
flows between the Business and the Company.
F-14
4. DISTRIBUTION AGREEMENTS
In November 1998, the Company entered into a series of agreements with
Vulcan and Charter whereby the Company 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, 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 the Company additional homes
passed, although it is not obligated to do so. The agreements will continue
until the Company ceases to provide services to an end user residing in a home
passed in a committed system.
The Company also agreed to issue a warrant to Charter that will, in
the aggregate, entitle Charter to purchase 7,750,000 shares of the Company's
common stock at a purchase price of $3.23 per share. The warrants become
exercisable at the rate of 1.55 shares of common stock for each home passed in
excess of 750,000. A minimum of 3,875,000 warrants must be earned by Charter
on or before July 31, 2001, and a minimum of 3,875,000 warrants must be earned
by Charter on or before July 31, 2003. Each warrant issued to Charter must
be exercised on or before one year from the date that the warrants may be
earned. The warrants may be forfeited in certain circumstances, generally if the
number of homes passed in committed systems 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 per end user 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 one
warrant per every three homes passed if it commits systems totaling less than
one million homes passed, and one warrant for every two homes passed if the
systems total one million or more homes passed.
In May 2000, the Company entered into a second Network Services
agreement with Charter. Under this agreement, Charter committed to provide
the Company exclusive right to provide Network Services related to the delivery
of Internet access to homes passed in certain cable systems. We will provide
Network Services, including system monitoring and security as well as call
center support. Charter will receive the warrants described in the following
paragraph as an incentive to provide the Company additional homes passed,
although it is not obligated to do so. Charter can terminate these exclusivity
rights, on a system-by-system basis, if the Company fails to meet performance
specifications or otherwise breaches the agreement. The agreement has an initial
term of five years and may be renewed at Charter's option for additional
successive five-year terms.
In connection with the second Network Services agreement, the Company
and Charter entered into an amended and restated warrant to purchase up to
12,000,000 shares of common stock at an exercise price of $3.23 per share and
terminated two warrants that had been issued to Charter in November 1998. The
new warrant becomes exercisable at the rate of 1.55 shares for each home passed
committed to us by Charter under the Network Services agreement entered into
by Charter and us in November 1998. The warrant also becomes exercisable at
the rate of .775 shares for each home passed committed to us by Charter under
the Network Services agreement entered into in May 2000 up to 5,000,000 homes
passed, and at a rate of 1.55 shares for each home passed in excess of
5,000,000. Charter also has the opportunity to earn additional warrants to
purchase shares of common stock upon any renewal of the May 2000 agreement. Such
a renewal warrant will have an exercise price of $10 per share and will be
exercisable to purchase .50 shares for each home passed in the systems for which
the May 2000 agreement is renewed. With respect to each home passed, launched or
intended to be launched on or before the second anniversary date of the second
Network Services agreement, the Company will pay Charter, at Charter's
option, a launch fee of $3.00 per home passed committed. As of December 31,
2000, the Company has paid Charter approximately $3.8 million of launch fees
related to launched systems or systems to be deployed in the near future. The
launch fees paid will be amortized over the remaining term of the agreement.
Charter earned warrants to purchase 2,650,659 share of common stock
under these agreements as of June 30, 2001 and 2,050,710 and 77,738 shares of
common stock under these agreements as of December 31, 2000 and 1999,
respectively. If the asset sale is consummated, these warrants will be
cancelled.
F-15
5. COMMITMENTS AND CONTINGENCIES
The company, our directors, our former directors as well as Charter and
Paul Allen have been named as defendants in three class action lawsuits filed in
the Court of Chancery of the State of Delaware (Denault, et. al. v. O'Brien, et.
al., Civil Action No. 19045NC, Tesche, et. al. v. O'Brien, et al., Civil Action
No. 19046NC and Johnson, et. al. v. O'Brien, et. al., Civil Action No. 19053NC).
All three lawsuits, which subsequently have been consolidated, allege, among
other things, that the initially proposed cash purchase price of $73 million is
grossly inadequate and that "[t]he purpose of the proposed acquisition is to
enable Charter and Allen to acquire [the company's] valuable assets for their
own benefit at the expense of [the company's] public shareholders."
The suits allege that the defendants breached their fiduciary duties
owed to the company in connection with the making and consideration of Charter's
proposal. The plaintiffs ask to represent the interests of all common
stockholders of the company and seek injunctive relief preventing the company
from going forward with the transaction, to rescind the transaction in the event
it is consummated and unspecified monetary damages. We believe these lawsuits
are without merit and intend to vigorously defend against the claims made
therein.
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.
F-16
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
High Speed Access Corp.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of comprehensive loss, of
stockholders' equity (deficit) and of cash flows present fairly, in all material
respects, the financial position of High Speed Access Corp. and its subsidiaries
at December 31, 2000 and 1999, and the results of their operations and their
cash flows for the years ended December 31, 2000 and 1999 and the period April
3, 1998 (Inception) to December 31, 1998 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
Effective August 10, 2001, AT&T effected the split off of Liberty from AT&T by
means of a redemption of AT&T Liberty Media Group tracking stock includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
February 27, 2001
F-17
HIGH SPEED ACCESS CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
DECEMBER 31,
2000 1999
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 114,847 $ 53,310
Short-term investments 15,698 125,420
Accounts receivable, net of allowance for doubtful accounts of $296
and $63, respectively 2,087 393
Prepaid expenses and other current assets 3,818 4,308
--------- ---------
Total current assets 136,450 183,431
Property, equipment and improvements, net 63,008 39,308
Intangible assets, net 4,197 3,300
Deferred distribution agreement costs, net 11,783 4,042
Other non-current assets 4,269 345
--------- ---------
Total assets $ 219,707 $ 230,426
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 15,395 $ 10,226
Accrued compensation and related expenses 6,757 3,842
Other current liabilities 9,073 3,916
Long-term debt, current portion 2,633 1,527
Capital lease obligations, current portion 7,790 3,176
--------- ---------
Total current liabilities 41,648 22,687
Long-term debt 2,313 4,035
Capital lease obligations 11,380 7,574
--------- ---------
Total liabilities 55,341 34,296
--------- ---------
Commitments and contingencies (Note 13)
Stockholders' equity:
Convertible preferred stock, $.01 par value (aggregate liquidation
preference of $75.0 million), 10,000,000 shares authorized, 75,000
shares issued and
outstanding at December 31, 2000 1 --
Common stock, $.01 par value, 400,000,000 shares authorized, 58,684,052
and 54,276,130 shares issued and outstanding at December 31, 2000 and
1999, respectively 587 543
Class A common stock, 100,000,000 shares authorized, none issued
and outstanding
Additional paid-in capital 737,215 618,823
Deferred compensation (713) (288)
Accumulated deficit (573,217) (422,807)
Accumulated other comprehensive income (loss) 493 (141)
--------- ---------
Total stockholders' equity 164,366 196,130
--------- ---------
Total liabilities and stockholders' equity $ 219,707 $ 230,426
========= =========
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
F-18
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<Table>
<Caption>
APRIL 3, 1998
YEARS ENDED DECEMBER 31, (INCEPTION) TO
2000 1999 DECEMBER 31, 1998
--------------- --------------- -----------------
Net Revenue $ 14,200 $ 3,446 $ 337
Costs and expenses:
Operating 70,289 24,021 2,067
Engineering 23,960 9,255 2,266
Sales and marketing 25,147 18,134 3,696
General and administrative:
Non-cash compensation expense from stock options, warrants and
restricted stock 216 3,039 --
Amortization of distribution agreement costs 2,674 3,723 --
Write-down of intangible assets 22,444
Other general and administrative expenses 25,093 11,888 2,323
--------------- --------------- ---------------
Total general and administrative 50,427 18,650 2,323
--------------- --------------- ---------------
Total costs and expenses 169,823 70,060 10,352
--------------- --------------- ---------------
Loss from operations (155,623) (66,614) (10,015)
Investment income 7,371 6,181 94
Interest expense (2,158) (519) (54)
--------------- --------------- ---------------
Net loss (150,410) (60,952) (9,975)
Mandatorily redeemable convertible preferred stock dividends -- (1,122) (385)
Accretion to redemption value of mandatorily redeemable convertible
preferred stock -- (229,148) (120,282)
--------------- --------------- ---------------
Net loss available to common stockholders $ (150,410) $ (291,222) $ (130,642)
=============== =============== ===============
Basic and diluted net loss available to common stockholders per share $ (2.67) $ (8.69) $ (21.07)
=============== =============== ===============
Weighted average shares used in computation of basic and diluted net loss
available to common stockholders per share 56,347,891 33,506,735 6,200,000
</Table>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS)
<Table>
<Caption>
APRIL 3, 1998
YEARS ENDED DECEMBER 31, (INCEPTION) TO
2000 1999 DECEMBER 31, 1998
--------------- --------------- -----------------
Net loss $ (150,410) $ (60,952) $ (9,975)
Net unrealized gain (loss) on investments 634 (141)
--------------- --------------- ---------------
Comprehensive loss $ (149,776) $ (61,093) $ (9,975)
=============== =============== ===============
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
F-19
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD APRIL 3, 1998 (INCEPTION) TO DECEMBER 31, 1998 AND THE YEARS
ENDED DECEMBER 31, 1999 AND 2000
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
Preferred Stock Common Stock
------------------------------ --------------------------------
Shares Amount Shares Amount
------------- -------------- --------------- --------------
Issuance of common stock in connection
with acquisition of CATV and HSAN 6,200,000 $ 62
Mandatorily redeemable convertible
preferred stock dividends
Accretion to redemption value of mandatorily
redeemable convertible preferred stock
Grant of option to purchase Series C mandatorily
redeemable convertible preferred stock
Deferred compensation from grants of stock
options to purchase common stock
Net loss
------------- -------------- --------------- --------------
Balance at December 31, 1998 -- -- 6,200,000 62
Mandatorily redeemable convertible
preferred stock dividends
Accretion to redemption value of mandatorily
redeemable convertible preferred stock
Distribution of Darwin Networks, Inc common stock
to shareholders
Issuance of common stock warrants in
connection with purchase of customer base
Issuance of vested compensatory stock options
Deferred compensation from grants of stock
options to purchase common stock
Amortization of deferred compensation
Conversion of mandatorily redeemable convertible preferred
stock and accrued dividends to common stock 31,115,887 311
Issuance of common stock warrants in connection
with distribution agreements
Exercise of stock options and warrants 484,470 5
Net proceeds from sale of common stock 16,475,773 165
Net unrealized loss on investments
Net loss
------------- -------------- --------------- --------------
Balance at December 31, 1999 -- -- 54,276,130 543
Deferred compensation from grant of restricted stock
Amortization of deferred compensation
Issuance of preferred stock to Charter and Vulcan 75,000 $ 1
Issuance of common stock and common stock warrants in
connection with distribution agreements
Issuance of common stock warrants in connection
with lease agreements
Issuance of common stock 1,250,000 13
Issuance of common stock in connection with acquisition of
Digital Chainsaw 2,961,718 30
Issuance of stock options in connection with acquisition of
Digital Chainsaw
Issuance of common stock warrants in connection with
acquisition of Digital Chainsaw
Exercise of stock options and warrants 196,204 1
Net unrealized gain on investments
Net loss
------------- -------------- --------------- --------------
Balance at December 31, 2000 75,000 $ 1 58,684,052 $ 587
============= ============== =============== ==============
<Caption>
Additional
Paid-In Deferred Accumulated
Capital Compensation Deficit
-------------- --------------- --------------
Issuance of common stock in connection
with acquisition of CATV and HSAN $ 3,153
Mandatorily redeemable convertible
preferred stock dividends $ (385)
Accretion to redemption value of mandatorily
redeemable convertible preferred stock (120,282)
Grant of option to purchase Series C mandatorily
redeemable convertible preferred stock 1,000
Deferred compensation from grants of stock
options to purchase common stock 84 $ (84)
Net loss (9,975)
-------------- --------------- --------------
Balance at December 31, 1998 4,237 (84) (130,642)
Mandatorily redeemable convertible
preferred stock dividends (1,122)
Accretion to redemption value of mandatorily
redeemable convertible preferred stock (229,148)
Distribution of Darwin Networks, Inc common stock
to shareholders 569 (943)
Issuance of common stock warrants in
connection with purchase of customer base 208
Issuance of vested compensatory stock options 1,793
Deferred compensation from grants of stock
options to purchase common stock 1,450 (1,450)
Amortization of deferred compensation 1,246
Conversion of mandatorily redeemable convertible preferred
stock and accrued dividends to common stock 404,195
Issuance of common stock warrants in connection
with distribution agreements 7,766
Exercise of stock options and warrants 830
Net proceeds from sale of common stock 197,775
Net unrealized loss on investments
Net loss (60,952)
-------------- --------------- --------------
Balance at December 31, 1999 618,823 (288) (422,807)
Deferred compensation from grant of restricted stock 519 (519)
Amortization of deferred compensation 133
Issuance of preferred stock to Charter and Vulcan 74,017
Issuance of common stock and common stock warrants in
connection with distribution agreements 10,123
Issuance of common stock warrants in connection
with lease agreements 128
Issuance of common stock 9,987
Issuance of common stock in connection with acquisition of
Digital Chainsaw 17,927
Issuance of stock options in connection with acquisition of
Digital Chainsaw 3,654 (39)
Issuance of common stock warrants in connection with
acquisition of Digital Chainsaw 1,367
Exercise of stock options and warrants 670
Net unrealized gain on investments
Net loss (150,410)
-------------- --------------- --------------
Balance at December 31, 2000 $ 737,215 $ (713) $ (573,217)
============== =============== ==============
<Caption>
Accumulated
Other Total
Comprehensive Stockholders'
Loss Equity (Deficit)
----------------- ---------------
Issuance of common stock in connection
with acquisition of CATV and HSAN $ 3,215
Mandatorily redeemable convertible
preferred stock dividends (385)
Accretion to redemption value of mandatorily
redeemable convertible preferred stock (120,282)
Grant of option to purchase Series C mandatorily
redeemable convertible preferred stock 1,000
Deferred compensation from grants of stock
options to purchase common stock --
Net loss (9,975)
----------------- ---------------
Balance at December 31, 1998 -- (126,427)
Mandatorily redeemable convertible
preferred stock dividends (1,122)
Accretion to redemption value of mandatorily
redeemable convertible preferred stock (229,148)
Distribution of Darwin Networks, Inc common stock
to shareholders (374)
Issuance of common stock warrants in
connection with purchase of customer base 208
Issuance of vested compensatory stock options 1,793
Deferred compensation from grants of stock
options to purchase common stock --
Amortization of deferred compensation 1,246
Conversion of mandatorily redeemable convertible preferred
stock and accrued dividends to common stock 404,506
Issuance of common stock warrants in connection
with distribution agreements 7,766
Exercise of stock options and warrants 835
Net proceeds from sale of common stock 197,940
Net unrealized loss on investments $ (141) (141)
Net loss (60,952)
----------------- ---------------
Balance at December 31, 1999 (141) 196,130
Deferred compensation from grant of restricted stock --
Amortization of deferred compensation 133
Issuance of preferred stock to Charter and Vulcan 74,018
Issuance of common stock and common stock warrants in
connection with distribution agreements 10,123
Issuance of common stock warrants in connection
with lease agreements 128
Issuance of common stock 10,000
Issuance of common stock in connection with acquisition of
Digital Chainsaw 17,957
Issuance of stock options in connection with acquisition of
Digital Chainsaw 3,615
Issuance of common stock warrants in connection with
acquisition of Digital Chainsaw 1,367
Exercise of stock options and warrants 671
Net unrealized gain on investments 634 634
Net loss (150,410)
----------------- ---------------
Balance at December 31, 2000 $ 493 $ 164,366
================= ===============
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
F-20
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31, APRIL 3, 1998
---------------------------- (INCEPTION) TO
2000 1999 DECEMBER 31, 1998
------------ ------------ ------------
OPERATING ACTIVITIES
Net loss $ (150,410) $ (60,952) $ (9,975)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 24,704 6,681 1,344
Provision for doubtful accounts receivable 1,269 252 13
Write-off of capitalized software costs 464
Write-down of intangible assets 22,444
Realized gain (loss) on sale of investments 31 (236)
Non-cash compensation expense from stock options, warrants and
restricted stock 216 3,039
Amortization of distribution agreement costs 2,674 3,723
Changes in operating assets and liabilities excluding the effects of
acquisitions:
Accounts receivable (2,263) (562) (49)
Prepaid expenses and other current assets 653 (4,221) (106)
Other non-current assets (3,924) (345)
Accounts payable 8,231 5,549 739
Accrued compensation and related expenses 2,419 3,098 629
Other current liabilities 4,268 3,521 211
------------ ------------ ------------
Net cash used in operating activities (89,688) (39,989) (7,194)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of short-term investments (99,751) (551,844)
Sales and maturities of short-term investments 210,076 426,519
Purchases of property, equipment and improvements, net of leases (33,892) (26,900) (4,235)
Purchase of customer base (511)
Net cash acquired (paid) in connection with the acquisitions (3,573) 907
------------ ------------ ------------
Net cash provided by (used in) investing activities 72,860 (152,736) (3,328)
------------ ------------ ------------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 10,000 197,940
Net proceeds from issuance of mandatorily redeemable convertible
preferred stock 24,987 27,583
Net proceeds from issuance of preferred stock 74,018
Payments on capital lease obligations (5,708) (639) (17)
Proceeds from long-term debt 1,213 5,508 1,000
Payments on long-term debt (1,829) (484) (156)
Proceeds from exercise of stock options 671 835
------------ ------------ ------------
Net cash provided by financing activities 78,365 228,147 28,410
------------ ------------ ------------
Net change in cash and cash equivalents 61,537 35,422 17,888
Cash and cash equivalents, beginning of period 53,310 17,888
------------ ------------ ------------
Cash and cash equivalents, end of period $ 114,847 $ 53,310 $ 17,888
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 2,139 $ 473 $ 14
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 $ 13,763 $ 11,126 $ 241
Issuance of note payable as consideration for advance from related party $ 650
Issuance of preferred stock in exchange for cancellation of notes payable -
related parties $ 1,000
Property and equipment purchases payable $ (12) $ 3,366 $ 1,429
Distribution of Darwin Networks, Inc. subsidiary to shareholders $ 943
Warrants issued in connection with acquisitions $ 1,367 $ 208
Warrants issued in connection with Microsoft Corp. agreements $ 3,235
Warrants earned in connection with distribution agreements $ 10,123 $ 4,530
Issuance of common stock and employee stock options in connection with the
purchase of Digital Chainsaw $ 21,611
</Table>
The accompanying notes are an integral part of these consolidated
financial statements.
F-21
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
High Speed Access Corp. and its subsidiaries (the "Company") provides high
speed Internet access to residential and commercial end users primarily using
cable modem technology. The Company primarily focuses on residential end users
in exurban areas, although the Company has recently begun providing broadband
services in some urban markets. The Company defines exurban markets as cable
systems with fewer than 100,000 homes passed. The term "homes passed" refers to
the number of homes that potentially can be served by a cable system. The
Company enters into long-term exclusive contracts with cable system operators to
provide them with service either on "Network Services" basis as well as on a
comprehensive "turnkey" basis. These services enable a cable system's customers
to receive high speed Internet access.
In exchange for providing the Company with access to its customers in the
turnkey solution, we pay the cable operator a portion of the monthly fees
received from an end user that subscribes to our services. In an unbundled or
"Network Services" solution, we will deliver fewer services and incur lower
costs than a turnkey solution but also earn a smaller percentage of the
subscription revenue or a fixed fee on a per subscriber basis. Under the Network
Services solution, our cable partners will typically bill the end user and will
remit to us our percentage of the revenue or the fixed fee. Network Services
solutions have become a significant part of our business mix, and we anticipate
this trend will continue.
We intend to offer facilities-based Digital Subscriber Line ("DSL")
Internet access services. Additionally, we are expanding our offering of
services to include expanded web site hosting and a range of other value-added
and ongoing support services, all primarily for small and medium enterprises
("SMEs"). We also intend to continue expanding our suite of core connectivity
and related value-added services as broadband technology proliferates and
additional services become viable. The Company also provides on a limited basis
standard Internet access through traditional dial-up service to residential and
SME customers.
LIQUIDITY
The Company has incurred losses from operations and negative cash flows
from operating activities since Inception, which have been funded primarily
through the issuance of equity securities and borrowings. Management expects to
experience substantial negative cash flows for at least the next several years.
As of December 31, 2000, the Company had $130.5 million of cash, cash
equivalents and short-term investments which management believes are sufficient
to meet the Company's cash needs in 2001. Management is closely monitoring the
level of expenditures and cash commitments. Continued implementation of the
Company's business plan will be dependent upon obtaining additional financing by
no later than early 2002 to fund operations, to finance investments in equipment
and corporate infrastructure needed for the Company's planned expansion, to
enhance and expand the range of services the Company offers and to respond to
competitive pressures and perceived opportunities, such as investment,
acquisition and international expansion activities. Management is evaluating the
availability of additional financing. There can be no assurance that additional
financing will be available on terms favorable to the Company, or at all. If
additional financing is not available on acceptable terms, the Company will be
forced to curtail operations, which could have a material adverse effect on the
Company. Such curtailment of operations would involve significant amendments to
the Company's current business plan including, but not limited to some or all of
the following: a delay in further deployment of certain services, administrative
and operating expense reductions, a reduction in planned capital expenditures,
reduction of our sales and marketing efforts, sales of certain assets or sale of
the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany transactions and balances
have been eliminated in consolidation.
REVENUE RECOGNITION
Monthly customer subscription revenue, consisting of fees for cable modem
Internet access services and traditional dial-up services, is reported net of
the contractual share paid to cable system operators and is recognized as
services are provided. Included in subscription revenues are revenues related to
the rental of cable modems to customers in connection with subscription
contracts.
F-22
Rental revenue under such agreements is directly related to the customer's
subscription agreement and is recognized ratably over the rental period.
In Network Service systems, the cable partner typically bills the customer
and the Company recognizes revenue as a percentage of total revenue or on a
fixed fee basis in the period in which the revenue is earned. Monthly
subscription revenue from web hosting services is recognized ratably over the
period during which services are provided. Revenue received in advance is
initially recorded as deferred revenue and is recognized as income in the period
in which the related services are provided.
During the fourth quarter of 2000, the provisions of Staff Accounting
Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements,"
became effective. The Company's revenue recognition policies complied with the
provisions of SAB 101 prior to its effective date, and accordingly, the adoption
of SAB 101 did not have an effect on the Company's financial position or results
of operations.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include all short-term, highly-liquid investments
with an original maturity of 90 days or less. At December 31, 2000, cash
equivalents consist principally of interest-bearing money market accounts with
financial institutions and highly-liquid investment-grade debt securities of
corporations and the U.S. Government. At December 31, 1999, cash equivalents
consisted principally of money market accounts. The Company maintains the
majority of its cash at one financial institution. At most times, such cash is
in excess of the FDIC insurance level. The carrying value of cash equivalents
approximates fair market value due to the short-term maturities of the
instruments.
SHORT-TERM INVESTMENTS
Short-term investments are classified as available-for-sale and are
accounted for at fair value. Unrealized holding gains and losses are included as
a component of stockholders' equity until realized. For the purpose of
determining gross realized gains and losses, the cost of securities sold is
based upon specific identification.
Short-term investments classified as current assets at December 31, 2000
and 1999 consisted of $15.7 million of U.S. Government obligations with a gross
unrealized gain of $0.5 million and $125.4 million of U.S. Government
obligations with a gross unrealized loss of $0.1 million, respectively. All
short-term investments are due contractually within one year as of December 31,
2000. Realized gains and realized losses for the year ended December 31, 2000
were $0.1 million and $0.1 million, respectively. Realized gains and realized
losses for the year ended December 31, 1999 were $0.3 million and $0.1 million,
respectively.
LONG-LIVED ASSETS
Property, equipment and improvements are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets for
equipment and software (3 years) and furniture and fixtures (5 years), or the
shorter of useful life or lease term for leasehold improvements or capital
leases. The Company capitalizes costs associated with the design and
implementation of internal-use software, including internally and externally
developed software, in accordance with Statement of Position 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use".
Capitalized external software costs include the actual costs to purchase
existing software from vendors. Capitalized internal software costs generally
include personnel costs incurred in the enhancement and implementation of
purchased software packages. Retirements, sales and disposals of assets are
recorded by removing the cost and accumulated depreciation from the accounts
with any resulting gain or loss recognized in the results of operations.
Depreciation and amortization expense of property, equipment and
improvements, excluding capitalized computer software costs, for the years ended
December 31, 2000 and 1999 and the period April 3, 1998 (Inception) to December
31, 1998 was $19.8 million, $5.7 million and $0.7 million, respectively.
Amortization of capitalized computer software costs was $1.8 million for the
year ended December 31, 2000. There was no amortization of capitalized computer
software costs during the year ended December 31, 1999 and the period April 3,
1998 (Inception) to December 31, 1998. The unamortized cost of capitalized
internal-use software was $7.8 million and $3.1 million at December 31, 2000 and
1999, respectively.
Intangible assets consist primarily of goodwill and other identifiable
intangible assets recorded in connection with the acquisitions of Digital
Chainsaw, Inc. ("Digital"), CATV.net, Inc. ("CATV") and High Speed Access
Network, Inc. ("HSAN"). Intangible assets are being amortized on a straight-line
basis, generally over a five-year period. Amortization expense for the years
ended December 31, 2000 and 1999 and the period April 3, 1998 (Inception) to
December 31, 1998 was $3.1 million, $1.0 million and $0.6 million, respectively.
F-23
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
is recognized when estimated undiscounted future cash flows expected to result
from the use of the asset and its eventual disposition is less than its carrying
amount. In addition, the estimated useful lives of all long-lived assets are
periodically reviewed by management for reasonableness.
During 1999, the Company wrote-off $0.4 million of capitalized costs
related to software no longer in use by the Company.
WARRANTS ISSUED IN CONNECTION WITH DISTRIBUTION AGREEMENTS
As an inducement to certain cable partners to commit systems, the Company
issues warrants to purchase its common stock in connection with Network Service
agreements and other agreements, collectively referred to as distribution
agreements. The Company values warrants to purchase its common stock using an
accepted options pricing model based on the value of the stock when the warrants
and options are earned. The Company recognizes an addition to equity for the
fair value of any warrants issued, and recognizes the related expense over the
term of the agreement with the respective cable system, 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."
INCOME TAXES
The Company accounts for income taxes under the liability method. Deferred
tax assets and liabilities are determined based on differences between the
financial reporting and tax basis of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse. A valuation allowance is provided against deferred tax
assets if it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
STOCK-BASED EMPLOYEE COMPENSATION
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion Opinion No. 25, "Accounting for Stock Issued
to Employees" and has adopted the disclosure-only requirements of Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). See Note 10 for a discussion of stock options and
the disclosures required by SFAS 123.
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS PER SHARE
The Company computes net loss available to common stockholders per share
under the provisions of SFAS No. 128, "Earnings per Share," ("SFAS 128"). Under
the provisions of SFAS 128, basic net loss available to common stockholders per
share is computed by dividing the net loss available to common stockholders for
the period by the weighted average number of shares of common stock outstanding
during the period.
Diluted earnings per share is determined in the same manner as basic
earnings per share, except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and assuming conversion of convertible preferred stock. In addition, income or
loss is adjusted for dividends and other transactions relating to preferred
stock for which conversion is assumed. The calculation of diluted net loss
available to common stockholders per share excludes potential common shares if
the effect is dilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for current assets and current liabilities, other than
notes payable to related parties and short-term investments, approximate their
fair value due to their short maturity. The fair value of notes payable to
related parties cannot be reasonably and practicably estimated due to the unique
nature of the related underlying transactions and terms. These notes payable are
carried at $0.5 million at both December 31, 2000 and 1999. However, given the
terms and conditions of these instruments, if these financial instruments were
with unrelated parties, interest rates and payment terms could be different than
their currently stated rates and terms. The fair values of short-term
investments at December 31, 2000 and 1999 were $0.5 million greater than cost
and $0.1 million less than cost, respectively. The carrying values of long
term-debt and capital lease obligations approximate fair value.
F-24
ENGINEERING
Engineering costs are expensed as incurred.
CONCENTRATION OF CREDIT RISK
The Company's turnkey customers consist of residential and commercial
customers in the various markets served by the Company. As such, no single
customer accounted for greater than 10% of turnkey revenue or accounts
receivable balances for any periods presented. Revenue from the Company's major
Network Services customer, Charter Communications, Inc. ("Charter"), accounted
for 16.4% of net revenue for the year ended December 31, 2000. Approximately
31.0% of the Company's gross trade receivables balance at December 31, 2000 was
from Charter, which exposes the Company to a concentration of credit risk. The
Company maintains an allowance for doubtful accounts receivable based upon its
historical experience and the expected collectibility of all accounts
receivable.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
These estimates are based on knowledge of current events and anticipated future
events. Actual results could differ from those estimates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities" ("SFAS 133") as amended by
SFAS 138, 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 requires that all derivatives be recognized as either assets or
liabilities in the balance sheet at their fair value, and sets forth the manner
in which gains or losses thereon are to be recognized. The treatment of such
gains or losses is dependent upon the type of exposure, if any, the derivative
is designated to hedge. This standard is effective for the Company's financial
statements beginning on January 1, 2001. Management of the Company has not
completed the process of analyzing the impact of adopting SFAS 133; however, the
adoption is not expected to have a material impact on the Company's financial
position, results of operations or cash flows.
3. BUSINESS COMBINATIONS AND OTHER EQUITY TRANSACTIONS
BUSINESS COMBINATIONS
The Company was incorporated on April 2, 1998. No initial capitalization
transactions occurred on that date. On April 3, 1998, Broadband Solutions, LLC
("Broadband") contributed its preferred stock investments in CATV and HSAN to
the Company. The Company issued $1.0 million of Series A mandatorily redeemable
convertible preferred stock to Broadband in the exchange. This transaction was
accounted for as a transaction between entities under common control. The
Company assumed Broadband's interest in the assets and liabilities of CATV and
HSAN and recorded them at Broadband's historical cost.
Later on April 3, 1998, the Company issued 6,200,000 shares of common stock
for all of the outstanding common stock of HSAN and CATV. The Company valued the
common stock issued in the acquisitions of HSAN and CATV at approximately $.52
per share. In connection with the purchase of CATV, the Company issued 93,000
stock options in exchange for options held by CATV employees. The acquisitions
of the common stock of HSAN and CATV have been accounted for as purchases. The
Company recorded intangible assets, consisting primarily of goodwill, of $4.2
million in connection with these acquisitions.
The accompanying consolidated statements of operations include the
operations of HSAN and CATV since April 3, 1998. Had the transactions occurred
on January 1, 1998, total unaudited pro forma revenues, unaudited pro forma net
loss available to common stockholders, and unaudited pro forma basic and diluted
net loss available to common stockholders per share for the year ended December
31, 1998, would have been $0.5 million, $132.6 million and $21.39, respectively.
In August 2000, the Company completed the acquisition of Digital. The
Company issued 2,961,718 shares of common stock valued at approximately $18.0
million in exchange for all of the outstanding shares of Digital. Additionally,
the Company issued stock
F-25
options and warrants valued at approximately $5.0 million. The acquisition of
Digital has been recorded using the purchase method of accounting. In connection
with this acquisition, the Company recorded goodwill of $26.4 million to be
amortized on a straight-line basis over a five-year period.
A summary of assets acquired and liabilities assumed in the acquisition
follow (in thousands):
Assets acquired, including goodwill $ 28,331
Liabilities assumed (1,819)
Common stock and other equity instruments issued (22,939)
------------
Cash paid $ 3,573
============
The Company's plan to exit the high-end web development and system
integration services of Digital and the deterioration in revenue growth
prospects for the web-hosting services of Digital during the fourth quarter of
2000 prompted a review for the possible impairment of goodwill associated with
Digital. This review indicated that estimated undiscounted future cash flows
were insufficient to recover the carrying value of the goodwill. Accordingly,
the Company reduced the carrying value of the goodwill to its estimated fair
value resulting in a write-down of $22.4 million. The Company estimated the fair
value of Digital based upon an analysis of comparable companies in the sector.
The accompanying consolidated financial statements include the operations
of Digital since the date of acquisition. The following unaudited pro forma
financial information for the years ended December 31, 2000 and 1999 presents
the combined results of operations of the Company as if the acquisition of
Digital had occurred on January 1, 2000 and 1999, respectively (in thousands).
2000 1999
------------ ------------
Net revenue $ 17,199 $ 5,267
Net loss available to common stockholders $ (158,688) $ (300,796)
Basic and diluted net loss available to common stockholders per
share $ (2.73) $ (8.25)
Since the unaudited pro forma financial information for the acquisitions of
Digital, HSAN and CATV is based upon the operating results of Digital, HSAN and
CATV during periods when they were not under the control of management of the
Company, the unaudited pro forma financial information presented may not be
indicative of the results of operations that would have actually been obtained
if the acquisitions had occurred as of the beginning of the periods presented,
nor is the information indicative of future operating results.
INITIAL PUBLIC OFFERING
In June 1999, the Company sold 14,950,000 shares of its common stock in an
initial public offering ("Offering"), including the underwriters' over-allotment
option, which generated proceeds of $179.4 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 its
common stock to Cisco Systems, Inc., Com21, Inc. and Microsoft Corp.
("Microsoft"), respectively, under stock purchase agreements which generated
$18.5 million in proceeds.
Upon the closing of the Offering, all 20,000,000 outstanding shares of the
Company's mandatorily redeemable convertible preferred stock, including
5,000,000 shares sold to Vulcan Ventures Incorporated ("Vulcan") in April 1999
for $25.0 million, 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 through 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
preferred stock to its estimated redemption value at the time of the Offering of
$13 per share. During the year ended December 31, 1999, the Company recorded
$229.1 million, and during the period April 3, 1998 (Inception) through December
31, 1998 ("Inception Period"), the Company recorded $120.3 million related to
this charge. In addition, the Company accrued dividends on the preferred stock
of $1.1 million for the year ended December 31, 1999, and $385 for the Inception
Period.
F-26
OTHER EQUITY TRANSACTIONS
In December 2000, the Company completed the sale of 75,000 shares of
convertible preferred stock to Vulcan and Charter Communications Ventures, LLC,
an affiliate of Charter, for proceeds of approximately $74.0 million, net of
issuance costs. The preferred stock converts at the option of Vulcan and Charter
into common stock of the Company at an initial conversion price of $5.01875 per
share, subject to adjustment for future stock issuances of capital stock and
other customary adjustments for stock splits and dividends. If additional shares
of capital stock are issued at a price per share below the initial conversion
price of the preferred stock, the initial conversion price would be adjusted
downward. The adjustment of the initial conversion price could result in the
Company recording a charge to deficit associated with a beneficial conversion
feature of the preferred stock if the adjusted conversion price is less than the
fair value of the Company's common stock at the date of the adjustment. The
preferred stock ranks senior to the Company's common stock with respect to
dividends and upon liquidation. The holders of the preferred stock have the
right to one vote for each share of common stock into which the preferred stock
could be converted.
In May 2000, Lucent Technologies, Inc. ("Lucent") purchased 1,250,000
shares of the Company's common stock at fair value for total proceeds to the
Company of $10.0 million. In addition, Lucent and the Company entered into a
general agreement whereby Lucent will provide equipment and services to the
Company with an initial purchase commitment by the Company of $5.0 million.
In May 1999, the Company completed a 1.55 for 1 split of its common stock.
The accompanying financial statements have been restated for all periods
presented to reflect the effects of the stock split.
4. PROPERTY, EQUIPMENT AND IMPROVEMENTS
The components of property, equipment and improvements at December 31, 2000
and 1999 are as follows (in thousands):
2000 1999
------- -------
Equipment ...................................... $73,429 $40,731
Furniture and fixtures ......................... 1,189 960
Capitalized software ........................... 9,560 3,145
Leasehold improvements ......................... 7,095 807
------- -------
91,273 45,643
Less accumulated depreciation .................. 28,265 6,335
------- -------
$63,008 $39,308
======= =======
Equipment includes assets acquired under capital leases, principally
headend equipment, modems, furniture and fixtures, and telephone equipment, with
a cost of $25.1 million and $11.4 million at December 31, 2000 and 1999,
respectively. Accumulated depreciation of these assets was $4.1 million and $0.5
million at December 31, 2000 and 1999, respectively.
5. LEASE OBLIGATIONS
The Company leases certain office facilities under non-cancelable operating
leases that expire at various dates through 2006, and which require the Company
to pay operating costs, including property taxes, insurance and maintenance.
These facility leases generally contain renewal options and provisions adjusting
the lease payments based upon changes in the consumer price index and increases
in real estate taxes and operating expenses or in fixed increments. Rent expense
is reflected on a straight-line basis over the term of the leases. Facility rent
expense was $4.0 million and $1.1 million for the years ended December 31, 2000
and 1999, respectively, and $0.1 million for the period April 3, 1998
(Inception) through December 31, 1998.
The Company also has obligations under capital equipment leases. Future
minimum lease payments under non-cancelable operating and capital leases having
original terms in excess of one year as of December 31, 2000 are as follows (in
thousands):
OPERATING CAPITAL
LEASES LEASES
------------ ------------
Year Ending December 31,
2001 .................................................. $ 3,649 $ 9,550
2002 .................................................. 3,152 8,726
2003 .................................................. 2,593 3,899
2004 .................................................. 2,476 734
2005 .................................................. 2,023 29
Thereafter ............................................ 3,070 --
------------ ------------
Total minimum lease payments .......................... $ 16,963 22,938
============
Less amounts representing interest ..................... 3,768
------------
Present value of minimum capital lease obligations ..... 19,170
Less current portion ................................... 7,790
------------
Non-current portion .................................... $ 11,380
============
F-27
6. LONG TERM DEBT
LOAN FACILITIES
In July 1999, the Company entered into a $5.0 million loan facility of
which $4.1 million and $2.9 million had been drawn down through December 31,
2000 and 1999, respectively. The terms of the loan facility provide for interest
at the rate of the 3-year U.S. Treasury Note yield plus 9.76% on each draw, 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.
In April 1999, the Company entered into a $3.0 million loan facility of
which $2.6 million had been drawn down through both December 31, 2000 and 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% on each draw, 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 and other field equipment of
the Company.
At December 31, 2000, $4.4 million was outstanding under these loan
facilities. The interest rate on the draws on these facilities ranged from
14.63% to 15.52% as of December 31, 2000. These terms are effective on the date
of, and applied separately to, each draw on the total loan facilities. The
remaining $1.3 million of the $8.0 million total loan facilities expired and is
no longer available.
NOTES PAYABLE -- RELATED PARTY
As part of its acquisition of HSAN, the Company assumed a note payable in
the aggregate principal amount of $0.7 million, evidenced by a promissory note
and assignment and security agreement, owing to Gans Multimedia Partnership
("Gans"). The note bears interest at a rate of 7% per annum. The Company repaid
$0.2 million of the note in December 1998 and the remaining $0.5 million balance
matures on April 1, 2001. Certain tangible assets of the Company serve as
collateral for this note. The loan represents working capital of HSAN funded by
Gans from July 1997 to April 1998.
The aggregate amount of long-term debt maturities, including notes payable
to related parties, at December 31, 2000 are as follows (in thousands):
YEAR ENDING DECEMBER 31,
2001................................... $ 2,633
2002................................... 2,211
2003................................... 102
---------
Total principal payments............... $ 4,946
=========
7. INCOME TAXES
As of December 31, 2000 and 1999, the Company had deferred tax assets of
approximately $77.6 million and $26.5 million, respectively, primarily related
to federal and state net operating loss carryforwards. The net deferred tax
asset has been fully offset by a valuation allowance based upon the Company's
history of operating losses. The federal and state net operating loss
carryforwards of approximately $182.1 million and $63.6 million, at December 31,
2000 and 1999, respectively, expire beginning in year 2018. Utilization of these
net operating losses may be subject to a substantial annual limitation based
upon changes in the Company's ownership as provided in Section 382 of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses before
utilization.
The Company's income tax provision (benefit) for the years ended December
31, 2000 and 1999 and the period April 3, 1998 (Inception) to December 31, 1998
differs from the income tax benefit determined by applying the U.S. federal
statutory rate to the net loss as follows (in thousands):
2000 1999 1998
--------- --------- ---------
Tax provision (benefit) at U.S. statutory rate ........ $ (51,139) $ (20,724) $ (3,392)
Net operating losses and temporary differences not
recognized ........................................... 42,729 20,319 3,159
Amortization and other permanent differences .......... 8,410 405 233
--------- --------- ---------
Total ................................................ $ -- $ -- $ --
========= ========= =========
F-28
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes at December 31, 2000 and 1999 are as follows
(in thousands):
2000 1999
---------- ----------
Deferred tax assets (liabilities):
Net operating loss carryforwards ............ $ 74,548 $ 26,793
Long-lived assets ........................... 868 (606)
Accrued expenses, not currently deductible .. 2,174 315
---------- ----------
Total deferred tax assets ................... 77,590 26,502
Less valuation allowance .................... (77,590) (26,502)
---------- ----------
Net deferred tax assets ..................... $ -- $ --
========== ==========
8. EMPLOYEE BENEFITS
The Company has established a deferred compensation plan in accordance with
Section 401(k) of the Internal Revenue Code. Under the retirement plan,
participating employees may defer a portion of their pretax earnings up to the
annual contribution limit. The Company may make contributions to the plan at the
discretion of the Board of Directors. To date, no such contributions have been
made by the Company.
In 2000 and 1999, the Company recorded severance and other benefit related
costs of $1.3 million and $1.2 million, respectively, associated with the
termination of certain of its employees. In 1999, total costs included a
non-cash portion approximating $0.3 million, included in non-cash compensation
expense from stock options, warrants and restricted stock in the accompanying
consolidated statement of operations associated with the acceleration of the
vesting on certain non-vested stock options of the terminated employees. At
December 31, 2000 and 1999, approximately $0.1 million and $0.8 million,
respectively, remain unpaid.
9. DISTRIBUTION AGREEMENTS
VULCAN VENTURES INCORPORATED
In November 1998, the Company entered into a series of agreements with
Vulcan whereby the Company 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, 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. The agreements will continue until the Company ceases to provide services
to an end user residing in a home passed in a committed system.
The Company also agreed to issue a warrant to Charter that will, in the
aggregate, entitle Charter to purchase 7,750,000 shares of the Company's common
stock at a purchase price of $3.23 per share. The warrants become exercisable at
the rate of 1.55 shares of common stock for each home passed in excess of
750,000. A minimum of 3,875,000 warrants must be earned by Charter on or before
July 31, 2001, and a minimum of 3,875,000 warrants must be earned by Charter on
or before July 31, 2003. Each warrant issued to Charter must be exercised on or
before one year from the date that the warrants may be earned. The warrants may
be forfeited in certain circumstances, generally if the number of homes passed
in committed systems 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 per end user 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 one
warrant per every three homes passed if it commits systems totaling less than
one million homes passed, and one warrant for every two homes passed if the
systems total one million or more homes passed.
In May 2000, the Company entered into a second Network Services agreement
with Charter. Under this agreement, Charter committed to provide the Company
exclusive right to provide Network Services related to the delivery of Internet
access to homes passed in certain cable systems. We will provide Network
Services, including system monitoring and security as well as call center
support. Charter will receive the warrants described in the following paragraph
as an incentive to provide the Company additional homes passed, although it is
not obligated to do so. Charter can terminate these exclusivity rights, on a
system-by-system basis, if the Company fails to meet performance specifications
or otherwise breaches the agreement. The agreement has an initial term of five
years and may be renewed at Charter's option for additional successive five-year
terms.
F-29
In connection with the second Network Services agreement, the Company and
Charter entered into an amended and restated warrant to purchase up to
12,000,000 shares of common stock at an exercise price of $3.23 per share and
terminated two warrants that had been issued to Charter in November 1998. The
new warrant becomes exercisable at the rate of 1.55 shares for each home passed
committed to us by Charter under the Network Services agreement entered into by
Charter and us in November 1998. The warrant also becomes exercisable at the
rate of .775 shares for each home passed committed to us by Charter under the
Network Services agreement entered into in May 2000 up to 5,000,000 homes
passed, and at a rate of 1.55 shares for each home passed in excess of
5,000,000. Charter also has the opportunity to earn additional warrants to
purchase shares of common stock upon any renewal of the May 2000 agreement. Such
a renewal warrant will have an exercise price of $10 per share and will be
exercisable to purchase .50 shares for each home passed in the systems for which
the May 2000 agreement is renewed. With respect to each home passed, launched or
intended to be launched on or before the second anniversary date of the second
Network Services agreement, the Company will pay Charter, at Charter's option, a
launch fee of $3.00 per home passed committed. As of December 31, 2000, the
Company has paid Charter approximately $3.8 million of launch fees related to
launched systems or systems to be deployed in the near future. The launch fees
paid will be amortized over the remaining term of the agreement.
Charter earned warrants to purchase 2,050,710 and 77,738 shares of common
stock under these agreements as of December 31, 2000 and 1999, respectively.
Deferred distribution agreement costs of $9.5 million and $0.8 million were
recorded in conjunction with these warrants during the years ended December 31,
2000 and 1999, respectively. Amortization of distribution agreement costs of
$1.5 million and $0.2 million was recognized in the statement of operations for
the same periods. 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 passed committed
to the Company.
CLASSIC CABLE
In July 1999, the Company executed a series of agreements with Classic
Cable, Inc. ("Classic"). The Company issued warrants to purchase up to 600,000
shares of the Company's common stock at a purchase price of $13.00 per share.
The warrants are earned and exercisable generally at the rate of one share of
common stock per home passed in systems committed, subject to certain minimum
homes passed criteria. The warrants may be earned by Classic on or before
December 31, 2003. The warrants must be exercised within three years of the date
earned.
Classic earned warrants to purchase 109,894 and 76,095 shares of common
stock under these agreements as of December 31, 2000 and 1999, respectively.
Deferred distribution agreement costs of $0.5 million and $1.9 million were
recorded in connection with the warrants during the years ended December 31,
2000 and 1999, respectively. Amortization of distribution agreement costs of
$0.4 million and $0.2 million was recognized in the statement of operations for
the same periods. Additional deferred distribution agreement costs may be
recorded and amortized in future periods should Classic earn the right to
purchase additional shares based on the number of homes passed committed to the
Company.
CABLE MANAGEMENT ASSOCIATES
In July 1999, the Company executed a series of agreements with ETAN
Industries Inc. d/b/a Cable Management Associates ("CMA"). The Company issued
warrants to purchase up to 200,000 shares of the Company's common stock at a
purchase price of $13.00 per share. The warrants are earned and exercisable
generally at the rate of one share of common stock for each home passed in
systems committed to the Company by CMA, subject to certain minimum homes passed
criteria. The warrants may be earned by CMA on or before December 31, 2002. The
warrants must be exercised on or before December 31, 2002.
CMA earned warrants to purchase 66,161 and 44,911 shares of common stock
under these agreements as of December 31, 2000 and 1999, respectively. Deferred
distribution agreement costs of $0.1 million and $1.8 million were recorded in
conjunction with the warrants during the years ended December 31, 2000 and 1999,
respectively. Amortization of distribution agreement costs of $0.2 million was
recognized in the statement of operations for the same periods. Additional
deferred distribution agreement costs may be recorded and amortized in future
periods should CMA earn the right to purchase additional shares based on the
number of homes passed committed to the Company.
F-30
MICROSOFT CORP.
At the time of the Offering, the Company entered into 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 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 expense of $3.2 million during the year ended December
31, 1999 related to the issuance of these warrants based on the fair value of
the shares at the time of grant. Additional expense may be recognized in future
periods should Microsoft earn the right to purchase additional common stock
based on the number of homes passed committed to the Company by Comcast Corp.
ROAD RUNNER
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 five million homes, in those systems where ServiceCo LLC engages
the Company to serve as a subcontractor of services. No warrants have been
issued under this agreement as of December 31, 2000.
10. STOCK OPTION PLAN
In April 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan ("1998 Plan"). A total of 1,395,000 shares of common stock were
reserved for issuance under the 1998 Plan. The Company adopted the 1999 Stock
Option Plan ("1999 Plan") and the 1999 Non-Employee Directors Plan ("Directors
Plan") in January 1999. A total of 3,100,000 shares were originally reserved for
issuance under the 1999 Plan. An additional 4,679,500 shares were reserved for
the 1999 Plan in June 2000. A total of 465,000 shares are reserved for issuance
under the Directors Plan.
The exercise price for the options is determined by the Board of Directors,
but generally shall not be less than 100% of the estimated fair market value of
the common stock on the date the option is granted. All options outstanding
under the 1998 Plan are fully vested as a result of the Offering. Generally,
options issued under the 1999 Plan and Directors Plan vest over a four-year
period after the date of grant and expire ten years after the date of grant.
Option holders that terminate their employment with the Company forfeit all
non-vested options.
Stock options with an exercise price of $.65 and $1.61 were granted under
the 1998 Plan with an exercise price equal to the price per share at which
preferred stock was issued during the month in which the options were granted.
Stock options granted under the 1998 Plan with an exercise price of $3.23 in
December 1998, were later determined to be compensatory based on a revised
estimate of the fair value of the Company's common stock. Upon the Offering in
1999, the Company recognized non-cash compensation expense from stock options of
$0.1 million related to the acceleration of vesting of stock options outstanding
under the 1998 Plan. Expense recognized in 1998 was insignificant.
Options to acquire an additional 140,740 shares were granted under the 1998
Plan in January 1999 that fully vested upon the Offering. These options were
also considered compensatory; and accordingly, the Company recorded non-cash
compensation expense from stock options of $1.1 million related to the
acceleration of vesting of these options.
Options to purchase 46,500 shares were granted under the 1999 Plan with an
exercise price of $3.23 per share. These stock options were considered to be
compensatory; and accordingly, the Company recorded deferred compensation of
$0.4 million. The Company will recognize this amount over the four year vesting
period of these options. During each of the years ended December 31, 2000 and
1999, the Company recognized $0.1 million of non-cash compensation expense
related to these options. Options to purchase 2,612,615 shares were also granted
under the 1999 Plan with an exercise price equal to the fair market value at the
time of grant. The Company recognized $0.3 million of non-cash compensation
expense from stock options for the acceleration of 44,963 options, granted under
the 1999 Plan, in connection with severance agreements during the year ended
December 31, 1999.
F-31
Under the Directors Plan, options to purchase 189,875 shares with an
exercise price of $3.23 per share, were granted in January 1999, all of which
were immediately exercisable. These options were considered compensatory; and
accordingly, the Company recognized expense of $1.5 million of non-cash
compensation expense from stock options during the year ended December 31, 1999
related to the issuance of these options.
The following table summarizes the activity in the 1998, 1999 and Directors
Plans:
SHARES UNDER EXERCISE PRICE WEIGHTED AVERAGE
OPTION PER SHARE EXERCISE PRICE
----------- -------------------------- ----------------
Outstanding at April 3, 1998 --
Options Granted 709,435 $ 0.65 to $ 3.23 $ 1.36
Options Cancelled (4,650) $ 0.65 to $ 3.23 $ 1.48
----------- ---------
Outstanding at December 31, 1998 704,785 $ 0.65 to $ 3.23 $ 1.35
Options Granted 2,777,755 $ 3.23 to $ 27.88 $ 16.41
Options Cancelled (84,209) $ 3.23 to $ 27.88 $ 13.88
Options Exercised (464,320) $ 0.65 to $ 3.23 $ 1.53
----------- ---------
Outstanding at December 31, 1999 2,934,011 $ 0.65 to $ 27.88 $ 15.10
Options Granted 5,442,603 $ 1.84 to $ 20.75 $ 7.16
Options Cancelled (1,519,215) $ 0.65 to $ 27.88 $ 15.02
Options Exercised (196,204) $ 0.65 to $ 13.00 $ 2.68
----------- ---------
Outstanding at December 31, 2000 6,661,195 $ 0.65 to $ 27.88 $ 9.22
=========== =========
Pro forma information regarding net loss and net loss per share is required
by SFAS 123. This information is required to be determined as if the Company had
accounted for its employee stock options granted subsequent to May 31, 1996
under the fair value method of that statement.
The fair value of options granted for the years ended December 31, 2000 and
1999 and the period April 3, 1998 (Inception) to December 31, 1998 reported
below has been estimated at the date of grant using the minimum value option
pricing method for grants prior to the Offering and the Black-Scholes option
pricing model for grants following the Offering. The following weighted average
assumptions were used in the pricing models:
2000 1999 1998
-------------- ---------- ---------
Expected life of options in years................... 5 years 5 years 5 years
Risk-free interest rate............................. 6.15% 5.00% 5.00%
Expected dividend yield............................. 0% 0% 0%
Expected volatility (subsequent to Offering)........ 90% 90% N/A
The Black-Scholes option value model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. The
Company's options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate. Based upon the above assumptions, the weighted
average fair value of employee stock options granted during the years ended
December 31, 2000 and 1999 and the period April 3, 1998 (Inception) to December
31, 1998 was $5.25, $15.38 and $0.42 per share, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' expected life. Had the Company's stock
option plans been accounted for under SFAS 123, net loss available to common
stockholders and basic and diluted net loss available to common stockholders per
share would have been reduced to the following pro forma amounts (in thousands,
except per share amounts):
2000 1999 1998
--------- ---------- ----------
Net loss available to common stockholders:
As reported........................................................... $(150,410) $ (291,222) $ (130,642)
Pro forma ............................................................ $(167,431) $ (294,766) $ (130,654)
Basic and diluted net loss available to common
stockholders per share:
As reported........................................................... $ (2.67) $ (8.69) $ (21.07)
Pro forma............................................................. $ (2.97) $ (8.80) $ (21.07)
F-32
The effects of applying SFAS 123 in the pro forma disclosures are not likely to
be representative of the effects on pro forma results of operations for future
years because variables such as option grants, exercises and stock price
volatility in the disclosures may not be indicative of future activity.
The following table summarizes information about options outstanding at
December 31, 2000:
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
---------------------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF REMAINING CONTRACTUAL WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES SHARES LIFE EXERCISE PRICE SHARES EXERCISE PRICE
----------------------- ---------- --------------------- ---------------- --------- ----------------
$ 0.65 to $ 2.79 202,593 8.3 $ 1.44 130,543 $ 1.22
$ 2.79 to $ 5.58 2,669,779 9.1 $ 3.83 304,255 $ 4.55
$ 5.58 to $ 8.36 1,711,210 8.2 $ 7.63 196,737 $ 7.74
$ 8.36 to $11.15 56,000 8.5 $ 9.81 -- --
$ 11.15 to $13.94 469,363 6.5 $ 13.00 125,452 $ 13.00
$ 16.73 to $19.51 872,875 8.8 $ 17.79 187,500 $ 17.63
$ 19.51 to $22.30 460,500 7.8 $ 21.23 39,123 $ 22.19
$ 25.09 to $27.88 218,875 7.1 $ 26.94 60,624 $ 26.89
----------------------- ---------- --- --------- --------- -------
$ 0.65 to $27.88 6,661,195 8.5 $ 9.22 1,044,234 $ 10.05
======================= ========== === ========= ========= =======
11. LOSS PER SHARE
Diluted loss available to common stockholders per share equals basic loss
available to common stockholders per share because the assumed exercise of the
Company's stock options and warrants and the assumed conversion of preferred
stock is dilutive. Options and warrants to purchase 9,505,853, 3,567,936 and
704,785 shares of common stock at December 31, 2000, 1999 and 1998,
respectively, were excluded from the calculation of net loss available to common
stockholders per share.
There is a potential to issue additional warrants pursuant to the
agreements set forth in Note 9. These potential warrants have been excluded from
the calculation above because they are not currently measurable and would be
dilutive. In the future, the Company may issue additional stock or warrants to
purchase its common stock in connection with its efforts to expand the
distribution of its services. Stockholders could face additional dilution from
these possible future transactions.
12. RELATED PARTY TRANSACTIONS
GENERAL
In November 1998, the Company entered into a systems access agreement with
Vulcan, Charter and Marcus, a programming content agreement with Vulcan, and a
related networks services agreement with Charter and Marcus, pursuant to which
Vulcan, Charter and Marcus retained the Company to offer and provide Internet
access and related services to cable customers of various cable systems owned
and operated by Charter and Marcus. Vulcan is a significant stockholder of the
Company and management of Vulcan and Charter represent three of the Company's
Board of Directors. See Note 9 for more information on these agreements. Also
see Note 2 for a discussion of the concentration of credit risk related to
Charter.
The Company has an agreement with Gans under which Gans granted the Company
the exclusive right to provide the customers of six cable systems owned by Gans
with high speed Internet access. The agreement has a five year term and provides
that Gans will receive a share of the gross revenues the Company receives under
the agreement. During 2000, 1999 and 1998, the Company paid Gans $0.3 million,
$0.2 million and $0.1 million, respectively, under the agreement.
NOTES PAYABLE -- RELATED PARTY
See Note 6 for information related to notes payable to related parties.
13. 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.
F-33
SIGNIFICANT AGREEMENTS
The Company uses high speed data backbone circuits provided by a national
telecommunication company. The contract period for the service agreements is
typically three years from the date the circuit is installed. Minimum payments
under the service agreements are as follows (in thousands):
YEAR ENDING DECEMBER 31,
2001 $ 4,992
2002 5,010
2003 2,417
---------
Total $ 12,419
=========
F-34
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of unaudited quarterly financial information for the years ended
December 31, 2000 and 1999 follows.
(in thousands, except per share amounts)
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
2000 2000 2000 2000
------------ ------------ ------------ ------------
Net revenue ................................ $ 1,994 $ 2,757 $ 4,282 $ 5,167
Loss from operations ....................... (29,362) (29,837) (33,238) (63,186)
Net loss ................................... (27,727) (28,501) (32,238) (61,944)
Net loss available to common stockholders .. (27,727) (28,501) (32,238) (61,944)
Basic and diluted net loss available to
common stockholders per share ............. (0.51) (0.52) (0.56) (1.06)
</Table>
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
------------ ------------ ------------ ------------
Net revenue ................................ $ 299 $ 641 $ 1,070 $ 1,436
Loss from operations ....................... (8,156) (15,899) (17,027) (25,532)
Net loss ................................... (8,037) (15,252) (14,325) (23,338)
Net loss available to common stockholders .. (113,787) (139,772) (14,325) (23,338)
Basic and diluted net loss available to
common stockholders per share ............. (18.35) (7.47) (0.26) (0.43)
F-35
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 25,977 $ 114,847
Short-term investments 30,489 13,229
Restricted cash 2,404 2,469
Accounts receivable, net of allowance for doubtful accounts of $491
and $296, respectively 4,561 2,087
Prepaid expenses and other current assets 5,747 3,818
--------- ---------
Total current assets 69,178 136,450
Property, equipment and improvements, net 55,662 63,008
Intangible assets, net 3,444 4,197
Deferred distribution agreement costs, net 9,724 11,783
Other non-current assets 6,171 4,269
--------- ---------
Total assets $ 144,179 $ 219,707
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,836 $ 15,395
Accrued compensation and related expenses 5,843 6,757
Other current liabilities 10,777 9,073
Long-term debt, current portion 2,345 2,633
Capital lease obligations, current portion 8,223 7,790
--------- ---------
Total current liabilities 35,024 41,648
Long-term debt 1,072 2,313
Capital lease obligations 7,333 11,380
Other liabilities 617 --
--------- ---------
Total liabilities 44,046 55,341
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value (aggregate liquidation preference of $75.0 million),
10,000,000 shares authorized, 75,000 shares issued and outstanding at June 30,
2001 and December 31, 2000 1 1
Common stock, $.01 par value, 400,000,000 shares authorized, 58,809,052
and 58,684,052 shares issued and outstanding at June 30, 2001 and
December 31, 2000, respectively 588 587
Class A common stock, 100,000,000 shares authorized, none issued -- --
and outstanding
Additional paid-in-capital 742,063 737,215
Deferred compensation (2,296) (713)
Accumulated deficit (640,616) (573,217)
Accumulated other comprehensive income 393 493
--------- ---------
Total stockholders' equity 100,133 164,366
--------- ---------
Total liabilities and stockholders' equity $ 144,179 $ 219,707
========= =========
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-36
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- ----------------------------
2001 2000 2001 2000
----------- ------------ ------------ ------------
Net Revenue $ 9,300 $ 2,757 $ 16,304 $ 4,751
Costs and expenses:
Operating 24,050 14,844 46,147 30,790
Engineering 5,561 5,479 12,840 10,391
Sales and marketing 2,806 6,249 7,440 12,465
General and administrative:
Non-cash compensation expense from stock options, warrants
and restricted stock 193 24 270 48
Amortization of distribution agreement costs 4,075 891 4,679 1,116
Other general and administrative expenses 6,928 5,107 13,399 9,140
----------- ------------ ------------ ------------
Total general and administrative 11,196 6,022 18,348 10,304
----------- ------------ ------------ ------------
Total costs and expenses 43,613 32,594 84,775 63,950
----------- ------------ ------------ ------------
Loss from operations (34,313) (29,837) (68,471) (59,199)
Investment income 882 1,866 2,299 3,991
Interest expense (578) (530) (1,227) (1,020)
----------- ------------ ------------ ------------
Net loss available to common stockholders $ (34,009) $ (28,501) $ (67,399) $ (56,228)
=========== ============ ============ ============
Basic and diluted net loss available to common stockholders per share $ (0.58) $ (0.52) $ (1.15) $ (1.03)
=========== ============ ============ ============
Weighted average shares used in computation of basic and diluted net
loss available to common stockholders per share 58,767,843 55,232,317 58,726,179 54,780,674
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-37
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(IN THOUSANDS)
(UNAUDITED)
<Table>
<Caption>
2001 2000
--------- ---------
OPERATING ACTIVITIES
Net loss $ (67,399) $ (56,228)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 20,241 7,599
Non-cash compensation expense from stock options, warrants and restricted stock 270 48
Amortization of distribution agreement costs 4,679 1,116
Changes in operating assets and liabilities:
Restricted cash 65 (1,937)
Accounts receivable (2,474) (461)
Prepaid expenses and other current assets (1,929) 212
Other non-current assets (1,902) (1,195)
Accounts payable (11,926) 309
Accrued compensation and related expenses (914) 8
Other current liabilities 2,079 4,282
Other liabilities 617 --
--------- ---------
Net cash used in operating activities (58,593) (46,247)
--------- ---------
INVESTING ACTIVITIES
Purchases of short-term investments (31,703) (65,883)
Sales and maturities of short-term investments 14,343 126,464
Purchases of property, equipment and improvements, net of leases (7,435) (19,525)
--------- ---------
Net cash (used in) provided by investing activities (24,795) 41,056
--------- ---------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock -- 10,000
Payments on capital lease obligations (3,953) (2,978)
Proceeds from long-term debt -- 1,213
Payments on long-term debt (1,529) (872)
Proceeds from exercise of stock options -- 588
--------- ---------
Net cash (used in) provided by financing activities (5,482) 7,951
--------- ---------
Net change in cash and cash equivalents (88,870) 2,760
Cash and cash equivalents, beginning of period 114,847 53,310
--------- ---------
Cash and cash equivalents, end of period $ 25,977 $ 56,070
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Equipment acquired under capital leases $ 339 $ 3,574
Property and equipment purchases payable $ 2,873 $ 2,547
Warrants earned in connection with distribution agreements $ 2,621 $ 6,558
Issuance of common stock in connection with distribution agreement $ 375 --
</Table>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
F-38
ITEM 1 - NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION
THE COMPANY
High Speed Access Corp. and its subsidiaries (hereinafter referred to as the
Company, we, us, or our) provides high speed Internet access to residential and
commercial end users primarily using cable modem technology. The Company focuses
primarily on residential end users in exurban areas, although the Company has
recently begun providing broadband services in some urban markets. The Company
defines exurban markets as cable systems with fewer than 100,000 homes passed.
The term "homes passed" refers to the number of homes that potentially can be
served by a cable system. The Company enters into long-term exclusive contracts
with cable system operators to provide a suite of services on a comprehensive
"turnkey" basis, as well as on an unbundled or "Network Services" basis. These
services enable a cable system's customers to receive high speed Internet
access.
In exchange for providing the Company with access to its customers in the
turnkey solution, we pay the cable operator a portion of the monthly fees
received from an end user that subscribes to our services. In an unbundled or
Network Services solution, we deliver fewer services and incur lower costs than
a turnkey solution, but also earn a smaller percentage of the subscription
revenue or a fixed fee on a per subscriber basis. Under the Network Services
solution, our cable partners will typically bill the end user and will remit to
us our percentage of the revenue or the fixed fee. Network Services solutions
have become a significant part of our business mix, and we anticipate this trend
will continue.
The Company currently offers certain related services including web site
hosting, all primarily for small and medium enterprises ("SMEs"). The Company
also currently provides, on a limited basis, standard Internet access through
traditional dial-up service to residential and SME customers.
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 present fairly the Company's
financial position, results of operations and cash flows for the periods
presented. Certain information and footnote disclosures normally included in
audited financial information prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission's rules and regulations.
The results of operations for the period ended June 30, 2001 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year ending December 31, 2001. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2000.
ABILITY TO CONTINUE AS A GOING CONCERN
The Company continues to closely monitor the level of its expenditures and
cash commitments and recently announced a series of significant cost reduction
measures. Among the actions being taken by the Company are the completion of its
previously announced exit from certain one-way cable TV markets, the
commencement of negotiations to exit all of its turnkey contracts with cable
operators other than Charter Communications, Inc. ("Charter"), a related party,
(covering 22,500 current subscribers), and material reductions in the workforce
of the Company. The Company has also begun scaling back the operations of
Digital Chainsaw ("Digital Chainsaw" or "Digital") including reducing its
workforce and service offerings, and is currently pursuing the sale of this
subsidiary. Finally, the Board of Directors of the Company has made the
strategic determination to no longer pursue entry into the digital subscriber
line ("DSL") market and to cease development of any other new service and
product offerings other than those that are expected to be cash flow positive in
the short term. The Company will cease further attempts to acquire DSL assets
and has begun pursuing the sale of its current DSL assets. Following completion
of these measures, the Company's business will consist of its cable internet
access business with Charter and its international ISP infrastructure services
business. The Company recently received a non-binding proposal from Charter to
acquire the Company's cable modem business with Charter. See Note 7, "Business
Developments" and "Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Recent Developments" for a description of
such proposal.
The Company has incurred losses from operations and negative cash flows from
operating activities since April 3, 1998 ("Inception"), which have been funded
primarily through the issuance of equity securities and borrowings. Management
expects to experience substantial negative cash flows for at least the next
several years. As of June 30, 2001, the Company had $56.5 million of
unrestricted cash, cash equivalents and short-term investments, which management
believes are sufficient to meet the Company's cash needs in 2001.
F-39
Continued implementation of the Company's revised business plan, however, will
be dependent upon obtaining substantial additional financing by no later than
early 2002 to fund continuing operations. The Company will continue to evaluate
the size of its operations with the goal of extending its cash resources and
enhancing the possibility of entering into a strategic transaction including a
financing or a business combination transaction. Management has attempted to
secure additional financing over the last several months but has thus far been
unsuccessful in its efforts. The Company believes that it is very unlikely that
it will be able to secure additional financing in the current economic
environment being faced by the telecommunications industry before the Company's
cash reserves are depleted in early 2002. In light of the difficult current
financing environment, the Company has been pursuing additional strategic
alternatives, including consideration of Charter's proposal to acquire the
Company's cable modem business with Charter. If the Charter proposal is not
consummated and if additional financing is not available on acceptable terms,
the Company will be forced to further curtail operations, which could have a
material adverse effect on the Company. Such curtailment of operations would
involve significant additional amendments to the Company's current business plan
including, but not limited to, some or all of the following: further
administrative and operating expense reductions, further reduction of our sales,
marketing and customer service efforts, sales of certain assets or of the
Company or the bankruptcy and/or dissolution of the Company.
Consequently, there is substantial doubt as to the Company's ability to
continue as a going concern unless it is able to secure additional financing in
early 2002. The accompanying condensed consolidated financial statements have
been prepared on a going concern basis and include no adjustments that may
result from the outcome of this uncertainty.
See Note 7, "Business Developments."
RECLASSIFICATION
Certain prior period amounts in the condensed consolidated financial
statements have been reclassified to conform to the current period presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
These estimates are based on knowledge of current events and anticipated future
events. Actual results could differ from those estimates.
NOTE 2 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), which provides that all business combinations should be accounted
for using the purchase method of accounting and establishes criteria for the
initial recognition and measurement of goodwill and other intangible assets
recorded in connection with a business combination. The provisions of SFAS 141
apply to all business combinations initiated after June 30, 2001 and to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001, or later. The Company will apply the provisions of SFAS 141
to any future business combinations.
In addition, the FASB issued Statements of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which establishes
the accounting for goodwill and other intangible assets following their
recognition. SFAS 142 applies to all goodwill and other intangible assets
whether acquired singly, as part of a group, or in a business combination. SFAS
142 provides that goodwill should not be amortized but should be tested for
impairment annually using a fair-value based approach. In addition, SFAS 142
provides that other intangible assets other than goodwill should be amortized
over their useful lives and reviewed for impairment in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS 142 is
effective for the Company beginning on January 1, 2002. Upon adoption, the
Company will be required to perform a transitional impairment test for all
goodwill recorded as of January 1, 2002. Any impairment loss recorded as a
result of completing the transitional impairment test will be treated as a
change in accounting principle. The impact of the adoption of SFAS 142 on the
Company's results of operations for all periods beginning on or after January 1,
2002 will be to eliminate amortization of goodwill. Management of the Company
has not performed a transitional impairment test under SFAS 142 and accordingly
cannot estimate the impact of the adoption as of January 1, 2002.
NOTE 3 - LOSS PER SHARE
The Company computes net loss available to common stockholders per share
under the provisions of Statements of Financial Accounting Standards No. 128,
"Earnings per Share," ("SFAS 128"). Under the provisions of SFAS 128, basic net
loss available to common stockholders per share is computed by dividing the net
loss available to common stockholders for the period by the weighted average
number of shares of common stock outstanding during the period.
Diluted earnings per share is determined in the same manner as basic
earnings per share, except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and assuming conversion of preferred stock. In addition, income or loss is
adjusted for dividends and other transactions relating to preferred stock for
which conversion is assumed. The calculation of diluted net loss available to
common stockholders per share excludes potential common
F-40
shares if the effect is dilutive.
Basic and diluted net loss available to common stockholders per share for
the three months ended June 30, 2001 and 2000, were $0.58 and $0.52 based on
weighted average shares outstanding of 58,767,843 and 55,232,317, respectively.
For the six months ended June 30, 2001 and 2000, basic and diluted net loss
available to common stockholders were $1.15 and $1.03 based on weighted average
shares outstanding of 58,726,179 and 54,780,674, respectively. Diluted loss
available to common stockholders per share equals basic loss available to common
stockholders per share because the assumed exercise of the Company's stock
options and warrants and the assumed conversion of preferred stock are dilutive.
Options and warrants to purchase 10,850,012 shares and 5,387,718 shares of
common stock at June 30, 2001 and 2000, respectively, were excluded from the
calculation of net loss available to common stockholders per share. Also
excluded from the calculation were 75,000 shares of preferred stock that are
convertible into 14,952,906 shares of common stock at June 30, 2001.
There is a potential to issue additional warrants pursuant to the agreements
set forth in Note 5. These potential warrants have been excluded from the
calculation above because they are not currently measurable and would be
dilutive. In the future, the Company also may issue additional stock or warrants
to purchase its common stock in connection with its efforts to expand the
distribution of its services. Stockholders could face additional dilution from
these possible future transactions.
NOTE 4 - COMPREHENSIVE LOSS
Comprehensive loss, comprised of net loss available to common stockholders
and net unrealized holding gains and losses on investments, totaled $33.8
million and $27.3 million for the three months ended June 30, 2001 and 2000,
respectively, and $67.5 million and $55.6 million for the six months ended June
30, 2001 and 2000, respectively.
NOTE 5 - DISTRIBUTION AGREEMENTS
As an inducement to certain cable partners to commit systems, the Company
issues warrants to purchase its common stock in connection with Network Service
agreements and other agreements, collectively referred to as distribution
agreements. The Company values warrants to purchase its common stock using an
accepted options pricing model based on the value of the stock when the warrants
are earned. The Company recognizes an addition to equity for the fair value of
any warrants issued, and recognizes the related expense over the term of the
agreement with the respective cable system, 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."
In May 2000, the Company entered into a distribution agreement with Charter,
a related party. Under this agreement, Charter committed to provide the Company
exclusive right to provide Network Services related to the delivery of Internet
access to homes passed in certain cable systems. We provide Network Services,
including system monitoring and security, as well as call center support.
Charter receives the warrants described in the following paragraph as an
incentive to provide the Company additional homes passed, although it is not
obligated to do so. Charter can terminate these exclusivity rights, on a
system-by-system basis, if the Company fails to meet performance specifications
or otherwise breaches the agreement. The agreement has an initial term of five
years and may be renewed at Charter's option for additional successive five-year
terms.
In connection with this distribution agreement, the Company and Charter
entered into an amended and restated warrant to purchase up to 12,000,000 shares
of common stock at an exercise price of $3.23 per share and terminated two
warrants that had been issued to Charter in November 1998. The new warrant
becomes exercisable at the rate of 1.55 shares for each home passed committed to
us by Charter under the distribution agreement entered into by Charter and us in
November 1998. The warrant also becomes exercisable at the rate of .775 shares
for each home passed committed to us by Charter under the distribution agreement
entered into in May 2000 up to 5,000,000 homes passed, and at a rate of 1.55
shares for each home passed in excess of 5,000,000. Charter also has the
opportunity to earn additional warrants to purchase shares of common stock upon
any renewal of the May 2000 agreement. Such a renewal warrant will have an
exercise price of $10 per share and will be exercisable to purchase 0.5 shares
for each home passed in the systems for which the May 2000 agreement is renewed.
With respect to each home passed, launched or intended to be launched on or
before the second anniversary date of the second distribution agreement, the
Company will pay Charter, at Charter's option, a launch fee of $3.00 per home
passed committed. As of June 30, 2001, the Company has paid Charter
approximately $6.7 million of launch fees related to launched systems or systems
to be deployed in the near future. In these systems where the Company paid a
launch fee to Charter, the Company receives additional revenue in years two
through five or the distribution agreement. The launch fees paid are amortized
against the additional revenue received from Charter. The Company recently
received a non-binding proposal from Charter to acquire the Company's cable
modem business with Charter. See Note 7, "Business Developments" and "Item 2 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments" for a description of such proposal.
F-41
For the three and six months ended June 30, 2001, the Company recognized
$4.6 million and $8.2 million of revenue, respectively, under these distribution
agreements. At June 30, 2001 the company had receivables from Charter of $5.0
million.
As of June 30, 2001, various cable partners, including Charter, had earned
2,826,714 warrants under distribution agreements of which 91,308 of these
warrants were earned at a cost of $0.9 million in the three months ended June
30, 2001. Deferred distribution agreement costs of $9.7 million, net of
accumulated amortization of $7.5 million were recorded in conjunction with these
warrants at June 30, 2001. Amortization of distribution agreement costs of $4.1
million and $4.7 million were recognized in the statement of operations for the
three and six months ended June 30, 2001, respectively. Included in these
amounts are deferred distribution agreement costs of $2.8 million related to
warrants in terminated one-way systems. Additional deferred distribution
agreement costs may be recorded and amortized in future periods should the cable
partners earn the right to purchase additional common shares based on the number
of homes passed committed to the Company. At June 30, 2001, there were
14,973,286 additional warrants available to be earned under distribution
agreements.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
As of June 30, 2001 the Company was not a party to any material legal
proceedings. In the opinion of management, the amount of ultimate liability with
respect to any actions known as of June 30, 2001 will not materially affect the
financial position, results of operations or cash flows of the Company. See also
Note 7, "Business Developments" for a discussion of a legal proceeding pending
in connection with Charter's proposal to acquire the Company's cable modem
business.
NOTE 7 - BUSINESS DEVELOPMENTS
The Company recently announced a series of significant cost reduction
measures. Among the actions being taken by the Company in the third quarter are:
o The completion of its previously announced exit from certain one-way
cable TV markets. In the second quarter of 2001, the Company recorded a
$2.8 million charge for the write-down of equipment used in one-way
markets and other operating costs, primarily non-cancelable lease
obligations.
o The commencement of negotiations to exit all of its turnkey contracts
with cable operators other than Charter (covering 22,500, or
approximately 12% of the Company's current subscribers). The net book
value of the equipment used in these systems is $4.3 million. The
Company expects to record impairment charges relating to these assets as
well as additional costs associated with these actions in the third
quarter of 2001. The amounts of these impairment charges and possible
additional costs are not currently estimable.
o Scaling back the operations of Digital Chainsaw, including reducing its
workforce and eliminating all service offerings other than web site
hosting. The net book value of Digital Chainsaw's assets is $0.5
million. The Company expects to record impairment charges relating to
these assets as well as additional costs associated with these actions
in the third quarter of 2001. The amounts of these impairment charges
and possible additional costs are not currently estimable.
o Ceasing pursuit of its previously planned entry into the DSL market and
ceasing development of any other new service and product offerings other
than those that are expected to be cash flow positive in the short term.
The net book value of the Company's DSL assets is $3.5 million,
including $3.4 million purchased in July 2001. In connection with this
purchase, the Company entered into a $1.9 million debt financing
agreement with Lucent Technologies ("Lucent"). This transaction, along
with prior purchases, has fulfilled the Company's $5.0 million purchase
obligation with Lucent. The Company expects to record impairment charges
relating to these assets as well as additional costs associated with
these actions in the third quarter of 2001. The amounts of these
impairment charges and possible additional costs are not currently
estimable.
o Material reductions in workforce. The Company expects to incur $2.0
million in severance and related costs relating to these workforce
reductions in the third quarter of 2001.
The Company also has begun pursuing the sale of Digital Chainsaw as well as
its DSL assets. Following completion of these measures, the Company's business
will consist of its cable internet access business with Charter and its
international ISP infrastructure services business. The Company will continue to
monitor the size of its workforce and the levels of its other operating costs
and cash commitments with a view to conserving cash and enhancing the
possibility of entering into a strategic transaction including a financing or a
business combination transaction.
On July 31, 2001, the Company received a non-binding proposal from Charter
to acquire certain contracts and associated assets of the Company's cable modem
business that service Charter's customers. The proposal relates to all assets of
the Company used in or necessary to perform services provided by the Company
under the Full Turnkey contract and Network Services Agreement for Charter cable
systems, including the Company's call center and network operations center in
Louisville, KY and all Company-owned equipment in Charter headends and customer
homes. The proposed purchase price for those contracts and associated assets is
approximately $73 million, consisting of cash and the assumption of certain
liabilities, subject to certain adjustments. In addition, as part of the
proposed transaction consideration, all 37,000 and 38,000 shares of the
Company's convertible preferred stock respectively held by Charter and Vulcan,
would be cancelled.
F-42
In view of the related-party issues attendant on Charter's proposal,
Messrs. Jerald L. Kent, Stephen E. Silva and William D. Savoy have resigned from
the Company's Board of Directors. Mr. Kent is President, Chief Executive Officer
and a director of Charter and Mr. Silva is Senior Vice President, Corporate
Development and Technology of Charter. Mr. Savoy is a director of Charter and
President of Vulcan. See "Risk Factors -- Because of our relationship with
Vulcan Ventures, New Investors will have little influence over management
decisions."
A Special Committee of the Company's Board of Directors, comprised of
directors not affiliated with Charter or Vulcan (which, following the
resignations referred to above, comprise the Company's entire Board of
Directors) has been investigating a broad range of strategic options for the
Company, including, but not limited to, a sale of the Company, a sale of the
Company's assets, an acquisition, merger, consolidation, or other business
combination transaction, a strategic transaction, joint venture or partnership
with a financial, strategic or industry partner or other similar transaction, or
a public or private sale of debt or equity securities. Lehman Brothers, a
leading investment banking firm, has been assisting the Special Committee. The
Special Committee has been considering Charter's proposal and the Company is
currently in ongoing negotiations with Charter regarding certain financial and
other material elements of Charter's proposal. The Company is also evaluating
the impact of the proposal on the Company. Among the matters being considered,
assuming a definitive agreement with Charter can be achieved on mutually
acceptable terms, is whether the Company would commence an orderly shutdown of
its remaining business and distribute the net proceeds to its stockholders or
utilize the proceeds of the sale in furtherance of a restructuring and expansion
of the Company's remaining business. There can be no assurance that the Company
will agree upon or consummate a transaction with Charter or with any other
party. The Company, its directors, Charter Communications, Inc. and Paul Allen
have been named as defendants in two class action lawsuits filed in the Court of
Chancery of the State of Delaware (Tesche v. O'Brien, et. al., Civil Action No.
19046 NC and Denault v. O'Brien et al., Civil Action No. 19045 NC). Both
lawsuits allege a breach of fiduciary duty in connection with the making of the
Charter proposal and the Company's consideration of it. The Complaint seeks
injunctive relief preventing the Company from going forward with the Charter
transaction or in the event the transaction is consummated rescission of that
transaction as well as damages in an unspecified amount. The Company intends to
vigorously defend these lawsuits.
In April 2001, the Company notified its cable partners that it intended to
discontinue turnkey services in the majority of its one-way cable TV markets.
The change, which affected fewer than four percent of the Company's subscribers,
was accomplished by modifying the contractual relationship between the Company
and the cable operator from turnkey services to Network Services or by
terminating service in these markets. In connection with these service
terminations, the Company fully amortized deferred distribution agreement costs
of approximately $2.8 million associated with warrants issued under the related
distribution agreements. In addition, the Company recorded an impairment charge
of $1.7 million for the write-down of equipment used in one-way markets and a
charge of $1.1 million for lease termination and other costs expected to be paid
by the end of 2001.
In February 2001, the Company began providing internet infrastructure
services to Kabel Nordrhein-Westfalen GmbH & Co. KG ("KNRW") in Germany.
Revenues from the service agreement are recognized as services are provided. For
the three and six months ended June 30, 2001, the Company recognized revenues of
$1.7 million and $2.1 million, respectively. This agreement is terminable by
KNRW in the event of a change of control of the Company.
The Company recently entered into an agreement with Time Warner Cable, a
unit of AOL Time Warner, covering the provision of high-speed Internet access
services over AOL Time Warner's cable systems. The Company's strategy under this
agreement was to secure a national content provider to provide customer
acquisition and marketing support and consumer services. The Company has thus
far been unsuccessful in its efforts to reach agreement with a major content
provider and believes that it is very unlikely to secure such a party within the
period provided for in the Time Warner agreement.
F-43
ANNEX A
ASSET PURCHASE AGREEMENT
between
HIGH SPEED ACCESS CORP.
and
CHARTER COMMUNICATIONS HOLDING COMPANY, LLC
Dated as of September 28, 2001
A-1
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS............................................................................. A-2
Section 1.01. Specified Definitions............................................................. A-2
Section 1.02. Other Terms....................................................................... A-10
Section 1.03. Interpretation.................................................................... A-10
ARTICLE II TRANSFER OF ASSETS AND LIABILITIES...................................................... A-11
Section 2.01. Purchase and Sale of Assets....................................................... A-11
Section 2.02. Excluded Assets................................................................... A-12
Section 2.03. Assumption of Liabilities......................................................... A-13
Section 2.04. Excluded Liabilities.............................................................. A-13
Section 2.05. Risk of Loss; Condemnation........................................................ A-15
Section 2.06. Assignment of Contracts, Etc...................................................... A-15
ARTICLE III PURCHASE PRICE.......................................................................... A-16
Section 3.01. Purchase Price.................................................................... A-16
Section 3.02. Holdbacks......................................................................... A-16
Section 3.03. Purchase Price Adjustments........................................................ A-16
Section 3.04. Determination of Adjustments...................................................... A-17
Section 3.05. Allocation of Purchase Price...................................................... A-20
ARTICLE IV THE CLOSING............................................................................. A-20
Section 4.01. Closing Date...................................................................... A-20
Section 4.02. Deliveries by Seller at the Closing............................................... A-21
Section 4.03. Deliveries by Holdco at the Closing............................................... A-21
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER................................................ A-23
Section 5.01. Organization, Standing and Power.................................................. A-23
Section 5.02. Corporate Authorization........................................................... A-23
Section 5.03. Non-Contravention................................................................. A-24
Section 5.04. Governmental Filings; Consents.................................................... A-24
Section 5.05. Acquired Assets................................................................... A-24
Section 5.06. Absence of Certain Changes or Events.............................................. A-24
Section 5.07. Proxy Statement................................................................... A-25
A-2
TABLE OF CONTENTS
PAGE
Section 5.08. Compliance with Applicable Laws.................................................. A-25
Section 5.09. Litigation; Decrees.............................................................. A-25
Section 5.10. Security Deposits................................................................ A-25
Section 5.11. Contracts........................................................................ A-25
Section 5.12. Real Property.................................................................... A-26
Section 5.13. Title to and Condition of the Acquired Assets.................................... A-26
Section 5.14. Compliance with Environmental Laws............................................... A-27
Section 5.15. Intellectual Property Rights..................................................... A-27
Section 5.16. Taxes............................................................................ A-29
Section 5.17. Employees, Labor Matters, etc.................................................... A-29
Section 5.18. Employee Benefit Plans........................................................... A-30
Section 5.19. Brokers.......................................................................... A-30
Section 5.20. Solvency of Seller............................................................... A-30
Section 5.21. Opinion of Financial Advisors.................................................... A-30
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF HOLDCO............................................... A-30
Section 6.01. Organization, Standing and Power................................................. A-30
Section 6.02. Corporate Authorization.......................................................... A-31
Section 6.03. Non-Contravention................................................................ A-31
Section 6.04. Governmental Filings; Consents................................................... A-31
Section 6.05. Information Supplied; Schedule 13E-3............................................. A-31
Section 6.06. Brokers.......................................................................... A-32
Section 6.07. Assignment of Agreements......................................................... A-32
Section 6.08. Interested Stockholder........................................................... A-32
ARTICLE VII COVENANTS RELATED TO THE CONDUCT OF CABLE MODEM BUSINESS............................... A-32
Section 7.01. Conduct of Cable Modem Business in the Ordinary Course........................... A-32
Section 7.02. Arapahoe Facility................................................................ A-34
Section 7.03. Access to Information............................................................ A-34
ARTICLE VIII ADDITIONAL AGREEMENTS.................................................................. A-35
Section 8.01. Seller Stockholder Meeting....................................................... A-35
A-3
TABLE OF CONTENTS
PAGE
Section 8.02. Proxy Statement; Schedule 13E-3.................................................. A-35
Section 8.03. Governmental Approvals........................................................... A-35
Section 8.04. Third Party Consents............................................................. A-36
Section 8.05. Notification of Certain Matters.................................................. A-37
Section 8.06. Bulk Transfer Laws............................................................... A-37
Section 8.07. Further Assurances............................................................... A-37
Section 8.08. Acquisition Proposals............................................................ A-37
Section 8.09. Employee Matters................................................................. A-38
Section 8.10. CMB Business Records; Transitional Arrangements.................................. A-42
Section 8.11. Publicity........................................................................ A-43
Section 8.12. Fees and Expenses................................................................ A-43
Section 8.13. Cancellation of Charter Warrants................................................. A-43
Section 8.14. Letter of Credit................................................................. A-43
Section 8.15. Taxes............................................................................ A-44
Section 8.16. Use of Seller's Name............................................................. A-45
Section 8.17. Non-solicitation................................................................. A-45
Section 8.18. Confidentiality.................................................................. A-45
Section 8.19. Limitations on Seller's Representations and Warranties........................... A-45
Section 8.20. Launch Fees...................................................................... A-46
Section 8.21. Termination of Charter Contracts................................................. A-46
Section 8.22. CSR Classes...................................................................... A-46
Section 8.23. Customer Care Matters............................................................ A-47
ARTICLE IX CONDITIONS............................................................................. A-47
Section 9.01. Conditions to Each Party's Obligation............................................ A-47
Section 9.02. Conditions to Obligation of Holdco............................................... A-47
Section 9.03. Conditions to Obligation of Seller............................................... A-48
ARTICLE X TERMINATION, AMENDMENT AND WAIVER...................................................... A-49
Section 10.01. Termination...................................................................... A-49
Section 10.02. Notice of Termination............................................................ A-49
A-4
TABLE OF CONTENTS
PAGE
Section 10.03. Effect of Termination and Abandonment............................................ A-50
Section 10.04. Amendments....................................................................... A-50
Section 10.05. Extension; Waiver................................................................ A-50
ARTICLE XI INDEMNIFICATION........................................................................ A-51
Section 11.01. Indemnification by Seller........................................................ A-51
Section 11.02. Indemnification by Holdco........................................................ A-52
Section 11.03. Exclusive Remedy; No Consequential Damages....................................... A-53
Section 11.04. Characterization of Indemnification and Other Payments........................... A-53
Section 11.05. Damages Net of Insurance; Tax Benefits........................................... A-53
Section 11.06. Procedures Relating to Third Party Claims........................................ A-53
Section 11.07. Indemnification Holdback......................................................... A-55
ARTICLE XII GENERAL PROVISIONS..................................................................... A-56
Section 12.01. Notices.......................................................................... A-56
Section 12.02. Entire Agreement................................................................. A-57
Section 12.03. Severability..................................................................... A-57
Section 12.04. Third Party Beneficiaries........................................................ A-57
Section 12.05. Assignment....................................................................... A-58
Section 12.06. Specific Performance............................................................. A-58
Section 12.07. Governing Law.................................................................... A-58
Section 12.08. Waiver of Jury Trial............................................................. A-58
Section 12.09. Exhibits and Schedules........................................................... A-58
Section 12.10. No Strict Construction........................................................... A-58
Section 12.11. Counterparts; Effectiveness...................................................... A-58
A-5
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT dated as of September 28, 2001,
between High Speed Access Corp., a Delaware corporation ("Seller"), and Charter
Communications Holding Company, LLC, a Delaware limited liability company
("Holdco").
RECITALS
WHEREAS, Seller is engaged in the business of providing
broadband Internet access over cable and related services (the "Business");
WHEREAS, a significant portion of the Business conducted by
Seller relates to the provision of high speed internet access to residential and
commercial customers of Holdco and its Affiliates via cable modems pursuant to
the Full Turnkey Agreement and Second NSA Agreement (each as hereinafter
defined), and includes research and development and implementation of that
business (the "Cable Modem Business");
WHEREAS, Seller desires to sell, transfer and assign to
Holdco, and Holdco desires to purchase and assume from Seller, certain of the
assets and liabilities of the Cable Modem Business, namely, the Acquired Assets
and Assumed Liabilities, upon the terms and subject to the conditions set forth
herein;
WHEREAS, Seller has notified its cable partners that it
intends to exit from certain one-way cable television markets and to exit all of
its turnkey contracts with cable operators other than Holdco;
WHEREAS, in order to induce Seller and Holdco to enter into
this Agreement, as of the date hereof, Seller, Charter Communications Ventures,
LLC ("Charter Ventures"), Vulcan Ventures Incorporated ("Vulcan") and certain
other stockholders of Seller are entering into a Voting Agreement, substantially
in the form attached as Exhibit A hereto (the "Voting Agreement");
WHEREAS, in order to induce Holdco to enter into this
Agreement, as of the date hereof, Charter Communications, Inc., a Delaware
corporation ("CCI") and Seller are entering into a Services and Management
Agreement, substantially in the form attached as Exhibit B hereto (the
"Management Agreement");
WHEREAS, in order to induce Seller to enter into this
Agreement, as of the date hereof, Holdco and Seller are entering into a License
Agreement, substantially in the form attached as Exhibit C hereto (the "License
Agreement"); and
WHEREAS, in order to induce Holdco to enter into this
Agreement, as of the date hereof, Holdco and Seller are entering into a Billing
Letter Agreement, substantially in the form attached as Exhibit D hereto (the
"Billing Letter Agreement").
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NOW, THEREFORE, in consideration of the mutual covenants,
representations and warranties herein contained, the parties hereto, intending
to be legally bound, hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01. Specified Definitions. As used in this
Agreement, the following capitalized terms have the meanings specified below:
"Accounts Payable" means the accounts payable by Seller
arising out of the operation of the Cable Modem Business as of the Closing Date
(to the extent not paid or retained by Seller as of or at the Closing),
excluding the Intercompany Payments and the Excluded Liabilities.
"Accounts Receivable" means the accounts receivable, as of the
Closing Date, of Seller arising out of the operation of the Cable Modem
Business, including the Adjusted Accounts Receivable.
"Acquired Current Assets" means Adjusted Accounts Receivable,
Assigned Security Deposits and Prepayments.
"Adjusted Accounts Receivable" means the sum of the following:
(a) 100% of all Seller's accounts receivable from Holdco
related to the Second NSA Agreement plus amounts billed and outstanding from
September 1, 2001 through the Closing Date with respect to circuits and web
hosting plus any outstanding Incremental Costs (as such term is defined in the
Management Agreement) (collectively, the "CCI Receivables"), excluding the
Intercompany Payments; and
(b) amounts due to Seller from users of Seller's services in
the Cable Modem Business as of the Closing Date that are not more than 90 days
past the date of the applicable invoice (being not more than 60 days past the
end of the applicable service period), which amounts are calculated as set forth
on Schedule 1.01(a) (the "Non-CCI Receivables").
"Affiliate" of a Person means a Person that directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, such Person.
"Assigned Security Deposits" means the Security Deposits set
forth on Schedule 1.01(b).
"Assigned Voice & Data Circuits" means voice circuits, data
circuits and related contracts and agreements pertaining primarily to the CMB
Sites set forth on Schedule 1.01(c).
"Assumed Capital Leases" means the Capital Leases set forth on
Schedule 1.01(d).
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"Assumed Capital Lease Liabilities" means all Liabilities of
Seller under the Assumed Capital Leases, valued at their GAAP carrying value on
the Closing Date.
"Assumed Contracts" means all of the Contracts set forth on
Schedule 5.11(a)(i), together with (i) subscription agreements with individual
residential subscribers or commercial establishments for the services provided
by Seller with respect to the Cable Modem Business in the ordinary course of
business; (ii) miscellaneous service Contracts or buyer's requirements Contracts
with Seller's vendors terminable at will or upon notice of thirty (30) days or
less without penalty; and (iii) any Contract not involving a monetary obligation
in excess of $25,000 payable within 12 months.
"Assumed Current Liabilities" means the Accounts Payable,
Hired Employee Costs and Other Current Liabilities.
"Assumed Operating Leases" means the Operating Leases set
forth on Schedule 1.01(e).
"Assumed Operating Lease Liabilities" means all Liabilities of
Seller under the Assumed Operating Leases.
"Assumed Real Estate Leases" means the Real Estate Leases set
forth on Schedule 1.01(f).
"Assumed Real Estate Lease Liabilities" means all Liabilities
of Seller under the Assumed Real Estate Leases.
"Benefit Plans" means all "employee benefit plans" as defined
in Section 3(3) of ERISA and all bonus or other incentive compensation, deferred
compensation, supplemental retirement, employee loan, salary continuation,
severance, retention, vacation, sick leave, stock or other equity-related award,
option or purchase, educational assistance or leave of absence agreements,
arrangements, policies or plans maintained directly or indirectly by Seller or
any Affiliate of Seller relating to CMB Employees, officers, directors, or other
service providers.
"Business Day" means any day other than a Saturday, a Sunday
or a day on which banking institutions in New York, New York are authorized or
obligated by law, regulation or executive order to be closed.
"Capital Leases" means capital leases with any Person under
which Seller is the lessee of, or holds or uses, any machinery, equipment,
vehicles or other tangible personal property owned by any Person.
"CMB Business Records" means any documents, books, records,
files or papers of Seller, whether in hard copy or computer format, primarily
related to the Acquired Assets, Assumed Liabilities or the Cable Modem Business,
including, without limitation, all training materials, sales and promotional
literature, manuals and data, sales and purchase correspondence, personnel and
employment records, customer lists, supplier lists, catalogs, research material,
e-mail addresses, Charter system IP address blocks, passwords, URLs and domain
names, but
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excluding any and all internal e-mail between Seller's directors, officers and
employees residing on Seller's corporate domain whether in relation to the Cable
Modem Business or otherwise.
"CMB Claims" means rights, claims, actions and causes of
action that Seller may have against any third party to the extent relating to
the Cable Modem Business, Acquired Assets or the Assumed Liabilities, including
all rights of Seller under or pursuant to all warranties, representations,
guarantees and service agreements if any, made by suppliers, manufacturers and
contractors in connection with products sold to or services provided to Seller
for the Cable Modem Business, or affecting the property, machinery or equipment
owned or leased by Seller and used in the conduct of the Cable Modem Business.
"CMB Intellectual Property" means any and all Intellectual
Property used or held for use or in development for use by or for Seller
primarily in relation to or necessary for the Cable Modem Business, other than
Seller's website at www.hsacorp.net.
"CMB Sites" means Seller's call center and network operating
center in Louisville, Kentucky and Seller's data centers (or Internet hosting
sites) located at the addresses set forth on Schedule 1.01(g) provided in
Washington, D.C. by Exodus Communications, Inc. and in Denver, Colorado by
Virado (FKA FirstWorld, Inc.) and Inflow.
"Code" means the Internal Revenue Code of 1986, as amended.
"Contracts" means contracts, agreements, commitments and other
legally binding arrangements, including, without limitation, customer, supplier
and subscriber contracts, in each case whether oral or written, relating
primarily to the Cable Modem Business to which Seller or any of its Subsidiaries
is a party or bound, but excluding Operating Leases, Capital Leases and Real
Estate Leases.
"Customer Care Matters" means all customer care service issues
and complaints (including, without limitation, open Remedy tickets and
complaints), third party infringement claims regarding cable modem subscribers'
data files and activities (e.g., RIAA and Software Alliance), and law
enforcement subpoenas and court orders seeking, without limitation, subscriber
database information and activity logs.
"Excluded Stockholders" means (1) Holdco, Vulcan and their
respective Affiliates and (2) any executive officer or director of Seller who
will be entitled to receive any change of control, severance or other payment or
benefit in the nature of compensation that is contingent upon consummation of
the Transactions (other than solely in his or her capacity as a stockholder of
Seller).
"Employee Claims" means any allegations of sexual harassment,
workplace harassment, unlawful discrimination; violations of city, state and
federal equal employment laws; violations of wage/hour laws; unfair employment
practices of any type; unfair labor practices; violations of family and medical
leave laws; any harm to an employee, independent contractor, or consultant
arising from the employment relationship or the termination of that
relationship; slander, tortious interference with contract, intentional
infliction of emotional distress, invasion of privacy and generally any common
law tort of any type; breach of contract; failure to pay benefits due under any
arrangement, including any Benefit Plan; violations of the WARN Act;
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any harm to an individual arising from or through the individual's employment
relationship or the termination of that relationship with Seller; unpaid salary
or benefits or otherwise, made by any employee of Seller or any of its
Subsidiaries against Seller or any of its Subsidiaries.
"Environmental Law" means any applicable Legal Requirement
relating to pollution or the protection of the environment (including, ambient
air, surface water, ground water or land), including, but not limited to any
applicable provisions of the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (42 U.S.C. Sections 9601 et seq.), the Resource
Conservation and Recovery Act of 1976 (42 U.S.C. Sections 6901 et seq.), the
Toxic Substances Control Act (42 U.S.C. Sections 2601 et seq.), the Federal
Insecticide, Fungicide and Rodenticide Act (7 U.S.C. Sections 136 et seq.), the
Hazardous Materials Transportation Act (49 U.S.C. Sections 1801 et seq.), or the
Clean Water Act (33 U.S.C. Section 1251 et seq.).
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Fixtures and Equipment" means all furniture, fixtures,
furnishings, machinery, vehicles, equipment and other tangible personal property
(excluding Modem Inventory and Other Inventory) owned or leased by Seller or its
Subsidiaries and used or held for use primarily in relation to or necessary for
the Cable Modem Business and the CMB Sites, including all Seller-owned or leased
equipment in Holdco's systems headends and subscriber homes (but excluding
Fixtures and Equipment the subject of the Capital Leases and Operating Leases
described in Sections 2.02(e) and (f)).
"Full Turnkey Agreement" means the Network Services Agreement,
dated November 25, 1998, by and among Seller, CCI and Marcus Cable, Inc., as
assigned by CCI to Holdco pursuant to the Assignment of the Network Services
Agreement between Seller, Holdco and CCI dated November 8, 1999.
"GAAP" means United States generally accepted accounting
principles, consistently applied.
"Governmental Authority" means any agency, board, bureau,
court, commission, department, instrumentality or administration of any foreign
government, the United States government, any state government or any local or
other governmental body in a state, territory or possession of the United States
or the District of Columbia.
"Hazardous Substances" means any substance, material or waste
that is classified, characterized or otherwise regulated by any applicable
Environmental Law as hazardous, toxic, pollutant, contaminant, or words of
similar meaning and effecting, including but not limited to (a) any petroleum or
petroleum compounds (refined or crude); (b) asbestos or asbestos-containing
material; and (c) polychlorinated biphenyls.
"Hired Employee Costs" means the sum of (a) the accrued and
unpaid base salary and base wages as of the Closing Date, together with accrued
(in accordance with GAAP) and unpaid employer taxes with respect thereto, (b)
the economic value of unused vacation and sick time as of the Closing Date,
together with accrued (in accordance with GAAP) and unpaid
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employer taxes with respect thereto, and (c) up to $750,000 of accrued bonuses,
in each case to be paid or credited to Hired Employees by Holdco pursuant to
Section 8.09 hereof.
"Houlihan Lokey" means Houlihan Lokey Howard & Zukin Financial
Advisors, Inc.
"Houlihan Lokey Opinion" means the opinion rendered by
Houlihan Lokey to the Board of Directors of Seller, dated the date of this
Agreement, to the effect that, as of such date, the Cash Amount (as adjusted
pursuant to Section 3.03), together with the assumption by Holdco of the Assumed
Liabilities, constitutes fair consideration and reasonably equivalent value for
the Acquired Assets.
"HSA Common Stock" means the common stock of Seller, par value
$0.01 per share.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.
"HSR Date" means the date upon which the waiting period
applicable to the transactions contemplated hereby under the HSR Act shall have
terminated or expired.
"Intellectual Property" means any or all of the following and
all intellectual property rights in, arising out of, or associated therewith:
(i) all United States and other patents and utility models and applications
therefor and all reissues, divisions, renewals, extensions, provisionals,
continuations and continuations-in-part thereof, and equivalent or similar
rights anywhere in the world in inventions and discoveries ("Patents"), (ii) all
inventions (whether patentable or not), improvements, trade secrets, proprietary
information, know how, technology, technical data and customer lists, and all
documentation embodying or evidencing any of the foregoing ("Trade Secrets"),
(iii) all copyrights, copyright registrations and applications therefor and all
other rights corresponding thereto throughout the world ("Copyrights"), (iv) all
mask works, mask work registrations and applications therefor, and any
equivalent or similar rights in semiconductor masks, layouts, architectures or
topology ("Maskworks"); (v) all industrial designs and any registrations and
applications therefor throughout the world; (vi) all trade names, logos, common
law trademarks and service marks, trademark and service mark registrations and
applications therefor and all goodwill associated therewith throughout the world
("Marks"), (viii) all rights in interactive or noninteractive computer program
instruction code, whether in human-readable source code form, machine-readable
binary form, firmware, scripts, interpretive text, or otherwise, along with any
technical, user, or other documentation related thereto, and including any
related data files or data objects, and all media on which any of the foregoing
is recorded ("Software"), (ix) all rights in worldwide web addresses, Uniform
Resource Locators, and domain names, and (x) any similar, corresponding or
equivalent rights to any of the foregoing anywhere in the world.
"Intercompany Payments" means, collectively, the fixed amounts
payable by Seller and Holdco pursuant to Sections 4.02(a) and 4.03(b) hereof.
"Launch Fees" means fees payable by Seller to Holdco pursuant
to the Second NSA Agreement with respect to the launch of new cable modem
services.
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"Legal Requirement" means any statute, ordinance, code, law,
rule, regulation, permit, agency notice or order, approval, consent decree,
order or other written requirement, standard or procedure enacted, adopted or
applied by any Governmental Authority, together with all related amendments,
implementing regulations, and reauthorizations including any judgment, writ,
order, injunction, award or decree of any court, judge, justice or magistrate,
including any bankruptcy court or judge or the arbitrator in any binding
arbitration.
"Lehman Opinion" means the opinion rendered by Lehman to the
Board of Directors of Seller, dated the date of this Agreement, to the effect
that, as of such date, the consideration to be received by Seller pursuant to
this Agreement is fair to Seller from a financial point of view.
"Liabilities" means, as to any Person, all debts, adverse
claims, liabilities and obligations, direct, indirect, absolute or contingent,
known or unknown, of such Person, whether accrued, vested or otherwise, whether
in contract, tort, strict liability or otherwise and whether or not actually
reflected, or required by GAAP to be reflected, in such Person's balance sheet
or other books and records.
"Liens" means mortgages, liens (including Tax liens), security
interests, easements, rights of way, pledges, restrictions or encumbrances of
any nature whatsoever.
"Losses" means any and all demands, claims, complaints,
actions or causes of action, suits, proceedings, investigations, arbitrations,
assessments, losses, damages, liabilities, obligations (including those arising
out of any action, such as any settlement or compromise thereof or judgment or
award therein) and any reasonable costs and expenses, including, without
limitation, attorney's and other advisors' fees and disbursements.
"Material Adverse Effect" means an effect or change that, when
taken together with all other effects or changes, is materially adverse to (i)
the condition or value of the Acquired Assets or to the business, financial
condition or results of operations of the Cable Modem Business or (ii) the
ability of Seller to perform its obligations under this Agreement or the
Management Agreement or to consummate the Transactions, provided that none of
the following shall be deemed in and of itself, either alone or in combination,
to constitute a Material Adverse Effect on Seller: (A) any changes in general
economic conditions; (B) any changes generally affecting the industries in which
Seller and its Subsidiaries operate that do not disproportionately affect
Seller; or (C) any changes negatively affecting the Cable Modem Business to the
extent arising from or relating to actions taken by CCI pursuant to the terms of
the Management Agreement.
"Material Contract" means any Contract other than: (i)
subscription agreements with individual residential subscribers or commercial
establishments for the services provided by Seller with respect to the Cable
Modem Business in the ordinary course of business; (ii) miscellaneous service
Contracts or buyer's requirements Contracts with Seller's vendors terminable at
will or upon notice of thirty (30) days or less without penalty; (iii) any
Contract not involving a monetary obligation in excess of $25,000 payable within
a 12 month period; and (iv) employment contracts for Persons who are not Hired
Employees.
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"Modem Inventory" means modems and related supplies and parts
owned by Seller at the CMB Sites or in transit from or to the CMB sites.
"Operating Leases" means operating leases with any Person
under which Seller is the lessee of, or holds or uses, any machinery, equipment,
vehicles or other tangible personal property owned by any Person (and does not
include Capital Leases).
"Other Current Assets" means any current assets of Seller used
in or primarily relating to or necessary for the Cable Modem Business as of the
Closing Date, included in the Acquired Assets and transferred to Holdco at the
Closing, determined in accordance with GAAP, other than Adjusted Accounts
Receivable, Assigned Security Deposits and Prepayments. Other Current Assets
shall not include Other Inventory, the Intercompany Payments or Excluded Assets.
"Other Current Liabilities" means accrued expenses and other
current Liabilities (determined in accordance with GAAP) of Seller as of the
Closing Date in relation to the Cable Modem Business that are included in the
Assumed Liabilities and assumed by Holdco at the Closing. Other Current
Liabilities shall include, without limitation, (a) all accrued and unpaid real
property and personal property taxes (taking into account Section 8.15(b)), (b)
accrued (in accordance in with GAAP) and unpaid expenses relating to the
Acquired Assets for periods prior to the Closing Date and (c) any amounts due
with respect to franchise fees. Notwithstanding the foregoing, Other Current
Liabilities shall not include Assumed Capital Lease Liabilities, Assumed Real
Estate Lease Liabilities, Assumed Operating Lease Liabilities, CSR Charges (as
defined in Section 8.22 below), Accounts Payable, Hired Employee Costs, real
property and personal property taxes and accrued and unpaid expenses relating to
the Acquired Assets attributable to post-Closing periods (taking into account
Section 8.15(b)), Transfer Taxes and any liability of Seller in respect of Taxes
in accordance with Section 2.04(e) hereof.
"Other Inventory" means all inventory owned by Seller other
than the Modem Inventory.
"Permits" means any permits, licenses, franchises and other
authorizations by or of any Governmental Authority that are owned or held by or
otherwise have been granted to or for the benefit of Seller and that relate to
the operation of the Cable Modem Business or the CMB Sites.
"Permitted Liens" means the following Liens: (a) Liens for
Taxes, assessments and governmental charges not yet due and payable or Taxes
being contested in good faith by appropriate proceedings, all of which as of the
date hereof are disclosed on Schedule 1.01(i); (b) zoning laws and ordinances
and similar Legal Requirements; (c) any right reserved to any Governmental
Authority to regulate the affected property; (d) in the case of any leased
Acquired Asset, (i) the rights of any lessor and (ii) any Lien granted by any
lessor of such leased Acquired Asset; (e) inchoate materialmens', mechanics',
workmen's, repairmen's or other like inchoate Liens arising in the ordinary
course of business which constitute Assumed Liabilities; (f) in the case of Real
Property Leases, any easements, rights-of-way, servitudes, permits, restrictions
and minor imperfections or irregularities in title which do not individually or
in the aggregate materially interfere with the right to convey such leasehold or
other interest; or (g) any Lien that
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does not individually or in the aggregate together with other Permitted Liens
interfere with the continued use of the Acquired Assets subject thereto or the
operation of the Cable Modem Business as currently being conducted; provided,
that the dollar amount of the financial obligations to which any Permitted Lien
or Liens relate shall not exceed $50,000 in the aggregate (provided, further
that such $50,000 limit shall not apply to the Liens described in subparagraph
(a) above).
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, trust, unincorporated organization,
other form of business or legal entity or Governmental Authority.
"Prepayments" means all prepaid expenses of Seller as of the
Closing Date described on Schedule 1.01(h).
"Real Estate Leases" means leases or subleases of real
property under which Seller is a lessee or sub-lessee.
"Second NSA Agreement" means the Network Services Agreement,
dated May 12, 2000, by and between Seller and CCI, as assigned by CCI to Holdco
pursuant to the Assignment and Assumption Agreement between CCI and Holdco dated
August 1, 2000.
"Security Deposits" means security, restricted cash, vendor,
utility or other deposits.
"Series D Preferred Stock" means Series D Senior Convertible
Preferred Stock of Seller, par value $0.01 per share.
"Subsidiaries" means any entity directly or indirectly
controlled by Seller, including HSA Telecom Operating Co., Inc., HSA
International, Inc. and Digital Chainsaw, Inc.
"Tax" or "Taxes" means all taxes of any kind, charges, fees,
customs, duties, imposts, levies, required deposits or other assessments,
including, without limitation, all net income, gross receipts, ad valorem, value
added, alternative or add-on minimum (including taxes under Section 59A of the
Code), transfer, gains, franchise, profits, inventory, net worth, capital stock,
asset, sales, use, license, estimated, withholding, payroll, transaction,
capital, employment, social security, workers compensation, unemployment,
excise, severance, stamp, occupation, and personal and real property taxes,
together with any interest and any penalties, additions to tax or additional
amounts, imposed by any Federal, state, local or foreign taxing authority,
whether disputed or not, and shall include any liability pursuant to Treasury
Regulation Section 1.1502-6 or any tax sharing or contribution agreement and any
transferee or successor liability in respect of Taxes.
"Technology and Know-How" means all Trade Secrets, engineering
information, specifications, designs, drawings, processes and quality control
data, computer hardware, management information systems, Software, Marks, and
any other intangible property and applications for the same used or held for use
or in development for use by or for Seller primarily in relation to or necessary
for the operation of the Cable Modem Business, including any technology
evaluation reports and white papers, other than technology, know-how and other
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intangible property and applications that are non-confidential and generally
known and used in the high speed Internet access industry.
"Transactions" means the sale and purchase of the Acquired
Assets, the assumption of the Assumed Liabilities, and the other transactions
contemplated by this Agreement and the other Transaction Documents.
"Transaction Documents" means this Agreement, the Voting
Agreement, the Management Agreement, the License Agreement, the Billing Letter
Agreement and all other documents and instruments to be executed and delivered
in connection with the transactions contemplated by this Agreement.
"Transfer Tax" or "Transfer Taxes" means any Federal, state,
county, local, foreign and other sales, use, transfer, conveyance, documentary
transfer, recording or other similar tax, fee or charge imposed upon the sale,
transfer or assignment of property or any interest therein or the recording
thereof, and any penalty, addition to tax or interest with respect thereto, but
such term shall not include any tax on, based upon or measured by, the net
income, gains or profits from such sale, transfer or assignment of the property
or any interest therein.
"WARN Act" means the Worker Adjustment and Retraining
Notification Act of 1988, as amended, and any successor Legal Requirement, and
the rules and regulations thereunder and under any successor law.
Terms defined in the singular shall have a comparable meaning
when used in the plural, and vice versa.
Section 1.02. Other Terms. Other capitalized terms may be
defined elsewhere in this Agreement and, unless otherwise indicated, shall have
such meaning throughout this Agreement.
Section 1.03. Interpretation.
(a) When a reference is made in this Agreement to a Section,
Schedule or Exhibit, such reference shall be to a Section of, or a Schedule or
Exhibit to, this Agreement unless otherwise indicated.
(b) The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
(c) Whenever the words "include", "includes" or "including"
are used in this Agreement they shall be deemed to be followed by the words
"without limitation".
(d) Words denoting any gender shall include all genders. Where
a word or phrase is defined herein, each of its other grammatical forms shall
have a corresponding meaning.
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(e) A reference to any party to this Agreement or any other
agreement or document shall include such party's successors and permitted
assigns.
(f) A reference to any legislation or to any provision of any
legislation shall include any modification or re-enactment thereof, any
legislative provision substituted therefor and all regulations and statutory
instruments issued thereunder or pursuant thereto.
(g) All references to "$" and dollars shall be deemed to refer
to United States currency unless otherwise specifically provided.
(h) Unless otherwise specifically provided herein, all
references to any financial or accounting terms shall be defined in accordance
with GAAP.
(i) The term "day", unless specified as a "Business Day",
means a calendar day.
(j) The phrases "the date of this Agreement", "the date
hereof", and terms of similar import, unless the context otherwise requires,
shall be the date referenced in the Recitals hereto.
ARTICLE II
TRANSFER OF ASSETS AND LIABILITIES
Section 2.01. Purchase and Sale of Assets. On the terms and
subject to the conditions of this Agreement, at the Closing, Seller will sell,
assign, transfer, convey and deliver to Holdco, and Holdco will purchase,
acquire and accept from Seller, all right, title and interest of Seller or any
of its Subsidiaries in and to the Acquired Assets free and clear of all Liens
other than Permitted Liens. The term "Acquired Assets" means all of the
business, properties, assets, contracts, permits, licenses, authorizations,
interests, claims, goodwill and rights of Seller, whether real or personal,
tangible or intangible, and wherever located, that are owned, leased, used or
held for use by Seller or any of its Subsidiaries primarily in, or primarily
relating to or necessary to the performance of, the Cable Modem Business, other
than the Excluded Assets. The Acquired Assets include, without limitation, the
following:
(a) the Assumed Real Estate Leases;
(b) the Assumed Capital Leases;
(c) the Assumed Operating Leases;
(d) the Assigned Security Deposits;
(e) subject to Section 2.02(h), all Fixtures and Equipment,
including, but not limited to, those set forth on Schedule 2.01(e);
(f) the Assigned Voice & Data Circuits;
(g) all Accounts Receivable;
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(h) the Assumed Contracts;
(i) the CMB Intellectual Property, including, but not limited
to, the CMB Intellectual Property set forth on Schedule 2.01(i);
(j) the Technology and Know-How, including, but not limited
to, the Technology and Know-How set forth on Schedule 2.01(j);
(k) all Permits, including, but not limited to, those set
forth on Schedule 2.01(k);
(l) all CMB Claims;
(m) all Prepayments;
(n) the Other Current Assets;
(o) all Modem Inventory;
(p) the CMB Business Records; and
(q) all goodwill related to the foregoing assets.
Seller and Holdco acknowledge that the Accounts Receivable,
Prepayments, CMB Claims, Other Current Assets, Modem Inventory and CMB Business
Records included in the Acquired Assets may change in the ordinary course of
business consistent with Section 7.01.
Section 2.02. Excluded Assets. The term "Excluded Assets"
means all assets of Seller other than the Acquired Assets, including the
following:
(a) the capital stock in each of the Subsidiaries;
(b) all contracts, agreements, commitments and other legally
binding arrangements, whether oral or written, other than the Assumed Contracts;
(c) all Security Deposits other than the Assigned Security
Deposits;
(d) all Real Estate Leases other than the Assumed Real Estate
Leases;
(e) all Capital Leases other than the Assumed Capital Leases;
(f) all Operating Leases other than the Assumed Operating
Leases;
(g) all voice circuits, data circuits and related contracts
and agreements other than the Assigned Voice & Data Circuits, including those
set forth on Schedule 2.02(g)
(h) the Fixtures and Equipment set forth on Schedule 2.02(h);
(i) all Other Inventory;
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(j) all assets (including, without limitation, facilities,
equipment, intellectual property, technology, permits and licenses) that are
both (i) used primarily in businesses other than the Cable Modem Business and
(ii) not necessary for the performance of the Cable Modem Business;
(k) all cash on hand or in banks and all cash equivalents or
similar type investments, uncollected checks, bank accounts, certificates of
deposit, Treasury bills and other marketable securities;
(l) all insurance policies of Seller and rights thereunder,
including, without limitation, all insurance proceeds received prior to the
Closing, or rights to insurance proceeds receivable after the Closing (except as
otherwise provided in Section 2.05 hereof);
(m) all rights, claims and causes of action relating to any of
the Excluded Liabilities or the Excluded Assets;
(n) all rights and claims for refunds of, or credits against,
Taxes (including all investment tax credits, research credits and credits for
prepayments of Taxes), except as otherwise provided in Section 8.15(b); and
(o) the miscellaneous assets set forth on Schedule 2.02(o).
Section 2.03. Assumption of Liabilities. On the terms and
subject to the conditions of this Agreement, Holdco hereby agrees to assume,
effective as of the Closing, and agrees to pay, perform and discharge when due,
the following (collectively the "Assumed Liabilities"):
(a) Except as set forth in Section 2.03(b) below, all
Liabilities of Seller accruing and relating to periods on or after the Closing
Date in respect of the Acquired Assets as assigned and transferred to Holdco at
the Closing (taking into account Section 8.15); and
(b) the following Liabilities of Seller without regard to the
periods to which such Liabilities relate:
(i) the Assumed Current Liabilities;
(ii) the Assumed Capital Lease Liabilities;
(iii) the Assumed Operating Lease Liabilities; and
(iv) the Assumed Real Estate Lease Liabilities.
Section 2.04. Excluded Liabilities. All Liabilities of Seller
or any of its Subsidiaries, whether or not arising out of the Acquired Assets or
the Cable Modem Business, other than the Assumed Liabilities, will remain and be
the obligations and liabilities solely of Seller and will be "Excluded
Liabilities", including, without limitation, the following:
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(a) any Liabilities of Seller or any of its Subsidiaries to
the extent not arising out of, relating to or otherwise in respect of the
Acquired Assets or the Cable Modem Business (or the operations thereof);
(b) any Liability of Seller or any of its Subsidiaries (i) for
or arising out of any indebtedness of Seller or any of its Subsidiaries for
borrowed money, (ii) for any credit, loan or other agreements arising out of or
relating to the Acquired Assets and pursuant to which Seller or any of its
Subsidiaries has created, incurred, assumed or guaranteed indebtedness for
borrowed money or under which any Lien securing such indebtedness has been or
may be imposed on any Acquired Asset or (iii) with respect to any financial
obligation underlying any Permitted Lien existing as of the Closing Date;
(c) all Liabilities arising out of the leasing or operation of
(i) the CMB Sites before the Closing Date and (ii) any property or facility
other than the CMB Sites at any time, including without limitation any
Liabilities relating to personal injury, property damage, the environment,
on-site or off-site waste disposal or any contractual indemnification provided
in connection with such property or facility;
(d) any Liability of Seller or any of its Subsidiaries under
contracts, agreements, commitments and other legally binding arrangements,
whether written or oral to which Seller or any of its Subsidiaries is a party or
is bound, other than (1) Liability under the Assumed Contracts to the extent
such Contracts are validly assigned to Holdco and do not relate to acts or
omissions of Seller occurring prior to the Closing Date or which are to be paid,
performed or satisfied prior to the Closing Date and (2) Assumed Current
Liabilities to the extent that such Liabilities relate to Assumed Contracts that
are validly assigned to Holdco;
(e) any Liability of Seller or any of its Subsidiaries in
respect of Taxes (including real or personal property Taxes) for all periods
ending on or prior to the Closing Date (except as otherwise provided in Section
8.15 hereof);
(f) any Liability with respect to (i) any employment agreement
or understanding with any employee of Seller, whether written or oral (except
with respect to the Hired Employee Costs), (ii) any agreement, plan or policy
relating to Seller's employees or employment matters, including, without
limitation, any stock option or other incentive plan, Benefit Plan, consulting,
severance, change of control or similar agreement and (iii) any Employee Claims
to the extent relating to events occurring prior to the Closing Date; and
(g) any claim, action, suit, proceeding, arbitration,
investigation or hearing, any tolling, settlement or license agreement with
respect to any of the foregoing, or any other activity or procedure, or any
notice of any of the foregoing which could result in any judgment, writ, order,
injunction, award or decree of any court, judge, justice or magistrate,
including any bankruptcy court or judge or the arbitrator in any binding
arbitration, and any order of or by any Governmental Authority arising out of or
relating to the Acquired Assets and commenced, or related to an event occurring,
on or prior to the Closing Date.
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Section 2.05. Risk of Loss; Condemnation.
(a) Seller shall bear the risk of loss of, and all
obligations, if any, to insure, the Acquired Assets prior to the Closing, and
such risk of loss and obligation to insure with respect to the Acquired Assets
shall transfer, with the Acquired Assets, from Seller to Holdco at the Closing.
If any such loss or damage is so substantial as to prevent the operation of any
material portion of the Acquired Assets or Cable Modem Business or the
replacement or restoration of the lost or damaged property within 45 days after
the occurrence of the event resulting in such loss or damage, Seller will
promptly notify Holdco of that fact and Holdco, at any time within 10 days after
receipt of such notice, may elect by written notice to Seller to either (i)
waive such defect or (ii) terminate this Agreement pursuant to Article X hereof.
If Holdco elects to so terminate this Agreement, Holdco and Seller will be
discharged of any and all obligations hereunder, subject to Article X hereof.
If, on the other hand, Holdco elects to waive such defect notwithstanding such
loss or damage, there will be no adjustment to the Purchase Price on account of
such loss or damage, but upon the consummation of the transactions contemplated
by this Agreement, all insurance proceeds payable as a result of the occurrence
of the event resulting in such loss or damage (other than insurance proceeds in
respect of "business interruption" damages based upon lost profits or business
opportunities) will be delivered by Seller to Holdco, or the rights to such
proceeds will be assigned by Seller to Holdco if not yet paid over to Seller.
(b) If, prior to the Closing, all or any part of, or interest
in, the Acquired Assets is taken or condemned as a result of the exercise of the
power of eminent domain, or if a Governmental Authority having such power
informs Seller or Holdco that it intends to condemn all or any part of the
Acquired Assets (such event being called, in either case, a "Taking"), then (i)
Holdco will have the sole right, in the name of Seller, if Holdco so elects, to
negotiate for, claim and contest (and shall have the right to receive all
damages at the Closing with respect to) the Taking, (ii) Seller will be relieved
of its obligation to convey to Holdco the Acquired Assets or interests that are
the subject of the Taking, (iii) at the Closing, Seller will assign to Holdco
all of Seller's rights to all damages payable with respect to such Taking and
will pay to Holdco all damages previously paid to Seller with respect to the
Taking, and (iv) following the Closing, Seller will give Holdco such further
assurances of Seller's rights and the assignment of Seller's rights, in each
case with respect to the Taking as contemplated in clauses (i) through (iii)
above, as Holdco may from time to time reasonably request. The foregoing will
not affect or limit the scope of any representation or warranty of Seller in
this Agreement.
Section 2.06. Assignment of Contracts, Etc. Notwithstanding
anything contained herein to the contrary, no Contracts, Real Estate Leases,
Capital Leases, Operating Leases, Intellectual Property, Technology and Know-How
or Permits shall be assigned contrary to any Legal Requirement or the terms
thereof. If there are Contracts, Real Estate Leases, Capital Leases or Operating
Leases which form part of the Acquired Assets that cannot be assigned or novated
to Holdco on the Closing Date, the performance obligations of Seller thereunder
shall, if so elected by Holdco, in its sole discretion (unless not permitted by
such Contracts, Real Estate Leases, Capital Leases or Operating Leases) be
deemed to be subleased or subcontracted to Holdco until such Contracts, Real
Estate Leases, Capital Leases or Operating Leases have been assigned or novated
(it being understood that the failure to obtain such consents shall not reduce
the Purchase Price). Holdco shall take all necessary actions to perform
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and complete all Contracts, Real Estate Leases, Capital Leases or Operating
Leases which form part of the Acquired Assets in accordance with their terms if
neither assignment, novation, subleasing nor subcontracting is permitted by the
other party. Seller shall pay over to Holdco any amounts received by Seller or
its Subsidiaries after the Closing (in so far as they relate to post-Closing
periods or performance) as a result of performance by Holdco of such Contracts,
Real Estate Leases, Capital Leases or Operating Leases, which payment shall be
made promptly, but in no event more than ten (10) days following receipt thereof
by Seller or any of its Subsidiaries (without set off or demand of any kind).
Nothing contained in this Section 2.06 shall prevent Holdco from exercising its
right to terminate this Agreement pursuant to Section 10.1(d) as a result of
conditions contained in Section 9.02 not being satisfied. Notwithstanding
anything to the contrary herein, Holdco shall be entitled to indemnification for
Damages (subject to the terms of Article XI hereof) with respect to any failure
by Seller to assign or novate any Assumed Contract, Assumed Real Estate Lease,
Assumed Capital Lease or Assumed Operating Lease.
ARTICLE III
PURCHASE PRICE
Section 3.01. Purchase Price. Subject to Sections 3.02 and
3.03, the purchase price for the Acquired Assets (the "Purchase Price") shall be
(i) $81,100,000 in cash (the "Cash Amount"), (ii) 75,000 shares of Series D
Preferred Stock, together with the cancellation of any rights to dividends with
respect to such shares, and (iii) the cancellation of the Charter Warrants.
Section 3.02. Holdbacks. At the Closing, Holdco shall set
aside and hold back the following from the Purchase Price, as adjusted pursuant
to Section 3.03:
(a) cash in the amount of Seven Hundred Fifty Thousand Dollars
($750,000) for use in effectuating the settlement of the adjustments under
Section 3.03 (the "Adjustment Holdback"); and
(b) cash in the amount of Four Million Dollars ($4,000,000)
for use in effectuating the settlement of indemnity claims under Article XI (the
"Indemnification Holdback").
The Adjustment Holdback shall not bear interest or be subject
to any charge or expense by Holdco.
Section 3.03. Purchase Price Adjustments. At the Closing, the
Purchase Price shall be adjusted in the manner set forth on Schedule 3.03. The
Purchase Price shall be adjusted, and Schedule 3.03 shall provide, as follows:
(a) the Cash Amount shall be reduced by the amount of each of
(i) Assumed Capital Lease Liabilities, (ii) Assumed Current Liabilities, and
(iii) the CSR Charges; and
(b) the Cash Amount shall be increased by the amount of the
Acquired Current Assets.
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For the avoidance of doubt, the dollar amount of each Adjustment Item (as
defined in Section 3.04(a) below) that will be set forth on Schedule 3.03 shall
be determined in accordance with Section 3.04(a), subject to further adjustment
in accordance with Sections 3.04(b) and (c).
Section 3.04. Determination of Adjustments.
(a) Closing Statement.
(i) Five (5) Business Days prior to the date of the Seller
Stockholder Meeting (as defined in Section 8.01 below), Holdco and Seller shall
jointly prepare a statement (the "Closing Statement") in the form attached as
Schedule 3.03. The Closing Statement shall set forth (A) Seller's good faith
estimate of the Assumed Capital Lease Liabilities, Acquired Current Assets and
Assumed Current Liabilities, including all line items of each, in each case as
of the Closing Date, and (B) Holdco's good faith estimate of the CSR Charges as
of the Closing Date. Holdco and Seller shall deliver to each other a copy of all
supporting evidence and work papers, books and records associated with such
preparation of their respective entries on the Closing Statement as each party
may reasonably request. Holdco and Seller will have five (5) Business Days
following the completion of the Closing Statement to review the other party's
entries on the Closing Statement and supporting information and to notify the
other party of any disagreements with the other party's estimates therein. If
Holdco or Seller provides a written notice of disagreement (the "Disagreement
Notice") with all or any of the other party's entries on the Closing Statement
within such five (5) Business Day period, Holdco and Seller will negotiate in
good faith to resolve any such dispute prior to the Closing. If no Disagreement
Notice is delivered or if a Disagreement Notice is delivered and the parties
resolve any such dispute before the Closing, then they shall each sign a
certificate to that effect and the Purchase Price shall be adjusted at the
Closing by the agreed upon amount. If a dispute can not be resolved on or before
the Closing, then the Purchase Price shall be adjusted at the Closing as
follows:
(1) with respect to each line item of the Assumed
Capital Lease Liabilities, Acquired Current Assets, Assumed Current
Liabilities and CSR Charges (each such line item referred to herein as
an "Adjustment Item") about which there is no good faith dispute at the
Closing, by the full amount of each such Adjustment Item as set forth
on the Closing Statement; and
(2) with respect to Adjustment Items about which there
is a good faith dispute in amount, by the undisputed amount of such
item set forth on the Disagreement Notice plus one-half of the
difference between each party's estimate of the amount of the
Adjustment Item at issue.
Regardless of the amount of the Purchase Price adjustments made pursuant to this
Section 3.04(a)(i), Holdco shall hold back the entire amount of the Adjustment
Holdback.
(ii) Within thirty (30) days after the Closing Date, if
either party determines that all or any of its entries on the Closing Statement
are inaccurate, it will deliver a corrected Closing Statement to the other
party, indicating the corrections made (the "Corrections") and a copy of all
supporting evidence and work papers, books and records associated with the
Corrections. The aggregate dollar amount of the Corrections will, if
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undisputed by the other party, be deemed to be final and binding; provided,
however, that all or any of the Corrections may be disputed pursuant to Section
3.04(a)(iii).
(iii) Within sixty (60) days after the Closing Date,
Holdco and Seller shall deliver to each other a written notice setting forth
their respective objections to the other party's entries on the Closing
Statement, including any objections to the Corrections and any adjustment made
at the Closing pursuant to Section 3.04(a)(i), together with a summary of the
reasons therefor and its determination of each Adjustment Item to which it
objects (collectively, the "Second Disagreement Notice"). In connection with its
review and verification of a Second Disagreement Notice, each party shall be
permitted to review all supporting evidence and work papers, books and records
associated with such preparation as such party may reasonably request.
(iv) If a party:
(1) does not timely deliver a Disagreement Notice or
a Second Disagreement Notice, then the other party's entries on the
Closing Statement shall be deemed final and binding as of such sixtieth
(60th) day after the Closing Date;
(2) timely delivers a Disagreement Notice and such
dispute is resolved with respect to all Adjustment Items in dispute on
such Disagreement Notice prior to the Closing pursuant to Section
3.04(a)(i) and the party that delivered the Disagreement Notice does
not timely deliver a Second Disagreement Notice then the other party's
entries on the Closing Statement and so agreed shall be deemed final
and binding as of such sixtieth (60th) day after the Closing Date; or
(3) timely delivers a Disagreement Notice and such
dispute is not resolved with respect to all Adjustment Items in dispute
on such Disagreement Notice prior to the Closing (such that an
adjustment of one or more Adjustment Items is made at the Closing
pursuant to Section 3.04(a)(i)) then if neither party timely delivers a
Second Disagreement Notice with respect to such disputed items, such
Closing adjustments shall be deemed final and binding as of such
sixtieth (60th) day after the Closing Date.
(v) Holdco and Seller shall have thirty (30) days after
delivery of a Second Disagreement Notice to object to the Second Disagreement
Notice. If the party receiving the Second Disagreement Notice does not so object
in writing within such period, then the Second Disagreement Notice shall be
deemed final and binding on the thirtieth (30th) day after delivery thereof. If
the party receiving the Second Disagreement Notice does object to such notice in
writing within such period, such written notice shall include a reasonably
specific description of the basis of its objections. Holdco and Seller shall
negotiate in good faith to resolve any dispute during the five (5) Business Day
period following delivery of the written objection. If Holdco and Seller resolve
all such differences and each signs a certificate to that effect, the Second
Disagreement Notice, as adjusted, shall be deemed final and binding for purposes
of this Agreement. If Holdco and Seller are unable to resolve all of such
differences, the Adjustment Items as to which the parties have agreed shall be
final and binding for purposes of this Agreement (and the parties shall issue an
appropriate certificate), the remaining items
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shall be determined as provided in Section 3.04(b) below and final settlement of
the Adjustment Items shall be made in accordance with Section 3.04(c) below.
(b) Adjustment Dispute Resolution. To resolve any disputes in
connection with the calculation of Adjustment Items that are not resolved
pursuant to the procedures set forth in Section 3.04(a) above, the parties shall
submit the dispute to Ernst & Young LLP, certified public accountants, or such
other nationally recognized firm of independent public accountants that does not
serve as an auditor of, or consultant to, Holdco, Seller or any of their
respective Affiliates (an "Independent Accounting Firm") as may be jointly
selected by Seller and Holdco, who shall, acting as experts and not as
arbitrators, determine on the basis of the standards set forth herein and only
with respect to the remaining differences so submitted, whether and to what
extent, if any, an Adjustment Item at issue requires adjustment. The Independent
Accounting Firm will base its determination only on evidence brought to it by
the parties and shall not conduct an audit. The Independent Accounting Firm
shall deliver its written determination to Holdco and Seller no later than the
thirtieth (30th) day after the submission to it of the Disagreement Notice
and/or Second Disagreement Notice and a statement of the objections of Holdco or
Seller, as the case may be, thereto, and, in any case, as soon as practicable
after such submission. The Independent Accounting Firm's determination shall be
conclusive and binding upon the parties. With respect to each disputed
Adjustment Item, the fees and disbursements of the Independent Accounting Firm
associated with determining that Adjustment Item shall be allocated between
Holdco and Seller in inverse proportion to the allocation of the disputed amount
of such Adjustment Item made by the Independent Accounting Firm between Holdco
and Seller. For example, if Seller contended that the amount of the Prepayments
Adjustment Item was $300,000 and Holdco delivered a Second Disagreement Notice
objecting to such amount contending that is was only $200,000, then the amount
in dispute with respect to such Adjustment Item would be $100,000. Accordingly,
if the Independent Accounting Firm determined that the correct amount was
$260,000, Holdco would pay 60% and Seller would pay 40% of the fees and
disbursements associated with the Independent Accounting Firm's determination of
the Prepayment amount. For purposes of the foregoing calculation, the parties
shall instruct the Independent Accounting Firm to provide a breakdown of its
overall fees and disbursements between each Adjustment Item which is submitted
to the Independent Accounting Firm for resolution. Holdco and Seller shall make
available to the Independent Accounting Firm all relevant books and records and
any work papers relating to the Second Disagreement Notice and all other items
reasonably requested by the Independent Accounting Firm.
(c) Final Settlement of Adjustments; Release of Adjustment
Holdback. Final settlement of the Purchase Price adjustments described in this
Section 3.04 shall be made after all, and not less than all, Adjustment Items
have been deemed final pursuant to Sections 3.04(a) and (b) above (the
"Settlement Date"). If, after giving effect to the Purchase Price adjustments to
which the parties have agreed or were deemed final and binding pursuant to
Section 3.04(a) or as determined by the Independent Accounting Firm as
contemplated in Section 3.04(b), as the case may be, the Purchase Price is
increased from the amount paid at the Closing, then Holdco shall pay such amount
together with the Adjustment Holdback to Seller no later than five (5) Business
Days after the Settlement Date. Any amount payable by Holdco pursuant to the
preceding sentence shall not bear interest. If, after giving effect to the
Purchase Price adjustments to which the parties have agreed or were deemed final
and binding pursuant to Section 3.04(a) or as
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determined by the Independent Accounting Firm acting as contemplated in Section
3.04(b), as the case may be, the Purchase Price is reduced from the amount paid
at the Closing, then Holdco may hold back and set-off such amount from the
Adjustment Holdback and shall return the excess amount of the Adjustment
Holdback, if any, to Seller not later than five (5) Business Days after the
Settlement Date, and, if the reduction is greater than the Adjustment Holdback,
Seller shall pay such excess amount to Holdco no later than five (5) Business
Days after the Settlement Date. Any amount payable by Holdco to Seller or by
Seller to Holdco pursuant to the preceding sentence shall not bear interest.
Section 3.05. Allocation of Purchase Price. As soon as
practicable after the Closing, but in no event later than 120 days after the
Closing Date, Holdco will deliver to Seller a written estimate of the allocation
of the Purchase Price as adjusted pursuant to Section 3.04, plus any liabilities
assumed for Federal income tax purposes, among the Acquired Assets, as such
Acquired Assets existed immediately prior to the Closing Date consistent with
the principles of Code Section 1060. Seller shall notify Holdco in writing
within thirty (30) days after receiving Holdco's estimate of the allocation if
Seller disagrees with Holdco's allocation. If Seller does not deliver written
notice of objection to Holdco within such thirty (30) day period, then Holdco's
estimate shall be deemed to have been accepted by Seller, shall become final and
binding upon the parties (the "Final Allocation"). During the thirty (30) days
immediately following the delivery of notice of objection, Seller and Holdco
shall use reasonable good faith efforts to agree on the Final Allocation among
the Acquired Assets pursuant to the principles of Code Section 1060. If the
Purchase Price is adjusted pursuant to Section 3.04 or Section 11.04 hereof,
such adjustment shall be reflected in the Final Allocation hereunder in a manner
consistent with Code Section 1060. If at the end of such thirty (30) day period
the parties fail to reach agreement on the Final Allocation among the Acquired
Assets, then the parties shall engage an appraisal firm to determine such Final
Allocation (which determination shall be binding on the parties hereto). During
the review by the appraisal firm, Holdco and Seller will each make available to
the appraisal firm such individuals and such information, books and records as
may be reasonably required by the appraisal firm to determine the Final
Allocation. The fees and disbursements of any appraisal firm shall be shared
equally between Holdco and Seller. Holdco and Seller shall prepare and timely
file IRS Forms 8594 and any other similar forms required to be filed by any
other taxing Governmental Authority employing the Final Allocation to report the
Transactions to the Internal Revenue Service and to all other taxing
Governmental Authorities. Neither Seller nor Holdco shall take a position in any
return, Tax proceeding, Tax audit or otherwise inconsistent with the Final
Allocation, unless a contrary treatment is required by law.
ARTICLE IV
THE CLOSING
Section 4.01. Closing Date. The closing of the purchase,
assignment and sale of the Acquired Assets and the assumption of the Assumed
Liabilities (the "Closing") will take place at the offices of Paul, Hastings,
Janofsky & Walker LLP, 399 Park Avenue, New York, New York, at 10:00 a.m. on a
date mutually agreed to by Holdco and Seller (the "Closing Date"), which date
shall be as soon as practicable (but in no event later than 5 Business Days)
after the satisfaction or waiver of the conditions set forth in Article IX
(other than those that by their nature cannot be satisfied until the time of
Closing).
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Section 4.02. Deliveries by Seller at the Closing. At the
Closing, Seller shall deliver to Holdco:
(a) by wire transfer of immediately available funds to an
account designated in writing by Holdco at least 2 Business Days prior to the
Closing, the fixed amount calculated as set forth on Schedule 4.02(a) (less any
portion thereof paid by Seller between the date hereof and the Closing Date),
which amount is due and payable by Seller to Holdco;
(b) duly executed deeds, bills of sale, assignments and other
documents and instruments of transfer providing for the sale, assignment,
transfer, conveyance and delivery of the Acquired Assets in form and substance
reasonably satisfactory to Holdco (it being understood that any such deed, bill
of sale, assignment or other document or instrument shall not provide for any
representations or warranties not otherwise expressly provided for in this
Agreement);
(c) the officer's certificates required to be delivered
pursuant to Sections 9.02(a), (b) and (c);
(d) evidence of each of the consents described in Section
9.02(d) in form and substance reasonably satisfactory to Holdco;
(e) the opinion of Weil, Gotshal & Manges LLP, counsel to
Seller, , as described in Section 9.02(f);
(f) any other documents or instruments that are requested by
Holdco during the period from the date of this Agreement to the Closing Date
that are necessary or reasonably appropriate to evidence the transfer of the CMB
Intellectual Property, Technology and Know-How or CMB Business Records;
(g) evidence of payment in full of all financial obligations
under the Master Agreement to Lease Equipment, dated May 18, 1999 between Seller
and Cisco Systems Capital Corporation, in form and substance reasonably
satisfactory to Holdco;
(h) a FIRPTA Non-Foreign Seller Certificate from Seller
certifying that it is not a foreign person within the meaning of Section 1445 of
the Code reasonably satisfactory in form and substance to Holdco; and
(i) properly executed copies of each of the Transaction
Documents to which Seller is a party and which have not been delivered prior to
the Closing Date.
Section 4.03. Deliveries by Holdco at the Closing. At the
Closing, Holdco shall deliver to Seller:
(a) by wire transfer of immediately available funds to an
account designated in writing by Seller at least 2 Business Days prior to the
Closing, an amount equal to $81,100,000 less (i) the initial Purchase Price
adjustments set forth in Section 3.03; (ii) the Adjustment Holdback; and (iii)
the Indemnification Holdback;
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(b) by wire transfer of immediately available funds to an
account designated in writing by Seller at least 2 Business Days prior to the
Closing, the fixed amount calculated as set forth on Schedule 4.03(b) (less any
portion thereof paid by Holdco between the date hereof and the Closing Date),
which amount is due and payable by Holdco to Seller;
(c) duly executed assumption agreements and other documents
and instruments of assumption providing for the assumption of the Assumed
Liabilities in form and substance reasonably satisfactory to Seller (it being
understood that any such agreement, document or instrument shall not provide for
any representations or warranties or any Liabilities that are not otherwise
expressly provided for in this Agreement);
(d) stock certificates representing 75,000 shares of Series D
Preferred Stock, which shall be tendered to Seller for cancellation, and Seller
shall accept such shares of Series D Preferred Stock so tendered, at which time
such shares shall be retired and cancelled and no amount shall be payable by
Seller with respect thereto;
(e) an instrument in writing executed by Holdco and Vulcan
acknowledging the cancellation of any rights to dividends with respect to the
75,000 shares of Series D Preferred Stock, whether such dividends are payable
before, on or after the Closing Date in form and substance reasonably
satisfactory to Seller;
(f) the Amended and Restated Securities Purchase Warrant dated
as of May 12, 2000 by and among Seller, CCI and Holdco (which warrants were
assigned by CCI to Holdco pursuant to the Assignment and Assumption Agreement
between CCI and Holdco dated August 1, 2000) (the "Charter Warrants"), which
shall be tendered to Seller for cancellation as contemplated in Section 8.13;
(g) the officer's certificates required to be delivered
pursuant to Sections 9.03(a), (b) and (c);
(h) the opinion of Paul, Hastings, Janofsky & Walker LLP,
counsel to Holdco described in Section 9.03(d); and
(i) properly executed copies of each of the Transaction
Documents to which Holdco is a party and which have not been delivered prior to
the Closing Date.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Holdco as follows;
provided, that any of the representations and warranties that Seller makes with
respect to itself and the Acquired Assets shall also be deemed to be made by
Seller with respect to any Subsidiary of Seller that so holds, owns or has
rights to any of the Acquired Assets:
Section 5.01. Organization, Standing and Power. Seller is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Delaware and has the requisite corporate power and authority to
own, lease and operate the Acquired Assets to be sold hereunder and to carry on
the Cable Modem Business as now being conducted. Seller is duly qualified as a
foreign corporation and is in good standing in each jurisdiction in which the
failure to be so qualified or in good standing would reasonably be expected to
have a Material Adverse Effect.
Section 5.02. Corporate Authorization.
(a) Seller has the requisite corporate power and authority to
execute and deliver this Agreement and the Transaction Documents to which Seller
is a party and to perform its obligations hereunder and thereunder. Other than
the Seller Requisite Vote (as hereinafter defined), no other corporate
proceedings on the part of Seller are necessary to authorize this Agreement or
the other Transaction Documents to which it is a party, or to consummate the
Transactions. This Agreement has been duly executed and delivered by Seller and
constitutes, and each Transaction Document to which Seller is a party will be
duly executed and delivered by Seller at or prior to the Closing and when so
executed and delivered will constitute, a legal, valid and binding obligation of
Seller enforceable against it, each in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting or relating to enforcement of creditor's
rights and remedies generally and subject, as to enforceability, to general
principles of equity.
(b) The Board of Directors of Seller (the "Seller's Board")
has (i) determined that this Agreement and the Transactions are fair to and in
the best interests of Seller, (ii) duly and validly authorized the execution and
delivery of this Agreement and approved the consummation of the Transactions,
and (iii) resolved to recommend that the stockholders of Seller vote in favor of
a resolution approving this Agreement and the transactions contemplated hereby.
The Seller's Board has directed that this Agreement be submitted to the
stockholders of Seller for their approval.
(c) The affirmative vote of (i) a majority of the votes
entitled to be cast by holders of outstanding shares of HSA Common Stock and
Series D Preferred Stock, voting together as a single class (it being understood
that holders of Series D Preferred Stock are entitled to one vote for each share
of HSA Common Stock into which their Series D Preferred Stock may be converted)
and (ii) at least two-thirds (2/3) of the votes entitled to be cast by holders
of outstanding shares of Series D Preferred Stock, voting separately as a single
class are, respectively, the only votes of the holders of any of Seller's
capital stock necessary in connection with the approval of this Agreement and
the transactions contemplated hereby. The stockholder
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approvals set forth in clauses (i) and (ii) above are collectively referred to
herein as the "Seller Requisite Vote".
(d) The sale of the Acquired Assets to Holdco and the
consummation of the transactions contemplated hereby are not subject to the
limitations or requirements of the provisions of Section 203 of the Delaware
General Corporation Law, as amended (the "DGCL"), and no further action is
necessary to ensure that the restrictions contained in Section 203 of the DGCL
will not apply to Holdco in connection with or following such transactions. To
Seller's knowledge, no other state takeover statute is applicable to the
transactions contemplated by this Agreement.
Section 5.03. Non-Contravention. The execution and delivery by
Seller of this Agreement and the other Transaction Documents do not, and the
consummation by Seller of the Transactions and the compliance by Seller with the
provisions hereof and thereof will not, conflict with, or result in any
violation of or default (with or without notice or lapse of time, or both)
under, any provision of (i) the certificate of incorporation and by-laws of
Seller, assuming receipt of the Seller Requisite Vote, (ii) except as set forth
on Schedule 5.03, any contract, agreement, indenture, mortgage, lease,
commitment or obligation of Seller or by which Seller or its properties or
assets are bound, or (iii) subject to the governmental filings and other matters
referred to in Section 5.04, any Legal Requirement applicable to Seller's
operation of the Cable Modem Business or use of the Acquired Assets, other than
in the case of clause (ii) above, any such conflicts, violations, or defaults
that, individually or in the aggregate, would not reasonably be expected to have
a Material Adverse Effect.
Section 5.04. Governmental Filings; Consents. Except as set
forth on Schedule 5.04, no material consent, approval, license, permit, order or
authorization of, or registration, declaration or filing with, any Governmental
Authority or any third party is required to be obtained or made by or with
respect to Seller, the Acquired Assets or the Assumed Liabilities in connection
with the execution and delivery by Seller of this Agreement or the other
Transaction Documents to which Seller is a party or the consummation of the
Transactions or compliance by Seller with the provisions hereof or thereof,
except for (i) compliance with and filings under the HSR Act and (ii) those that
may be required solely by reason of Holdco's (as opposed to any other Person's)
participation in the Transactions.
Section 5.05. Acquired Assets. Except as set forth on Schedule
5.05, the Acquired Assets are all of the material assets used in the operation
of the Cable Modem Business as it is conducted as of the date hereof.
Section 5.06. Absence of Certain Changes or Events. Except as
set forth on Schedule 5.06, or as specifically contemplated by this Agreement,
since June 30, 2001 there has not been (i) any transaction, commitment, dispute
or other event or condition (financial or otherwise) of any character (whether
or not in the ordinary course of business), that individually or in the
aggregate, has had or would reasonably be expected to have a Material Adverse
Effect or (ii) any sale, assignment or transfer of any asset or property, or any
damage, destruction or loss, whether or not covered by insurance, which,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect.
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Section 5.07. Proxy Statement. The proxy statement of Seller
(the "Proxy Statement") to be filed with the SEC in connection with this
Agreement and any amendments and supplements thereto, will, when filed, comply
as to form in all material respects with the requirements of the Exchange Act.
None of the Proxy Statement or any amendment or supplement thereto will, at the
date the Proxy Statement or any such amendment or supplement is first mailed to
stockholders of Seller or at the time such stockholders vote on the approval of
this Agreement, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. No representation or warranty is made by Seller in this
Section 5.07 with respect to statements made or incorporated by reference
therein based on information supplied by Holdco for inclusion or incorporation
by reference in the Proxy Statement or any amendment or supplement thereto.
Section 5.08. Compliance with Applicable Laws. Except as set
forth on Schedule 5.08, Seller complies in all material respects with all Legal
Requirements which apply to Seller's operation of the Cable Modem Business and
ownership or use of the Acquired Assets. This Section 5.08 does not apply to
Environmental Laws which are instead the subject of Section 5.14.
Section 5.09. Litigation; Decrees. Except as set forth on
Schedule 5.09 and except for any lawsuit, action or proceeding brought after the
date of this Agreement by a Person seeking to delay or prevent, or otherwise
challenging, this Agreement or the transactions contemplated hereby, there is no
lawsuit, action or proceeding pending, or, to Seller's knowledge, threatened,
against Seller relating to the Cable Modem Business, the Acquired Assets or the
Transactions.
Section 5.10. Security Deposits. The Assigned Security
Deposits are the only Security Deposits of Seller in relation to the Assumed
Real Estate Leases and the Assumed Capital Leases.
Section 5.11. Contracts.
(a) Each Material Contract is set forth on Schedule
5.11(a)(i). Each Contract limiting the right of Seller to compete is set forth
on Schedule 5.11(a)(ii). A true, complete and correct copy of each Material
Contract together with each Assumed Capital Lease and each Assumed Operating
Lease (and all amendments, side letters, guarantees, agreements and addenda
thereto) has been delivered to Holdco.
(b) Each Material Contract, Assumed Capital Lease and Assumed
Operating Lease (i) has been duly authorized, executed and delivered by Seller
and, to Seller's knowledge, the other parties thereto, (ii) except as set forth
on Schedule 5.11(b), remains in full force and effect to the extent of its terms
without any waiver not reflected therein, and (iii) is the valid and binding
obligation of Seller, enforceable against Seller in accordance with its terms.
Seller has not received any written notice threatening or declaring termination
of a Material Contract, Assumed Capital Lease or Assumed Operating Lease as a
result of any alleged uncured breach or default. Seller has performed all
material obligations required to be performed by it to date under each Material
Contract, Assumed Capital Lease and Assumed Operating Lease, and Seller is not
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in material breach or default under any Material Contract, Assumed Capital Lease
or Assumed Operating Lease. Neither Seller nor, to the knowledge of Seller, any
other party thereto, is in breach or default under (including any circumstances
that would result in a breach or default with notice or lapse of time or both)
any Material Contract, Assumed Capital Lease or Assumed Operating Lease in any
material respect. Neither Seller nor any other party thereto has waived any
material provision of any such Material Contract, Assumed Capital Lease or
Assumed Operating Lease or agreed to do so. Seller has not received any written
notice of breach or default or termination under any Material Contract, Assumed
Capital Lease or Assumed Operating Lease.
(c) Subject to Seller receiving the consent of any third
parties required to assign the Material Contracts, Assumed Capital Leases and
Assumed Operating Leases to Holdco and subject to the terms and conditions of
any such consent, except as otherwise expressly agreed by Seller and Holdco at
the Closing, Holdco will, by virtue of the assignment and assumption of such
Material Contracts, Assumed Capital Leases and Assumed Operating Leases
contemplated by this Agreement, succeed to the rights of Seller under (but
subject to all of the terms, conditions and limitations contained in) the
Material Contracts, Assumed Capital Leases and Assumed Operating Leases upon the
Closing.
Section 5.12. Real Property.
(a) Seller does not own any real property that forms part of
the Acquired Assets. Seller has valid and enforceable leasehold interests in the
Assumed Real Estate Leases free and clear of all Liens, other than Permitted
Liens, and such Assumed Real Estate Leases are in full force and effect. Neither
Seller nor, to Seller's knowledge, any other party thereto is in breach or
default, and no event has occurred that, with the giving of notice or passage of
time, would constitute a default thereunder in any material respect. Seller has
not received any notice of default by the landlord under any Assumed Real Estate
Lease.
(b) Seller has provided Holdco with access to true and
complete copies of each of the Assumed Real Estate Leases, including all
amendments, side letters, guarantees, agreements and addenda thereto. To
Seller's knowledge, each CMB Site and any improvements constructed thereon and
their current use, conforms in all material respects to (i) all applicable Legal
Requirements, and (ii) all restrictive covenants, if any, or other Liens
affecting all or part of such premises.
(c) There are no pending, or to Seller's knowledge, threatened
condemnation actions or special assessments or proceedings for changes in the
zoning with respect to the CMB Sites. Seller has complied in all material
respects with all notices or orders to correct violations of Legal Requirements
issued by any Governmental Authority to Seller in relation to the CMB Sites.
Section 5.13. Title to and Condition of the Acquired Assets.
(a) Except as set forth on Schedule 5.13, Seller has good and
valid title to, or holds by valid and subsisting lease or license, the Acquired
Assets free and clear of all Liens
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other than Permitted Liens. This Section 5.13(a) does not apply to the CMB
Intellectual Property or Technology and Know-How which are instead the subject
of Section 5.15.
(b) The tangible Acquired Assets having an original purchase
price, or if leased under a Capital Lease or an Operating Lease, having
aggregate lease payments of, at least $10,000 are in good repair and operating
condition (subject to normal wear and tear).
Section 5.14. Compliance with Environmental Laws.
(a) Seller's operation of the Cable Modem Business and use of
the Acquired Assets complies in all material respects with applicable
Environmental Laws, and Seller is not aware of any Hazardous Substances,
contamination condition or pollution existing or resulting from Seller's
operation of the Cable Modem Business or use of the Acquired Assets that have
given rise or could give rise to any unsatisfied on-site or off-site response,
removal, abatement, closure or remedial obligations of Seller under applicable
Environmental Laws.
(b) Without limiting clause (a) above, Seller's operation of
the Cable Modem Business and use of the Acquired Assets, (i) is not subject to
any pending action, suit or proceeding by or before any Governmental Authority
under applicable Environmental Laws and, to the knowledge of Seller, no such
proceeding has been threatened and (ii) to the knowledge of Seller, Seller is
not subject to any pending investigation or inquiry by any Governmental
Authority under applicable Environmental Laws or subject to any listing or the
threat of listing under Federal Superfund or state hazardous waste site
criteria.
(c) All material permits, licenses or similar authorizations,
if any, required to be obtained, retained or renewed by Seller under applicable
Environmental Laws in connection with the operation of the Cable Modem Business
and use of the Acquired Assets, including, without limitation, those relating to
the treatment, storage, disposal or release of Hazardous Substances have been
duly obtained, and, if applicable, retained or renewed, and Seller has complied
in all material respects with the terms and conditions of all such permits,
licenses and similar authorizations.
(d) To Seller's knowledge it has no material liability to any
person or entity as a result of any release of any Hazardous Substances in
connection with Seller's operation of the Cable Modem Business or use of the
Acquired Assets.
Section 5.15. Intellectual Property Rights.
(a) Seller owns, licenses or has other valid rights, title and
interest, free and clear of all Liens, other than Permitted Liens, to use the
CMB Intellectual Property and the Technology and Know-How, without infringing
upon or otherwise acting adversely to the right of any third party, except where
the failure to so own, license or have such rights would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect.
Schedule 5.15 sets forth all of the CMB Intellectual Property consisting of any
domestic or foreign Patents, Trademarks, Copyrights, Maskworks or licenses. All
of the CMB Intellectual Property and Technology and Know-How are valid and
enforceable rights of Seller and, subject to Section 5.15(e) below, will not
cease to be valid and in full force and effect by reason of the execution and
delivery of this Agreement or the consummation of the Transactions.
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(b) Except as set forth on Schedule 5.15, at the Closing,
Seller will not be obligated or under any liability whatsoever to make any
payments by way of royalties, fees or otherwise to any owner or licensee of, or
other claimant to, any Intellectual Property on account of Seller's prior use or
licensing of the CMB Intellectual Property; provided, that Holdco, by virtue of
the assignment and assumption of CMB Intellectual Property and Technology and
Know-How contemplated hereby will be obligated in the ordinary course to pay
renewal license fees for Software licenses and related support/maintenance
agreements that Holdco elects to renew. Upon consummation of the Transactions,
except as set forth on Schedule 5.15, and disregarding any facts or
circumstances that are particular to Holdco and are not known by Seller or any
change in applicable law after the Closing Date, Holdco will be entitled to
operate the Cable Modem Business and use the Acquired Assets as the same are now
and have been operated and used respectively by Seller prior to the Closing Date
without such operation or use infringing upon, misappropriating, violating or
otherwise acting adversely to the Intellectual Property or other rights of any
Person (including rights to privacy or publicity), violating any export control
law or regulation, or constituting unfair competition or trade practices under
any applicable laws.
(c) To Seller's knowledge, no Person has any right to, or is
infringing or misappropriating, any rights with respect to the CMB Intellectual
Property or the Technology and Know-How or engaging in other conduct that may
diminish or undermine the CMB Intellectual Property, such as the disclosure of
Seller's confidential information.
(d) Seller has taken reasonable steps to protect Seller's
rights in the Technology and Know-How and confidential information provided by
any other Person to Seller subject to a duty of confidentiality. Without
limiting the foregoing, (i) Seller has, and enforces, a policy requiring each of
its executive officers and research and development personnel to execute
non-competition, confidentiality and non-solicitation agreements, and all such
individuals have executed such an agreement, and (ii) as between Seller and any
of Seller's employees and other Persons who, either alone or in concert with
others, developed, invented, discovered, derived, programmed or designed any of
the Technology and Know-How, or who has knowledge of or access to information
about any of the Technology and Know-How, such Technology and Know-How and other
information may not be divulged or used without the written consent of Seller.
(e) Subject to Seller receiving the consent of any third
parties required to assign the CMB Intellectual Property and the Technology and
Know-How to Holdco as contemplated by this Agreement and subject to the terms
and conditions of any such consent, except as otherwise expressly agreed by
Seller and Holdco at the Closing, Holdco will, by virtue of the assignment and
assumption of the CMB Intellectual Property and Technology and Know-How
contemplated by this Agreement, succeed to the rights of Seller under (but
subject to all of the terms, conditions and limitations contained in) all
agreements relating to the CMB Intellectual Property and Technology and Know-How
upon the Closing; provided that Holdco's ability to enforce the provisions of
any of such agreements, or to realize the benefits thereunder, may be affected
by facts or circumstances relating to the business or affairs of Holdco or its
Affiliates, including, without limitation, legal or regulatory requirements or
restrictions applicable to Holdco or its Affiliates, and Seller makes no
representation or warranty regarding
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such matters or the effects such matters may have on the ability of Holdco to
realize the benefits of the CMB Intellectual Property and Technology and
Know-How.
Section 5.16. Taxes.
(a) Except as disclosed on Schedule 5.16, Seller has timely
prepared and filed in accordance with applicable law all federal and state
income Tax returns and all material other Tax returns required to be filed by it
or with respect to its operations and assets with respect to Taxes which could
result in a Lien on any of the Acquired Assets (other than a Lien for current
Taxes not yet due and payable) or for which Holdco or its Affiliates (other than
Seller and any Affiliate of Holdco that is a stockholder of Seller) could be
liable, and all Taxes shown as due on such Tax returns, or for which a notice
of, or assessment or demand for payment has been received or are otherwise due
and payable, have been timely paid, except for Taxes that are being contested in
good faith by appropriate proceedings. Such Tax returns were materially complete
and correct as of the date on which they were filed or as subsequently amended
and no facts have later become known by Seller to the contrary. Except as
disclosed on Schedule 5.16, Seller has received no revenue agent's reports or
other written or formal assertions of deficiencies or other liabilities for such
Taxes (including any reports, statements, summaries and other communications of
assertions or claims of deficiencies or other liabilities) with respect to
Seller for past periods for which the applicable statute of limitations has not
expired.
(b) Except for waivers and extensions disclosed on Schedule
5.16, there are no waivers or extensions of any applicable statute of
limitations for the assessment or collection of Taxes with respect to any Tax
return that relates to Seller which could result in a Lien upon any of the
Acquired Assets, and no request for any such waiver or extension is currently
pending.
(c) There are no Liens for Taxes (other than Permitted Liens
and other than for Taxes not yet due and payable) upon the Acquired Assets.
Except as disclosed on Schedule 5.16, no Lien, action, suit, proceeding,
investigation, audit, examination, request for information, claim or assessment
is presently pending or, to the knowledge of Seller, proposed with regard to any
Taxes that relate to Seller for which Holdco or its Affiliates would or could be
liable or which could result in a Lien on the Acquired Assets.
(d) Seller is not a "foreign person" within the meaning of
Code Section 1445(f)(3) and Treasury Regulation Section 1.1445-2(b)(2)(i).
(e) The Acquired Assets are not subject to any joint venture,
partnership or other arrangement or contract that is treated as a partnership
for United States Federal income tax purposes.
Section 5.17. Employees, Labor Matters, Etc.
(a) Seller is not a party to or bound by any collective
bargaining agreement relating to any of its employees and independent
contractors (including directors) and to the knowledge of Seller, there are no
labor unions or other organizations representing, purporting to represent or
attempting to represent any of its employees and independent contractors
(including directors). To the knowledge of Seller, there are no labor disputes
currently subject to any grievance procedure, arbitration or litigation other
than any dispute or disputes that, individually
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or in the aggregate, would not reasonably be expected to have a Material Adverse
Effect and there is no representation petition pending or, after due inquiry,
threatened with respect to any of its employees and independent contractors
(including directors).
(b) Seller and the employees of Seller listed on Schedule
8.09(k) are parties to employment agreements which prohibit each such employee
from hiring directly or through another entity any person who was an employee of
Seller at any time during the period of such employee's employment (the
"Post-Employment Hiring Prohibition").
Section 5.18. Employee Benefit Plans. Except as set forth on
Schedule 5.18 or as would not, either individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect, (i) each of the
Benefit Plans and its related trust intended to qualify under Sections 401, and
501(a) of the Code, respectively, so qualify, (ii) each of the Benefit Plans
complies and has been administered and operated in compliance in all material
respects with its terms and all Legal Requirements, including ERISA and the
Code, and (iii) no Benefit Plan is subject to Title IV of ERISA, is a
"multiemployer plan" within the meaning of Section 3(37) of ERISA.
Section 5.19. Brokers. Except for Lehman Brothers Inc.
("Lehman") and Houlihan Lokey, whose fees will be paid by Seller, no investment
banker, broker, finder, other intermediary or other Person is entitled to any
fee or commission from Seller or any of its Subsidiaries upon consummation of
the transactions contemplated by this Agreement.
Section 5.20. Solvency of Seller. Immediately after the
Closing, the fair market value of Seller's assets will exceed all of Seller's
Liabilities.
Section 5.21. Opinion of Financial Advisors. Seller has
delivered to Holdco a true and correct copy of (i) the Lehman Opinion, and (ii)
the Houlihan Lokey Opinion. As of the date of the Houlihan Lokey Opinion, (i)
the data, material and other information, with respect to Seller, furnished to
Houlihan Lokey by or on behalf of Seller and its agents, counsel, employees and
representatives (the "Information"), is true, complete and correct in all
material respects, (ii) the Information does not contain any untrue statement of
a material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances in which they were made, not
false or misleading, (iii) the financial forecasts and projections provided to
Houlihan Lokey by Seller were reasonably prepared and reflect the best currently
available estimates of the future financial results and condition of Seller, and
(iv) there have been no material changes in the assets, financial condition,
business or prospects of Seller since the date of the most recent financial
statements of Seller made available to Houlihan Lokey.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF Holdco
Holdco hereby represents and warrants to Seller as follows:
Section 6.01. Organization, Standing and Power. Holdco has
been duly formed and is validly existing as a limited liability company in good
standing under the laws of the state of Delaware and has the power and authority
to own, lease and otherwise hold and operate its assets and to carry on its
business as now being conducted.
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Section 6.02. Corporate Authorization. Holdco has the power
and authority to execute and deliver this Agreement and the Transaction
Documents to which Holdco is a party and to perform its obligations hereunder
and thereunder. The execution and delivery of this Agreement and the Transaction
Documents and the consummation of the Transactions have been duly authorized by
all necessary action on the part of Holdco. This Agreement has been duly
executed and delivered by Holdco and constitutes, and each Transaction Document
to which Holdco is a party will be duly executed and delivered by Holdco at or
prior to the Closing and when so executed and delivered will constitute, a
legal, valid and binding obligation of Holdco enforceable against it in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar laws affecting or
relating to enforcement of creditor's rights and remedies generally and subject,
as to enforceability, to general principles of equity.
Section 6.03. Non-Contravention. The execution and delivery by
Holdco of this Agreement and the Transaction Documents to which Holdco is a
party do not, and the consummation by Holdco of the Transactions and the
compliance by Holdco with the provisions hereof and thereof will not, conflict
with, or result in any violation of or default (with or without notice or lapse
of time, or both) under, any provision of (i) the Delaware Limited Liability
Company Act, (ii) the certificate of formation of Holdco, (iii) any contract,
agreement, indenture, mortgage, lease, commitment or obligation to which Holdco
is a party or by which Holdco or its properties or assets are bound, or (iv) any
Legal Requirement applicable to Holdco, other than, in the case of clauses (iii)
and (iv) above, any such conflicts, violations or defaults that, individually or
in the aggregate, would not materially impair the ability of Holdco to perform
its obligations under this Agreement or any of the Transaction Documents to
which Holdco is a party.
Section 6.04. Governmental Filings; Consents. No consent,
approval, license, permit, order or authorization of, or registration,
declaration or filing with, any Governmental Authority or any third party is
required to be obtained or made by or with respect to Holdco, the Acquired
Assets or the Assumed Liabilities in connection with the execution and delivery
by Holdco of this Agreement or the other Transaction Documents to which Holdco
is a party or the consummation of the Transactions or compliance by Holdco with
the provisions hereof or thereof, except for (i) compliance with and filings
under the HSR Act and (ii) those the failure of which to be obtained or made,
individually or in the aggregate, would not materially impair the ability of
Holdco to perform its obligations under this Agreement or any of the Transaction
Documents to which Holdco is a party.
Section 6.05. Information Supplied; Schedule 13E-3. The Rule
13E-3 Transaction Statement on Schedule 13E-3 ("Schedule 13E-3") of Holdco to be
filed with the SEC in connection with this Agreement and any amendments and
supplements thereto, will, when filed, comply as to form in all material
respects with the requirements of the Exchange Act. None of the information
supplied or to be supplied by Holdco for inclusion or incorporation by reference
in the Proxy Statement or any amendment or supplement thereto will, at the date
the Proxy Statement or any amendment or supplement thereto is first mailed to
stockholders of Seller or at the time such stockholders vote on the approval of
this Agreement, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
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Section 6.06. Brokers. Except for Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), whose fees will be paid by
Holdco, no investment banker, broker, finder, other intermediary or other Person
is entitled to any fee or commission from Holdco or any of its subsidiaries upon
consummation of the Transactions.
Section 6.07. Assignment of Agreements. All of CCI's rights
under the Full Turnkey Agreement, Second NSA Agreement and Charter Warrants have
been validly assigned to, and all of CCI's obligations thereunder have been
validly assumed by, Holdco.
Section 6.08. Interested Stockholder. Holdco was not an
interested stockholder, as such term is defined in Section 203 of the DGCL, of
Seller prior to November 25, 1998, on which date it became an interested
stockholder in connection with the sale and issuance of 8,000,000 shares of
Series B Preferred Stock by Seller to Vulcan, which issuance Holdco understands
was approved in advance by Seller's Board in a manner sufficient to approve
Holdco as an interested stockholder pursuant to Section 203 of the DGCL.
ARTICLE VII
COVENANTS RELATED TO CONDUCT OF THE CABLE MODEM BUSINESS
Section 7.01. Conduct of Cable Modem Business in the Ordinary
Course. During the period from the date of this Agreement to the Closing Date,
except as consented to in writing by Holdco or as specifically contemplated by
this Agreement, Seller shall conduct the Cable Modem Business in the ordinary
course consistent with past practice and will, to the extent consistent
therewith, use commercially reasonable efforts to preserve the Acquired Assets
and the Cable Modem Business, including relationships with customers, suppliers
and others having significant business dealings with the Cable Modem Business.
Without limiting the generality of the foregoing, during the period from the
date of this Agreement to the Closing Date, except as consented to in writing by
Holdco (such consent not to be unreasonably withheld or delayed) or as
specifically contemplated by this Agreement or as disclosed on Schedule 7.01:
(a) Seller will:
(i) use commercially reasonable efforts to keep available
the services of the employees listed on the Offer Schedule and Review Schedule
(including by enforcing any restrictions on Seller's employees with respect to
soliciting or hiring employees listed on those schedules), and use commercially
reasonable efforts to replace all such employees whose employment terminates
before the Closing Date, in accordance with past hiring practices; provided,
that Holdco must consent to the hiring of any replacement employee with an
annual compensation of $50,000 or more;
(ii) maintain the tangible Acquired Assets in good repair,
order and condition (ordinary wear and tear excepted);
(iii) make the Modem Inventory available to Holdco for
deployment, pursuant to the Management Agreement;
(iv) maintain in full force and effect, policies of
insurance with respect to the Cable Modem Business consistent with past
practices;
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(v) maintain its books, records and accounts related to
the Cable Modem Business in the ordinary course of business consistent with past
practices;
(vi) report and write off accounts receivable related to
the Cable Modem Business only in accordance with past practices;
(vii) withhold and pay when due all Taxes relating to
Hired Employees, the Acquired Assets and the Cable Modem Business;
(viii) comply in all material respects with all Legal
Requirements with respect to the Cable Modem Business;
(ix) provide Holdco with copies of any revenue agent's
reports or written assertions of deficiencies or other liabilities for Taxes
received after the date hereof up to and including the Closing Date within ten
(10) days of receipt thereof (but in no event later than the Closing Date); and
(x) provide Holdco with copies of material reports,
audits, studies, or analyses of any kind whatsoever in the possession of Seller,
or under its control, relating to environmental matters affecting the Acquired
Assets.
(b) Seller will not:
(i) sell, transfer or assign any portion of the Acquired
Assets other than sales in the ordinary course of business;
(ii) modify, terminate, renew (other than in the ordinary
course or as required by this Agreement), suspend or abrogate any Material
Contract or Real Estate Lease (other than those constituting Excluded Assets);
(iii) enter into any Material Contract with respect to the
Cable Modem Business;
(iv) make or approve any material change, modification or
alteration in or to any network operational or business systems, including CDB,
WebDT, Fred, Remedy (other than modifications in the normal development
process), and the Charter E-mail complex;
(v) modify its procedures for disconnection and
discontinuation of service to subscribers whose accounts are delinquent;
(vi) terminate the employment of any employees listed on
the Offer Schedule or the Review Schedule except for cause in the ordinary
course;
(vii) increase the compensation or materially change any
benefits available to any employee listed on the Offer Schedule or the Review
Schedule, except as required pursuant to existing written agreements, or in the
ordinary course of business consistent with past practice;
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(viii) create or permit to exist any Lien on any of the
Acquired Assets, other than any Lien which will be released at or prior to the
Closing or Permitted Liens;
(ix) enter into any collective bargaining agreement
covering any employee listed on the Offer Schedule or the Review Schedule or
enter into any new bonus, stock option, profit sharing, compensation, pension,
welfare, retirement, employment or similar agreement, except where required by
any Legal Requirement;
(x) adopt, amend, modify, spin-off, transfer or assume any
of the assets or liabilities of, terminate or partially terminate any benefit
plan;
(xi) decrease the rate charged for any level of services
to customers of Seller, except to the extent required by Holdco or any Legal
Requirement; or
(xii) engage in any marketing, subscriber installation,
collection or disconnection practices outside the ordinary course of business or
inconsistent with past practice, or change any billing arrangements (except as
contemplated by the Billing Letter Agreement).
(c) The provisions of Sections 7.01(a) and (b) shall not apply
with respect to any actions taken by CCI under the Management Agreement.
Section 7.02. Arapahoe Facility. Notwithstanding anything to
the contrary in Section 7.01 above, Seller shall be entitled to close its call
center on Arapahoe Road, Denver (the "Arapahoe Facility") and all operations
directly related thereto at any time on or after October 31, 2001, and may take
any action which Seller deems, in its sole discretion, to be reasonably
necessary or appropriate in connection with the closure of the Arapahoe Facility
without seeking the prior consent of Holdco. Notwithstanding the foregoing,
Seller shall retain certain of its personnel employed at the Arapahoe Facility
in accordance with the transitional procedures set forth on Schedule 7.02.
Section 7.03. Access to Information. To the extent permitted
by any applicable Legal Requirement, during the period from the date of this
Agreement to the Closing Date, Seller will furnish to Holdco and its authorized
representatives (including counsel, financial advisors and auditors) such
financial and operating data and other information relating to the Cable Modem
Business as such persons may reasonably request, and will instruct its officers,
employees, auditors, counsel and financial advisors to cooperate with Holdco in
its investigation of the Cable Modem Business and the Acquired Assets to be
purchased and Assumed Liabilities to be assumed hereunder; provided, however,
that nothing in this Agreement shall require Seller to provide Holdco with the
passwords to any of Seller's servers or software/enterprise applications,
including the e-mail server complex in Washington, D.C. prior to the Closing.
Notwithstanding the foregoing, Seller shall continue to provide to Holdco
temporary passwords as reasonably requested by Holdco to access equipment in
headends covered by the Full Turnkey Agreement. Holdco acknowledges that any
information provided to Holdco or any Holdco's representatives by Seller or any
of Seller's representatives pursuant to or in connection with this Agreement is
subject to the terms of the Confidentiality Agreement entered into between
Seller and CCI dated as of May 24, 2001 (the "Confidentiality Agreement").
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ARTICLE VIII
ADDITIONAL AGREEMENTS
Section 8.01. Seller Stockholder Meeting. Seller shall cause a
meeting of its stockholders to be duly called and held as soon as reasonably
practicable after the date of this Agreement (the "Seller Stockholder Meeting")
for the purpose of obtaining stockholder approval of this Agreement. Except as
provided in the next sentence, Seller's Board shall recommend to Seller's
stockholders that they vote in favor of the approval of this Agreement. Subject
to Section 10.03, Seller's Board shall be permitted to (i) not recommend to
Seller's stockholders that they vote in favor of the approval of this Agreement
or (ii) withdraw or modify in a manner adverse to Holdco its recommendation to
Seller's stockholders that they vote in favor of the approval of this Agreement,
only if and to the extent that Seller's Board, after consultation with
independent legal counsel, by a majority vote determines in its good faith
judgment that such action is necessary for Seller's Board to comply with its
fiduciary duties to Seller's stockholders under any applicable Legal
Requirement.
Section 8.02. Proxy Statement; Schedule 13E-3.
(a) In connection with the Seller Stockholder Meeting, Seller
will (i) promptly prepare and file with the SEC, use its reasonable best efforts
to have cleared by the SEC and thereafter mail to its stockholders as promptly
as practicable, the Proxy Statement and all other proxy materials for such
meeting, (ii) use its reasonable best efforts, subject to Section 8.01 hereof,
to obtain stockholder approval of this Agreement and (iii) otherwise comply with
all Legal Requirements applicable to such meeting.
(b) As soon as practicable after the date of this Agreement,
Holdco shall file with the SEC a Schedule 13E-3 with respect to this Agreement
and the Transactions. Holdco and Seller agree to use their respective reasonable
best efforts to cooperate and to provide each other with such information that
either of them may reasonably request in connection with the preparation of the
Schedule 13E-3. The information provided by each of Holdco and Seller for use in
the Schedule 13E-3 shall not, at the time the Schedule 13E-3 is filed with the
SEC, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Each of Holdco and Seller agrees to promptly supplement, update
and correct any information provided by it for use in the Schedule 13E-3 if and
to the extent that it is or shall have become incomplete, false or misleading.
Section 8.03. Governmental Approvals.
(a) Each of Holdco and Seller shall as promptly as
practicable, but in no event later than ten (10) days following the execution
and delivery of this Agreement, file with the United States Federal Trade
Commission and the United States Department of Justice, the notification and
report form under the HSR Act required for the Transactions and any supplemental
information requested in connection therewith pursuant to the HSR Act. Each of
Holdco and Seller shall as promptly as practicable comply with any other Legal
Requirements of any country which are applicable to any of the Transactions and
pursuant to which any consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental
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Authority or any other Person in connection with such Transactions is necessary.
Each of Holdco and Seller shall furnish to the other such necessary information
and reasonable assistance as the other may request in connection with its
preparation of any filing, registration or declaration which is necessary under
the HSR Act or any other such Legal Requirements. Holdco and Seller shall keep
each other apprised of the status of any communications with, and any inquiries
or requests for additional information from, any Governmental Authority, and
shall comply promptly with any such inquiry or request.
(b) Subject to the terms and conditions of this Agreement,
each party shall use commercially reasonable efforts to cause the Closing to
occur as promptly as practicable, including, without limitation, (i) in the case
of Holdco, assisting Seller and vigorously defending against any lawsuits,
actions or proceedings, judicial or administrative, challenging this Agreement
or the consummation of the Transactions on antitrust grounds, including seeking
to have vacated or reversed any preliminary injunction, temporary restraining
order, stay or other legal restraint or prohibition entered or imposed by any
court or other Governmental Authority that is not yet final and non-appealable
and (ii) in the case of Seller, assisting Holdco and cooperating fully with
Holdco in defending any lawsuits, actions or proceedings of the nature described
in clause (i) above, including, but not limited to, providing information within
Seller's possession and making Seller's personnel available to Holdco's counsel
in a timely manner as necessary, instructing Seller's counsel to vigorously
defend depositions of Seller's personnel and to work closely with Holdco's
counsel to develop common litigation strategies.
Section 8.04. Third Party Consents. Subject to Section 8.06,
as and from the date of this Agreement, Holdco and Seller will cooperate and use
their respective commercially reasonable efforts to obtain as promptly as
practicable all consents, approvals and waivers required by third Persons to
transfer, assign or novate any Acquired Asset (including the Assumed Real Estate
Leases, Assumed Capital Leases, Assumed Operating Leases, Assumed Contracts, CMB
Intellectual Property, Technology and Know-How), to Holdco in a manner that will
avoid any default, conflict, or termination of rights under the Assumed Real
Estate Leases, Assumed Capital Leases, Assumed Operating Leases, Assumed
Contracts, CMB Intellectual Property and Technology and Know-How or any
violation of any Legal Requirement. Seller shall also take such action
reasonably requested by Holdco in connection with Holdco's application to become
an "Approved Company" for purposes of succeeding to the rights of Seller under
the Service and Technology Agreement dated August 31, 2000 among Seller, the
Kentucky Economic Finance Authority and Faulkner Hinton/Ormsby I, LLC, and the
assignment of such agreement to Holdco. Subject to Section 8.12 below, Seller
shall pay all reasonable out-of-pocket costs and expenses incurred by any third
Person in connection with obtaining any required consent, approval or waiver
from any third Person with respect to the transfer, assignment or novation of
Acquired Assets, if and to the extent that a third Person seeks reimbursement
for such costs. Notwithstanding anything to the contrary in this Agreement,
nothing in this Section 8.04 shall require Seller or Holdco to expend any
material sum, make a material financial commitment or grant or agree to any
material concession to any third Person to obtain any such consent, approval or
waiver.
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Section 8.05. Notification of Certain Matters.
(a) Seller will promptly notify Holdco of any fact, event,
circumstance or action occurring from the date hereof through the Closing Date
(i) which, if known on the date of this Agreement, would have been required to
be disclosed to Holdco pursuant to this Agreement, (ii) the existence or
occurrence of which would cause any of Seller's representations or warranties
under this Agreement not to be true and correct as of the Closing Date, or (iii)
which would reasonably be expected to have a Material Adverse Effect; provided,
however, that Seller shall have no liability for breach of this Section 8.05
except to the extent that Holdco has been actually prejudiced by such breach.
(b) Seller and Holdco shall promptly notify each other of (i)
any notice or other communication from any Person alleging that the consent of
such Person is or may be required in connection with the consummation of the
Transactions, and (ii) any lawsuit, action or proceeding pending, or, to
Seller's and Holdco's knowledge, threatened, against Seller or Holdco,
respectively, relating to the Cable Modem Business, the Acquired Assets or the
Transactions.
Section 8.06. Bulk Transfer Laws. The parties agree to waive
the requirements, if any, of any so-called "bulk transfer law" of any
jurisdiction in connection with the sale of the Acquired Assets to Holdco.
Section 8.07. Further Assurances. Without limiting any other
obligation of Holdco or Seller under this Agreement, each of Holdco and Seller
will use commercially reasonable efforts to facilitate and effect the
implementation of the transfer of the Acquired Assets to Holdco and the
assumption of the Assumed Liabilities by Holdco, including, in the case of
Seller, causing any of its Subsidiaries that own, license or lease any of the
Acquired Assets to transfer such assets to Holdco in accordance with the terms
hereof. Without limiting the generality of the foregoing, at and after the
Closing, Holdco and Seller will, at the request of the other party, promptly
execute and deliver or cause to be executed and delivered to the other party
such assignments, deeds, bills of sale, assumption agreements, consents and
other instruments of transfer or assumption as Holdco or its counsel or Seller
or its counsel may reasonably request as necessary or desirable for such purpose
(it being understood that any such assignment, deed, bill of sale, assumption
agreement, consent or other instrument of transfer or assumption shall not
provide for any representations or warranties or any obligations or liabilities
that are not otherwise expressly provided for in this Agreement).
Section 8.08. Acquisition Proposals.
(a) From the date hereof until the Closing Date and except as
expressly permitted by this Section 8.08, Seller will not, and will ensure that
its directors, officers, employees, investment bankers, financial consultants
and other agents do not, directly or indirectly, solicit, initiate, knowingly
encourage or facilitate the submission of any Acquisition Proposal or any
inquiry with respect thereto, engage in any discussions or negotiations with any
Person with respect thereto, or disclose any non-public information relating to
Seller or afford access to the properties, books or records of Seller to any
Person that has made any Acquisition Proposal; provided, however, that, subject
to Section 10.03 hereof, nothing contained in this
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Section 8.08 shall prevent Seller from furnishing non-public information to, or
entering into discussions or negotiations with, any Person in connection with an
unsolicited bona fide Acquisition Proposal received from such Person after the
date hereof that Seller's Board determines in good faith could lead to a
Superior Proposal; provided, further, that nothing contained in this Agreement
shall prevent Seller's Board from complying with Rule 14e-2 or 14d-9 under the
Exchange Act with regard to an Acquisition Proposal. Upon the execution and
delivery of this Agreement, Seller will, and will ensure that the other Persons
listed in the first sentence of this Section 8.08(a), cease and cause to be
terminated all discussions and negotiations, if any, that have taken place prior
to the date hereof with any third parties with respect to any possible
Acquisition Proposal.
(b) In the event that Seller receives an unsolicited
Acquisition Proposal, Seller will promptly notify Holdco, describe the material
terms and identify the parties making such Acquisition Proposal and keep Holdco
informed as to the status of any such Acquisition Proposal.
(c) For purposes of this Agreement, "Acquisition Proposal"
means any offer or proposal for, or any indication of interest in, a merger or
other business combination involving Seller or any of its Subsidiaries which
have any right, title or interest in or to any of the Acquired Assets or the
acquisition of any equity interest in, or a substantial portion of the assets
of, Seller or any of its Subsidiaries which have any right, title or interest in
or to any of the Acquired Assets, other than the transactions contemplated by
this Agreement and other than an offer for a bona fide de minimis equity
interest, or for an amount of assets not material to Seller and its subsidiaries
taken as a whole, that Seller has no reason to believe would lead to a change of
control of Seller (or to the acquisition of a substantial portion of the assets
of Seller and its Subsidiaries). For purposes of this Agreement, "Superior
Proposal" means any bona fide Acquisition Proposal on terms that Seller's Board,
following consultation with outside counsel, determines in its good faith
judgment (taking into account all the terms and conditions of the Acquisition
Proposal, including any break-up fees, expense reimbursement provisions and
conditions to consummation) is more favorable to Seller's stockholders than this
Agreement taken as a whole.
Section 8.09. Employee Matters.
(a) Seller has previously delivered to Holdco a schedule of
all employees employed in the Cable Modem Business by work location as of July
31, 2001 (the "CMB Employees"), that shows the original hire date and the
then-current positions and rates of compensation, rate type (hourly or salary)
and whether the employee is on a leave of absence (the "CMB Employee Schedule").
Holdco will maintain the CMB Employee Schedule in strict confidence.
(b) Schedule 8.09(b)(i) sets forth a list of the CMB Employees
that Holdco will offer to employ following the Closing (the "Offer Schedule") on
the terms described in Section 8.09(c). Holdco shall make written offers of
employment to the CMB Employees listed on the Offer Schedule not more than
fourteen (14) days after the date hereof. Schedule 8.09(b)(ii) sets forth a list
of the CMB Employees that Holdco may elect, in its sole discretion, to hire
subject to the pre-hire evaluations permitted by this Section 8.09(b) (the
"Review
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Schedule"). Subject to the provisions of this Section 8.09(b), Holdco shall make
written offers of employment to those CMB Employees listed on the Review
Schedule that it elects to hire not less than thirty (30) days after the date
hereof. Seller agrees, and will cause its appropriate Subsidiaries, to cooperate
in all reasonable respects with Holdco to allow Holdco to evaluate the CMB
Employees listed on the Review Schedule during such thirty (30) day period. In
this regard, Holdco will have the opportunity to make such appropriate pre-hire
investigation of the CMB Employees listed on the Review Schedule as Holdco deems
necessary, including the right to review personnel files and the right to
interview such employees during normal working hours, so long as such interviews
are conducted after notice to Seller and do not unreasonably interfere with
Seller's operations, and so long as such investigations and interviews do not
violate any Legal Requirement or any Contract. To the extent consent is required
by applicable law, Seller will use good faith efforts to obtain the consent of
each of the CMB Employees listed on the Review Schedule to allow Holdco to
review their personnel files in connection with the foregoing. Holdco will bear
the expense of any examination or test requested by Holdco of a prospective
employee but Seller will, upon reasonable notice, cooperate in the scheduling of
such examinations so long as the examinations do not unreasonably interfere with
Seller's operations. Holdco shall have sole and absolute discretion to determine
which, if any, CMB Employees listed on the Review Schedule shall be offered
employment by Holdco, based on the needs and criteria established by Holdco, in
its absolute discretion.
(c) With respect to (i) each CMB Employee listed on the Offer
Schedule and (ii) each CMB Employee listed on the Review Schedule to whom Holdco
in its sole discretion offers employment, Holdco will endeavor in good faith to
offer a position substantially comparable to that held by the employee
immediately prior to the Closing at a salary level or hourly wage equivalent to
that received by the employee immediately prior to the Closing (subject to
Section 8.09(j) and Section 8.22), and shall offer the employee benefits that
are no less favorable than the benefits provided to similarly situated employees
of Holdco. In addition, Holdco shall credit those CMB Employees that are listed
on the Offer Schedule or on the Review Schedule and that are hired by Holdco or
its Affiliates (the "Hired Employees") for such employee's past service with
Seller for purposes of (A) eligibility to participate in Holdco's employee
welfare benefit (including medical, dental, flexible spending accounts,
accident, life insurance plans and programs, disability plans, and other
employee welfare benefits) plans to the extent permitted by the terms of such
plans, (B) participation and vesting (but not benefit accrual) under Holdco's
employee 401(k) plan and any other pension plan, (C) for any waiting periods
under Holdco's Welfare Plans or (D) for any post-Closing severance purposes.
Seller acknowledges that nothing in this Agreement will restrict Holdco from
changing a Hired Employee's job description, responsibilities, location, salary
or benefits following the Closing. If Hired Employees are included in any
medical, dental or health plan other than the plan or plans they participated in
as of the Closing Date, any such plans shall not include pre-existing condition
exclusions, except to the extent such exclusions were applicable under the
similar plans of Seller or its Subsidiaries as of the Closing Date, and shall
provide credit for any deductibles and co-payments applied or made with respect
to each Hired Employee in the calendar year of the change. Holdco will credit
each Hired Employee with the vacation time and sick time such Hired Employee had
accrued with Seller as of the Closing Date, provided, that Holdco shall only
credit such Hired Employees for such accrued vacation time and sick time to the
extent that such accrued vacation time or sick time does not exceed the maximum
amount of vacation time and sick time that similarly situated employees
(including, without limitation,
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comparable seniority) of Holdco are allowed to accrue (the "Maximum Vacation
Accrual" or "Maximum Sick Time Accrual", as applicable). Holdco shall receive an
adjustment to the Purchase Price for the economic value of such credited
vacation time and sick time as contemplated in Section 3.03(a) and Schedule
3.03. The economic value of such vacation time and sick time is the amount equal
to the cash compensation that would be payable to each such Hired Employee at
his or her level of compensation on the Closing Date for a period equal to such
credited accrued vacation or sick time. If such accrued vacation time or sick
time exceeds the Maximum Vacation Accrual or Maximum Sick Time Accrual, Seller
shall pay such Hired Employee cash in lieu of such excess accrued vacation time
or sick time. Seller shall accrue up to $750,000 of bonuses for the Hired
Employees as of the Closing Date and Holdco shall pay at least an aggregate of
$750,000 in bonuses to the Hired Employees in respect of the 2001 calendar year
no later than April 30, 2002; provided, that Holdco shall receive a maximum
Purchase Price adjustment of $750,000 with respect to the payment of such
bonuses. Notwithstanding anything set forth in this Section 8.09, Holdco will
have no obligation to CMB Employees who are on Approved Leave of Absence until
they become employees of Holdco pursuant to this Section 8.09. For purposes of
this Agreement, employees on "Approved Leave of Absence" means employees absent
from work on the Closing Date and unable to perform their regular job duties by
reason of illness or injury under approved plans or policies of the employer
(other than employee's absence for less than five (5) days due to short term
illness or injury not requiring written approval by the employer) or otherwise
absent from work under approved or unpaid leave policies of the employer.
(d) As of the Closing Date, Holdco will have no obligation
under this Section 8.09 to Seller, its Affiliates or to any of Seller's
employees, other than with respect to Hired Employees who will hereafter be the
responsibility of Holdco. As of the Closing Date, Seller will, and will cause
its Subsidiaries to, terminate the employment of all Hired Employees. Seller
will pay all severance obligations and other costs associated with such
termination (if any). Seller shall grant a limited release to all Hired
Employees from any contractual or common law duties which said employees may owe
to Seller, so as to permit such employees to (i) compete with Seller by working
for Holdco and (ii) disclose to Holdco secret or proprietary information of
Seller solely in relation to the Cable Modem Business. Seller will timely
satisfy any legal obligation with respect to continuation of group health
coverage required pursuant to Section 4980B of the Code or Section 601, et seq.,
of ERISA with respect to all CMB Employees whose employment with Seller or any
of Seller's ERISA Affiliates terminates on or before the Closing Date.
(e) Except as otherwise expressly provided pursuant in this
Agreement, Holdco will not have or assume any obligation or liability under or
in connection with any of Seller's Benefit Plans. In relation to any CMB
Employee on an Approved Leave of Absence, responsibility for benefit coverage of
such CMB Employee, and liability for payment of benefits, will remain that of
Seller or the Subsidiaries of Seller until such employee becomes an employee of
Holdco after the Closing or is terminated by Seller or its Subsidiary. For
purposes of this Agreement, the following claims and liabilities will be deemed
to be incurred as follows: (i) medical, dental and/or prescription drug benefits
upon the rendering of the medical, dental, pharmacy or other services giving
rise to the obligation to pay such benefits except with respect to such benefits
provided in connection with a continuous period of hospitalization, which will
be deemed to be incurred at the time of admission to the hospital; (ii) life,
accidental death and
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dismemberment and business travel accident insurance benefits and workers'
compensation benefits, upon the occurrence of the event giving rise to such
benefits; and (iii) salary continuation or other short-term disability benefits,
or long-term disability, upon commencement of the disability giving rise to such
benefit.
(f) Seller shall continue to pay the group health insurance
premiums that are necessary to continue, for a period of three (3) months after
the Closing Date, Seller's current group health plan for Seller's continuing
employees. Seller covenants that it will not terminate any group health plan in
connection with the Transactions.
(g) Any liability under the WARN Act with regard to any
employee of Seller terminated on or prior to the Closing Date, or not hired by
Holdco on or after the Closing Date, will, as a matter of contract between the
parties, be the responsibility of Seller. Holdco will cooperate with Seller and
Seller's Affiliates, if requested, in the giving of WARN Act notices on behalf
of the other party. Holdco shall not during the 60-day period beginning on the
Closing Date terminate the employment of full-time employees of the Cable Modem
Business whom it hires as contemplated in this Agreement so as to cause any
"plant closing" or "mass layoff" (as those terms are defined in the WARN Act)
such that Seller has any obligation under the WARN Act that Seller would not
otherwise have had absent such terminations. In the event of any breach by
Holdco of the foregoing covenant, Holdco shall indemnify Seller for any such
obligations arising under the WARN Act.
(h) Holdco and Seller hereby acknowledge and agree that,
pursuant to the authority of Revenue Ruling 2000-27, the Transactions will
result in a permissible distribution event under Section 401(k) of the Code from
any of Seller's Benefits Plans designed to satisfy the requirements of Section
401(k) of the Code.
(i) If, during the period from the date of this Agreement to
the Closing Date, Seller has, or acquires, a duty to bargain with any labor
organization with respect to any of the CMB Employees, then Seller will (i) give
prompt written notice of such development to Holdco, including notice of the
date and place of any negotiating sessions as they are planned or contemplated
and permit Holdco to have a representative present at all negotiating sessions
with such labor organization and at all meetings preparatory thereto (including
making Holdco's representative a representative of Seller's delegation if
required by the labor organization), and (ii) not, without Holdco's written
consent, enter into any contract with such labor organization that purports to
bind Holdco, including any successor clause or other clause that would have this
purpose or effect. Seller acknowledges and agrees that Holdco has not agreed to
be bound, and will not be bound, without an explicit assumption of such
liability or responsibility by Holdco, by any provision of any collective
bargaining agreement or similar contract with any labor organization to which
Seller or any its Affiliates is or may become bound. Seller will take no action
or engage in any inaction, which might obligate or require Holdco to recognize
or bargain with any labor organization on behalf of CMB Employees.
(j) If, during the period from the date of this Agreement to
the Closing Date, Seller hires new employees in order to comply with its
obligations under Section 7.01(a)(i) (the "New Hires"), Holdco shall include
each New Hire on the Offer Schedule; provided, that such New Hires will be
offered identical salary levels or hourly wages to those paid to them by Seller.
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Holdco will make a written offer of employment to each New Hire not more than 14
days after they are employed by Seller and Seller shall provide Holdco with any
information necessary for Holdco to comply with its obligations under this
Section 8.09(j).
(k) Seller shall not, either before the Closing or after the
Closing during the period while the Post-Employment Hiring Prohibition is
scheduled to remain in effect with respect to any of the employees listed on
Schedule 8.09(k), amend or waive any of the Post-Employment Hiring Prohibitions
or breach the terms of any provisions of the employment agreements referred to
in Section 5.17(b). At the direction (and, after the Closing, at the expense) of
Holdco, Seller shall enforce the Post-Employment Hiring Prohibition against any
of those employees who are alleged by Holdco to have violated the terms of the
Post-Employment Hiring Prohibitions with respect to the Hired Employees. Seller
shall turn over to Holdco any damages received as a result of any such
enforcement.
(l) Notwithstanding anything to the contrary in this
Agreement, if the offers of employment that Holdco makes to employees listed on
the Offer Schedule and, in Holdco's sole discretion, employees listed on the
Review Schedule are not (i) at an identical salary level or hourly wage to that
received by such employees immediately prior to the Closing, and (ii) at a
position substantially comparable to that held by such employees immediately
prior to the Closing, Seller shall not be liable for any breach of the covenant
in Section 7.01(a)(i) with respect to any failure by Seller to retain such
employees until the Closing.
(m) Nothing in this Section 8.09 or elsewhere in this
Agreement will be deemed to make any employee of Seller a third party
beneficiary of this Agreement.
Section 8.10. CMB Business Records; Transitional Arrangements.
(a) Seller shall deliver all CMB Business Records to Holdco at
or before the Closing. Holdco shall retain all material CMB Business Records for
a period of not less than three (3) years after the Closing Date. No CMB
Business Records will be destroyed during this 3 year period without at least
thirty (30) Business Days advance written notice to Seller, during which period
Seller may, at its sole expense, elect to take possession of the items to be
destroyed. After the Closing, Holdco shall grant Seller, its accountants,
counsel and other representatives access to the CMB Business Records as is
reasonably necessary with respect to Seller's review and verification of the
Closing Statement (or any corrected Closing Statement) as contemplated in
Section 3.04, Seller's continued operation and/or liquidation of all or part of
the Excluded Assets or for financial reporting and accounting matters, the
preparation and filing of any Tax returns, reports or forms, or for the defense
of, or response required under, or pursuant to, any lawsuit, action or
proceeding (including any proceeding involving Seller related to the Acquired
Assets).
(b) Not more than sixteen (16) employees of Seller shall be
entitled to continue to use their respective offices on the 4th floor of
Seller's call center and network operating center in Louisville, Kentucky until
March 31, 2002 for purposes of reviewing and verifying the Closing Statement and
for purposes of managing Seller's remaining business operations (other than the
Cable Modem Business). No rent or other amounts shall be payable to Holdco in
relation to the continued use of such offices by such employees. Seller shall
provide
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not more than twelve (12) representatives of Holdco or CCI access to and
reasonable workplace accommodations at Seller's locations (other than the CMB
Sites) as requested by Holdco, for no additional consideration, until thirty
(30) days after the Closing; provided, that Seller's obligation hereunder to
provide workplace accommodations shall terminate with respect to any location at
which Seller's occupancy rights have terminated at the time of such termination.
Seller shall provide Holdco with not less than thirty (30) days notice of
termination of any such occupancy rights.
Section 8.11. Publicity. During the period from the date of
this Agreement to the Closing Date, neither Seller, on the one hand, nor Holdco,
on the other hand, shall issue or cause the publication of any press release or
other public announcement with respect to the transactions contemplated by this
Agreement without the consent of the other party, except as such release or
announcement may be required by any Legal Requirement or the rules or
regulations of a national securities exchange in the United States, in which
case the party required to make the release or announcement shall allow the
other party reasonable time to comment on such release or announcement in
advance of its issuance.
Section 8.12. Fees and Expenses. Except as set forth in this
Agreement and irrespective of whether or not the Transactions are consummated,
all Expenses incurred in connection with this Agreement and the Transactions
shall be paid by the party incurring such Expenses, except (i) filings fees in
relation to the Schedule 13E-3 shall be paid by Holdco, (ii) Expenses incurred
in connection with the preparation, filing, printing and mailing of the Proxy
Statement shall be paid by Seller, (iii) filing fees in relation to filings made
under the HSR Act shall be shared equally by Seller and Holdco, and (iv)
Expenses incurred in connection with Holdco's application to become an "Approved
Company" for purposes of succeeding to the rights of Seller under the Service
and Technology Agreement dated August 31, 2000 among Seller, the Kentucky
Economic Finance Authority and Faulkner Hinton/Ormsby I, LLC, shall be borne by
Holdco. For purposes of this Agreement, "Expenses" includes all out-of-pocket
expenses (including all fees and expenses of counsel, accountants, investment
bankers, experts and consultants to a party hereto and its Affiliates) incurred
by a party or on its behalf in connection with or related to the authorization,
preparation, negotiation, execution and performance of this Agreement and the
transactions contemplated hereby.
Section 8.13. Cancellation of Charter Warrants. Holdco and
Seller hereby agree that, effective as of the Closing, the Charter Warrants
shall terminate without further action on the part of Holdco or Seller,
whereupon all rights, obligations and liabilities thereunder shall be
extinguished forthwith. Notwithstanding Holdco's rights under the Charter
Warrants, Holdco hereby undertakes and agrees not to transfer or assign its
right, title or interest in and to the Charter Warrants during the period from
the date of this Agreement to the Closing Date.
Section 8.14. Letter of Credit. As and from the date of this
Agreement, Seller and Holdco will cooperate and use their respective
commercially reasonable efforts to obtain as promptly as practicable the consent
of the third party beneficiary (the "Beneficiary") of the letter of credit
described on Schedule 1.01(b), to the cancellation of such letter of credit. If
required by the Beneficiary as a condition to the cancellation of Seller's
letter of credit, Holdco will use commercially reasonable efforts to replace
such letter of credit with a letter of credit for the account of Holdco on terms
no less favorable to such Beneficiary. The cost of obtaining any
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such replacement letter of credit shall be borne by Holdco. If the Beneficiary
does not consent to the cancellation or replacement of the letter of credit then
Holdco hereby agrees, conditional upon the Closing, to indemnify Seller in
respect of any Losses suffered or incurred by Seller as a result of such
Beneficiary presenting, or drawing down any amount under, such letter of credit.
Section 8.15. Taxes.
(a) Holdco shall pay any Transfer Taxes arising from or
payable by reason of the transfer of the Acquired Assets contemplated by this
Agreement. Tax returns required to be filed in respect of Transfer Taxes
("Transfer Tax Returns") will be prepared and filed by the party that has the
primary responsibility under any applicable Legal Requirement for filing such
Transfer Tax Returns. If neither party has primary responsibility for filing a
Transfer Tax Return, then Holdco will be responsible for preparing and filing
any such Transfer Tax Return and, if required by any applicable Legal
Requirement, Holdco will join in the execution of any such Transfer Tax Returns
and other documentation. After the Closing Date, Seller and Holdco shall
reasonably cooperate with each other in connection with the preparation and
filing of Tax returns and in the conduct of any audit or other proceedings with
respect to any tax relating to the Acquired Assets. The party liable to pay
relevant Transfer Taxes pursuant to this Agreement shall have the opportunity to
review and approve, acting reasonably, any Transfer Tax Return related to such
liability.
(b) Each party hereto will cooperate in assuring that all real
property taxes, personal property taxes and similar ad valorem obligations that
are levied with respect to the Acquired Assets or the Cable Modem Business for
assessment periods in which the Closing Date occurs and are otherwise not
accounted for in the adjustment to Purchase Price set forth in Section 3.03 of
this Agreement or excluded pursuant to Section 2.04(e) (collectively, the
"Apportioned Obligations") and any refund or rebate thereof, will be apportioned
between the Seller and Holdco as of the Closing Date based on the number of days
in any such period falling on or before the Closing Date, on one hand, and after
the Closing Date, on the other hand (it being understood that the Seller is
responsible for the portion of each such Apportioned Obligation attributable to
the number of days from the most recent Lien date up to and including the
Closing Date and Holdco is responsible for the portion of each such Apportioned
Obligation attributable to the period after the Closing Date. An adjustment will
be made to the Purchase Price to reflect any payment of Apportioned Obligations
that have been made by Seller on or prior to the Closing Date that are
apportioned to Holdco hereunder. The parties hereto will cooperate, including
during times of audit by taxing governmental authorities, to avoid payment of
duplicate Taxes or other ad valorem obligations of any kind or description which
related to the Acquired Assets or the Cable Modem Business, and each party will
furnish, at the request of the other, proof of payment of any such Taxes or ad
valorem obligations or other documentation that is a prerequisite to avoiding
payment of a duplicate Tax or other ad valorem obligations.
(c) Seller will cooperate with Holdco's reasonable requests to
take such actions and execute such documents or instruments necessary or
appropriate, as determined by Holdco, at Seller's expense, to reduce Holdco's
Transfer Tax liability in connection with the Transactions.
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(d) Holdco shall have the right to control the defense and
conduct of any audit or other examination by any taxing authority with respect
to transfer, sale or use Taxes that might be applicable to the transfer of the
Acquired Assets pursuant to this Agreement and for which Holdco is liable
hereunder.
Section 8.16. Use of Seller's Name. Seller will retain all
rights with respect to the names "HSA" and "High Speed Access" or any and all
derivations thereof after the Closing. Holdco will remove or delete such names
or any and all derivations thereof from the Cable Modem Business and Acquired
Assets as soon as reasonably practicable, but in any event by the 120th day
following the Closing. Seller will take no action to enforce its Intellectual
Property rights in such names against Holdco or its Affiliates during such
120-day period with respect to the Acquired Assets and Cable Modem Business.
Nothing in this Section 8.16 will require Holdco to remove or discontinue using
any such name or mark that is affixed to converters or other items in customer
homes or properties on the Closing Date, or as are used in a similar fashion
which makes such removal or discontinuation impracticable.
Section 8.17. Non-solicitation. During the period from the
Closing Date until the first anniversary of the Closing Date, Seller shall not,
and shall cause its Subsidiaries not to, without the prior written consent of
Holdco, solicit for employment any of the Hired Employees or any employees of
Holdco with whom Seller has had any material business contact within one year of
the date hereof; provided, however, that the foregoing prohibition shall not
prevent Seller from hiring any such Hired Employee or employee of Holdco by
means of a general advertisement.
Section 8.18. Confidentiality. Except as permitted under the
terms of the License Agreement, as and from the Closing Date, Seller agrees (i)
to preserve and protect the confidentiality of any trade secrets or other
confidential information relating to the CMB Intellectual Property, Technology
and Know-How and CMB Business Records sold and delivered to Holdco hereunder as
part of the Acquired Assets (the "Confidential Information"), and (ii) not to
disclose or disseminate the Confidential Information to any third party except
as required by any Legal Requirement. For the avoidance of doubt, the foregoing
obligations shall not apply to (A) information which is generally known to the
industry or the general public other than as a result of Seller's breach of this
Agreement, or (B) information furnished to Seller by a third party on a
non-confidential basis after the date hereof who is not known by Seller after
due inquiry to be otherwise bound by a confidentiality agreement. Any material
breach of the Confidentiality Agreement, as amended, will be deemed a material
breach of this Agreement.
Section 8.19. Limitations on Seller's Representations and
Warranties. Except for the representations and warranties expressly contained in
this Agreement, Seller makes no other express or implied representation or
warranty, including, without limitation, representations or warranties as to the
condition of the Acquired Assets, their fitness for any particular purpose,
their contents, the income derived or potentially to be derived from the
Acquired Assets or the Cable Modem Business, or the expenses incurred or
potentially to be incurred in connection with the Acquired Assets or the Cable
Modem Business. Seller is not, and will not be, liable or bound in any manner by
express or implied warranties, guarantees, statements, promises, representations
or information pertaining to the Acquired Assets or the Cable Modem Business,
made or furnished by any broker, agent, employee, servant or other
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person representing or purporting to represent Seller, unless and to the extent
the same is expressly set forth in this Agreement.
Section 8.20. Launch Fees. Notwithstanding the terms of the
Second NSA Agreement, Holdco hereby agrees that all unpaid Launch Fees as of the
date hereof, together with any Launch Fees that accrue during the period from
the date of this Agreement to the Closing Date, shall not be payable by Seller
to Holdco (except to the extent included in the Intercompany Payment set forth
on Schedule 4.02(a) and payable at Closing) unless this Agreement is terminated
or abandoned in accordance with its terms, at which time all such Launch Fees
shall be due and payable by Seller to Holdco in accordance with the terms of the
Second NSA Agreement.
Section 8.21. Termination of Charter Contracts. Holdco and
Seller agree that, effective as of the Closing, the Second NSA Agreement shall
terminate without further action on the part of Holdco or Seller, whereupon all
rights, obligations and liabilities thereunder shall be extinguished forthwith
(including any liability for breaches existing as of the Closing Date). Holdco
further agrees to use its best efforts to cause the Full Turnkey Agreement to be
terminated effective as of the Closing, without liability on the part of Seller,
Holdco or any other party thereto (including any liability for breaches existing
as of the Closing Date). Notwithstanding the foregoing, Purchase Price
adjustments with respect to payment obligations under the Second NSA Agreement
and the Full Turnkey Agreement shall be made in accordance with Sections 3.03
and 3.04. From the date of this Agreement to the Closing Date or termination
hereof, neither Holdco nor Seller will declare, claim or issue a notice of
default under the Full Turnkey Agreement or the Second NSA Agreement; provided,
that the foregoing shall not be deemed or construed as a waiver by either party
with respect to any claims or defaults under such agreements and any amendments
thereto.
Section 8.22. CSR Classes. Seller shall recruit, hire and
begin training classes at such time and for the number of full time equivalent
new customer service representative employees set forth on Schedule 8.22;
provided, that Holdco shall provide Seller with a written request to begin any
class scheduled to begin more than thirty (30) days after the date hereof and
Seller shall not be obligated to begin any such class until thirty (30) days
after delivery of such notice, notwithstanding the scheduled date of such class
on Schedule 8.22. Holdco shall include all of Seller's new employee
representatives attending such classes on the Offer Schedule and,
notwithstanding anything to the contrary in Section 8.09, shall offer employment
to such persons at identical salary levels or hourly wages to those paid to them
by Seller. Training classes shall be conducted in a manner consistent with past
practice. For purposes of determining whether Seller has complied with its
obligations under this Section 8.22, the number of full time equivalent customer
service representative employees shall include new employees of Seller that are
offered and accept employment under terms consistent with past practices and who
pass Seller's standard pre-hire tests (regardless of whether such employees
voluntarily terminate their employment before completion of such class or
classes). Subject to the foregoing, Seller shall pay Holdco $10,000 for each
full Business Day of delay (beginning on the sixth Business Day of such delay)
in the commencement of any class with the minimum number of participants
required pursuant to the terms of this Section 8.22 and each full Business Day
of any period during which classes have been early terminated (the "CSR
Charges"). The CSR Charges shall
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be payable at, and only at, the Closing as an adjustment of the Purchase Price
as contemplated in Section 3.03(a) and the Closing Statement.
Section 8.23. Customer Care Matters. Effective as of the
Closing Date, Holdco shall assume responsibility for handling, managing and
resolving all open Customer Care Matters.
ARTICLE IX
CONDITIONS
Section 9.01. Conditions to Each Party's Obligation. The
respective obligations of Holdco, on the one hand, and Seller, on the other
hand, to effect the purchase and sale of the Acquired Assets and the assumption
of the Assumed Liabilities shall be subject to the satisfaction prior to the
Closing of the following conditions:
(a) Seller Stockholder Approval. This Agreement and the
transactions contemplated hereby shall have been approved by the stockholders of
Seller by (i) the Seller Requisite Vote and (ii) a majority of the votes
actually cast affirmatively or negatively by holders of outstanding shares of
HSA Common Stock other than Excluded Stockholders.
(b) HSR Waiting Period. Any waiting period applicable to the
Transactions under the HSR Act shall have terminated or expired.
(c) No Injunctions or Restraints. No temporary restraining
order, preliminary or permanent injunction or other legal restraint or
prohibition preventing the consummation of the transactions contemplated by this
Agreement shall be in effect.
Section 9.02. Conditions to Obligation of Holdco. The
obligation of Holdco to purchase the Acquired Assets is subject to the
satisfaction at and as of the Closing of each of the following conditions:
(a) Representations and Warranties. The representations and
warranties of Seller set forth in this Agreement shall be true and correct in
all respects without regard to any "materiality", "material" or "Material
Adverse Effect" qualifiers therein as of the date hereof and on and as of the
Closing Date with the same force and effect as if made on and as of the Closing
Date, except (i) to the extent that such representations and warranties describe
a condition on a specified time or date or are affected by the conclusion of the
transactions permitted or contemplated hereby, or (ii) where the failure of such
representations and warranties to be true and correct, individually or in the
aggregate, does not have, has not had and would not reasonably be expected to
have, a Material Adverse Effect. Holdco shall have received a certificate signed
by an authorized officer of Seller (but without personal liability thereto) to
such effect.
(b) Performance of Obligations of Seller. Subject to Section
8.09(k), Seller shall have performed or complied in all material respects with
all obligations, conditions and covenants required to be performed or complied
with by it under this Agreement and the other Transaction Documents to which it
is a party at or prior to the Closing. Holdco shall have received a certificate
signed by an authorized officer of Seller (but without personal liability
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thereto) to such effect and identifying (1) each executive officer or director
of Seller who is an Excluded Stockholder, (2) the number of shares of HSA Common
Stock with respect to which each such officer and director has Voting Control
(as such term is defined in the Voting Agreement) and (3) the number of such
shares that were voted in favor of the transactions contemplated by this
Agreement.
(c) Certificate of Incumbency and Resolutions. Holdco shall
have received a certificate of the President and Secretary of Seller (i) as to
the incumbency and signatures of the officers of Seller and (ii) as to the
adoption and continued effectiveness of resolutions of Seller authorizing the
transactions contemplated hereby.
(d) Required Consents. Each of the consents set forth on
Schedule 9.02(d) shall have been obtained and no such consent shall have been
revoked.
(e) No Material Adverse Effect. No damage, destruction or loss
of any of the Acquired Assets has occurred or come to exist since the date of
this Agreement, after giving effect to any insurance, which has had or would
reasonably be expected to have a Material Adverse Effect, nor, subject to
Section 8.09(k), has any event, occurrence, fact, condition, change or
development occurred or come to exist since the date of this Agreement, which
has had or would reasonably be expected to have a Material Adverse Effect.
(f) Legal Opinion. Holdco shall have received an opinion from
Weil Gotshal & Manges LLP, counsel to Seller, substantially in the form attached
as Exhibit E. In addition, the opinion from Seller's General Counsel previously
delivered to Holdco shall not have been modified or withdrawn since the date
thereof or in the alternative, Holdco shall have received an alternative opinion
from a source reasonably acceptable to Holdco.
(g) Opinions of Financial Advisors. Copies of the Lehman
Opinion and Houlihan Lokey Opinion, together with a letter from Houlihan Lokey
in form and substance reasonably acceptable to Holdco to the effect that Holdco
may rely on the Houlihan Lokey Opinion, shall have been previously provided to
Holdco and neither of such opinions nor the letter from Houlihan Lokey regarding
reliance by Holdco on its opinion shall have been modified or withdrawn at or
before the Closing.
Section 9.03. Conditions to Obligation of Seller. The
obligation of Seller to sell, assign, transfer, convey and deliver the Acquired
Assets is subject to the satisfaction at and as of the Closing of each of the
following conditions:
(a) Representations and Warranties. The representations and
warranties of Holdco set forth in this Agreement that are qualified as to
materiality shall be true and correct and the representations and warranties of
Holdco set forth in this Agreement that are not so qualified shall be true and
correct in all material respects, in each case as of the date of this Agreement
and as of the Closing Date, with the same force and effect as made on and as of
the Closing Date. Seller shall have received a certificate signed by an
authorized officer of Holdco (but without personal liability thereto) to such
effect.
(b) Performance of Obligations of Holdco. Holdco shall have
performed or complied in all material respects with all obligations, conditions
and covenants required to be
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performed or complied with by it under this Agreement and the other Transaction
Documents to which it is a party at or prior to the Closing. Seller shall have
received a certificate signed by an authorized officer of Holdco (but without
personal liability thereto) to such effect.
(c) Certificate of Incumbency and Resolutions. Seller shall
have received a certificate of the President and Secretary of Holdco (i) as to
the incumbency and signatures of the officers of Holdco and (ii) as to the
adoption and continued effectiveness of resolutions of Holdco authorizing the
transactions contemplated hereby.
(d) Legal Opinion. Seller shall have received an opinion from
Paul, Hastings, Janofsky & Walker LLP, counsel to Holdco substantially in the
form attached as Exhibit F.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
Section 10.01. Termination. Notwithstanding anything to the
contrary in this Agreement, this Agreement may be terminated and the
transactions contemplated hereby abandoned at any time prior to the Closing
Date, (whether before or after the approval of this Agreement by the Seller
Requisite Vote):
(a) by mutual written consent of Seller and Holdco;
(b) by Holdco or Seller if any of the conditions set forth in
Section 9.01 have become incapable of fulfillment; provided, that a party
seeking to terminate this Agreement as a result of a failure of the condition
set forth in Section 9.01(c) shall have complied in all material respects with
its obligation under Section 8.03(b);
(c) by Seller if any of the conditions set forth in Section
9.03 shall have become incapable of fulfillment, and shall not have been waived
by Seller;
(d) by Holdco if any of the conditions set forth in Section
9.02 shall have become incapable of fulfillment, and shall not have been waived
by Holdco; or
(e) by Seller or Holdco if (i) the Closing shall not have
occurred on or prior to March 31, 2002 or (ii) Seller shall have entered into a
definitive agreement providing for a Superior Proposal with a Person other than
Holdco or its subsidiaries.
Section 10.02. Notice of Termination. A party desiring to
terminate this Agreement pursuant to this Article X shall give written notice of
such termination to the other party in accordance with Section 12.01, specifying
the provision hereof pursuant to which such termination is effected.
Notwithstanding anything to the contrary in this Agreement, the right to
terminate this Agreement pursuant to Sections 10.01(c) through (e) shall not be
available to any party whose failure to fulfill its obligations or to comply
with its covenants under this Agreement in all material respects has been the
cause of, or resulted in, the failure to satisfy a condition set forth in
Sections 9.02 or 9.03 as the case may be.
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Section 10.03. Effect of Termination and Abandonment.
(a) If this Agreement is terminated or abandoned pursuant to
this Article X, this Agreement shall become void and of no further force or
effect with no liability on the part of any party hereto (or on the part of any
of its directors, officers, employees, agents, legal or financial advisors or
other representatives), except that (i) the agreements contained in this Article
X, Article XI, Article XII and in the Confidentiality Agreement, shall survive
the termination hereof and (ii) no such termination shall relieve any party of
any liability or damages resulting from any willful material breach by that
party of this Agreement.
(b) If this Agreement is terminated pursuant to (i) Section
10.01(d), (ii) Section 10.01(e)(i) (but only if termination pursuant to Section
10.01(e)(i) is a result of the negligent or willful failure of Seller to perform
any obligations required to be performed by it hereunder on or prior to the date
of termination) or (iii) Section 10.01(e)(ii), then Seller shall pay all of
Holdco's reasonable out-of-pocket expenses incurred in connection with this
Agreement, including, without limitation, all reasonable legal fees and expenses
and all fees and expenses of Merrill Lynch incurred by Holdco, together with all
fees and expenses chargeable to Seller pursuant to Section 8 of the Management
Agreement, by wire transfer or cashier's check within five (5) Business Days
after termination hereof.
(c) If this Agreement is terminated pursuant to (i) Section
10.01(c), or (ii) Section 10.01(e)(i) (but only if termination pursuant to
Section 10.01(e)(i) is a result of the negligent or willful failure of Holdco to
perform any obligations required to be performed by it hereunder on or prior to
the date of termination), then Holdco shall pay all of Seller's reasonable
out-of-pocket expenses incurred in connection with this Agreement, including all
reasonable legal fees and expenses and all fees and expenses of Lehman and
Houlihan Lokey incurred by Seller, together with the Incremental Costs (as such
term is defined in the Management Agreement) chargeable to Holdco upon
termination of this Agreement by wire transfer or cashiers check within five (5)
Business Days after termination hereof.
Section 10.04. Amendments. This Agreement may be amended by
action taken by Seller and Holdco at any time before or after approval of this
Agreement by the Seller Requisite Vote but, after any such approval, no
amendment shall be made which requires the approval of Seller's stockholders
under applicable law without such approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of the parties hereto.
Section 10.05. Extension; Waiver. At any time prior to the
Closing Date, each party hereto may (i) extend the time for the performance of
any of the obligations or other acts of the other party, (ii) waive any
inaccuracies in the representations and warranties of the other party contained
herein or in any document, certificate or writing delivered pursuant hereto or
(iii) waive compliance by the other party with any of the agreements or
conditions contained herein (in whole or in part). Any agreement on the part of
either party hereto to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party. The failure of
either party hereto to assert any of its rights hereunder shall not constitute a
waiver of such rights.
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ARTICLE XI
INDEMNIFICATION
Section 11.01. Indemnification by Seller. Subject to the
provisions of this Article XI, Seller shall indemnify, defend and hold harmless
Holdco, its Affiliates, and their respective officers, directors, employees,
stockholders, agents and representatives (collectively, "Holdco Indemnitees")
from and against all claims (including, without limitation, claims by third
parties) and compensatory damages (including, without limitation, settlement
costs and any expenses, including reasonable out-of-pocket legal and accounting
expenses incurred in connection with investigating or defending any actions or
threatened actions) (collectively, "Damages") arising out of or in connection
with (a) the breach of any representation or warranty made by Seller in this
Agreement or any other Transaction Document (without regard to any materiality
or similar qualifications contained therein), (b) any breach of any covenant,
agreement or obligation of Seller contained in this Agreement or any other
Transaction Document, (c) the Excluded Liabilities, or (d) the operation of the
Cable Modem Business prior to Closing. Notwithstanding the foregoing, Seller
shall have no obligation to indemnify, defend and hold harmless any Holdco
Indemnitee for any damages (including with respect to Taxes) which a Holdco
Indemnitee incurred in its capacity as a stockholder of Seller. The foregoing
obligation of Seller to indemnify the Holdco Indemnitees shall be subject to and
limited by the following qualifications:
(i) Each of the covenants of Seller contained in
Sections 7.01, 7.02, 8.01, 8.02, 8.03, 8.05, 8.06, 8.08, 8.09(d), 8.11 and 8.22
and representations and warranties made by Seller in this Agreement or in any of
the other Transaction Documents shall survive for a period of eighteen (18)
months after the Closing Date (unless a claim shall have been commenced prior to
such time in which case the applicable covenants, representations and warranties
shall survive with respect to such claim until such claim has been resolved, and
thereafter all such covenants, representations and warranties shall be
extinguished), except that (1) the representations and warranties contained in
Section 5.16 will survive until 90 days after the expiration of the applicable
statute of limitations, (2) the representations and warranties contained in
Sections 5.14 and 5.18 will survive for a period of twenty-four (24) months
after the Closing Date and (3) the representations and warranties contained in
Sections 5.13(a) and 5.15 (but only, in Section 5.15, with respect to title to
the CMB Intellectual Property and Technology and Know-How) will survive in
perpetuity. The extended survival periods referenced in the preceding sentence
shall hereinafter be referred to as the "extended survival periods". The
covenants (other than those described in the first sentence of this clause (i))
and agreements made by the Seller in this Agreement or in any of the other
Transaction Documents shall survive the Closing and will continue in full force
and effect without limitation.
(ii) Subject to Section 11.01(iii) below, Seller shall
have no liability to the Holdco Indemnitee on or account of any Damages provided
in Section 11.01(a) or (b) (to the extent the matters in Section 11.01(b) relate
to covenants described in the first sentence of Section 11.01(i)) unless and
until such damages in the aggregate exceed Two Hundred Fifty Thousand Dollars
($250,000) (the "Threshold Amount"), in which case the Holdco Indemnitees shall
be entitled to Damages from the first dollar of such damages. Subject to Section
11.01(iii), the total liability of Seller for its indemnity obligation under
Sections 11.01(a) and 11.01(b) insofar as it includes the covenants described in
the first sentence of Section 11.01(i), shall be
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limited in all respects to, and shall be payable solely from, and to the extent
of, the Indemnification Holdback and upon the occurrence of an event to which
Seller's indemnity obligations under such sections applies, the Holdco
Indemnitees' sole and exclusive remedy shall be recourse to the Indemnification
Holdback.
(iii) With respect to any indemnification sought for
Damages arising out of (1) a breach of any representation or warranty subject to
an extended survival period pursuant to Section 11.01(i); (2) any Excluded
Liability; (3) the operation of the Cable Modem Business prior to the Closing
Date, (4) a breach of any covenants, agreements or obligations of Seller other
than those described in the first sentence of Section 11.01(i); or (5) actual
common law fraud (collectively, the "Excluded Damages"), such indemnification
(x) shall not be subject to the Threshold Amount set forth in Section 11.01(ii)
above and (y) shall neither be paid from, nor subject to the limits of, the
Indemnification Holdback; provided, however that the Holdco Indemnitees may
elect in its discretion to proceed against the Indemnification Holdback for
indemnification of all or any portion of the Excluded Damages.
Section 11.02. Indemnification by Holdco. Subject to the
provisions of this Article XI, Holdco shall indemnify, defend and hold harmless
Seller, its Affiliates and their respective officers, directors, employees,
stockholders, agents and representatives (collectively, "Seller Indemnitees")
from and against any Damages arising out of or in connection with (a) the breach
of any representation or warranty made by Holdco in this Agreement or any other
Transaction Document (without regard to any materiality or similar
qualifications contained therein), (b) any breach of any covenant, agreement or
obligation of Holdco contained in this Agreement or any other Transaction
Document, (c) the Assumed Liabilities or (d) the operation of the Cable Modem
Business from and after the Closing. Each of the covenants of Holdco contained
in Sections 8.02, 8.03, 8.05, 8.06 and 8.11 and representations and warranties
made by Holdco in this Agreement or in any of the other Transaction Documents
shall survive for a period of eighteen (18) months after the Closing Date
(unless a claim shall have been commenced prior to such time in which case the
applicable covenants, representations and warranties shall survive with respect
to such claim until such claim has been resolved, and thereafter all such
covenants, representations and warranties shall be extinguished). The covenants
(other than those described in the preceding sentence) and agreements made by
Holdco in this Agreement or in any of the other Transaction Documents shall
survive the Closing and will continue in full force and effect without
limitation. Holdco shall have no liability to Seller on or account of any
Damages provided in Sections 11.02(a) or (b) (to the extent the matters in
Section 11.02(b) relate to covenants described in the second sentence of this
Section 11.02) unless and until such damages in the aggregate exceed the
Threshold Amount, in which case Seller shall be entitled to Damages from the
first dollar of such damages. The total liability of Holdco for its indemnity
obligation under Sections 11.02(a) and 11.02(b) insofar as it includes the
covenants contained described in the second sentence of this Section 11.02,
shall be limited in all respects to an amount equal to the original amount of
the Indemnification Holdback. Notwithstanding the foregoing, Holdco's
indemnification obligations shall not be subject to the Threshold Amount or the
limits on total liability set forth above with respect to any indemnification
sought for Damages arising out of (1) any Assumed Liability; (2) a breach of any
covenants, agreements or obligations of Holdco other than those described in the
second sentence of this Section 11.02, (3) actual common law fraud, (4) any
Liability for Taxes arising
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under Section 8.15(a) or Taxes apportioned to Holdco pursuant to Section
8.15(b), or (5) the operation of the Cable Modem Business from and after the
Closing Date.
Section 11.03. Exclusive Remedy; No Consequential Damages.
Seller and Holdco acknowledge and agree that, from and after the Closing, their
sole and exclusive remedy with respect to any and all claims relating to the
subject matter of this Agreement shall be pursuant to the indemnification
provisions set forth in this Article XI, except in the case of actual common law
fraud. Notwithstanding anything to the contrary in this Agreement, no
indemnification shall be provided for under this Article XI in respect of any
indirect or consequential damages. The maximum amount of any indemnification
payable hereunder by any indemnifying party shall be limited to an amount equal
to the Cash Amount.
Section 11.04. Characterization of Indemnification and Other
Payments. All indemnity and other payments made under this Agreement shall be
treated for all Tax purposes as adjustments to the Purchase Price.
Section 11.05. Damages Net of Insurance; Tax Benefits. The
amount of any Damages for which indemnification is payable under this Article
XI, shall be (i) net of any amounts recovered or recoverable by the Indemnitee
(as defined below) under insurance policies with respect to such Damages, (ii)
net of any amounts recovered by the Indemnitee from any third Person (by
contribution, indemnification or otherwise) with respect to such Damages, and
(iii) adjusted to take account of any net Tax effect realized by the Indemnitee
arising from the incurrence or payment of any such Damages and the entitlement
to or the receipt of any indemnification payment.
Section 11.06. Procedures Relating to Third Party Claims.
(a) Notice of Third Party Claims. A Person entitled to any
indemnification provided for under this Agreement in respect of, arising out of,
or involving a claim made by any third party (a "Third Party Claim") against
such Person (the "Indemnitee"), shall notify the Person from whom
indemnification is sought (the "Indemnitor") in writing, and in reasonable
detail, of the Third Party Claim promptly after receipt by such Indemnitee of
written notice of the Third Party Claim. The failure to give such notification
shall not affect the indemnification provided hereunder except to the extent the
Indemnitor shall have been materially prejudiced as a result of such failure.
(b) Assumption of Defense of Third Party Claims by Indemnitor.
If any indemnification obligation hereunder shall arise from a Third Party
Claim, the Indemnitor shall have the right and Indemnitee shall permit the
Indemnitor to participate in the defense thereof and, if it so chooses, to
assume the defense of any such claim or any litigation resulting from such claim
unless the Indemnitee provides a written release to Indemnitor of its
indemnification obligation. If the Indemnitor assumes the defense of such claim
or litigation, the Indemnitor shall actively pursue the defense thereof in good
faith. The Indemnitor shall not, in the defense of such claim or litigation,
unless the Indemnitee expressly consents in writing (which consent will not be
unreasonably withheld), consent to entry of any judgment or enter into any
settlement unless such judgment or settlement provides only for monetary damages
to be paid by the Indemnitor and includes as an unconditional term thereof the
giving by the claimant or the plain-
A-58
tiff to the Indemnitee of a release from all liability in respect of such claim
or litigation. In cases where the Indemnitor has, by written instrument
delivered to the Indemnitee, assumed the defense or a settlement with respect to
a claim for which indemnity is being sought, the Indemnitor will not be liable
to the Indemnitee for any legal fees subsequently incurred by the Indemnitee in
connection with the defense thereof and the Indemnitor shall be entitled to
assume the defense or settlement thereof with counsel of its own choosing, which
counsel shall be reasonably satisfactory to the Indemnitee, provided that the
Indemnitee (and its counsel) shall be entitled to continue to participate at its
own cost in any such action or proceeding or in any negotiations or proceedings
to settle or otherwise eliminate any claim for which indemnification is being
sought, it being understood that the Indemnitor shall control such defense. If
the Indemnitor chooses to defend or prosecute a Third Party Claim, all the
parties hereto shall reasonably cooperate in the defense or prosecution thereof.
Such cooperation shall include the retention and (upon the Indemnitor's request)
the provision to the Indemnitor of records and information which are reasonably
relevant to such Third Party Claim, and making employees available on a mutually
convenient basis to provide additional information and explanation of any
material provided hereunder.
(c) Assumption of Defense of Third Party Claims by Indemnitee.
Notwithstanding the foregoing, if (i) the Indemnitor does not promptly assume
the defense of any Third Party Claim as provided in this Section 11.06(b) above
(other than during any period in which the Indemnitee shall have failed to give
notice of the Third Party Claim as provided above) or (ii) the Indemnitee
reasonably concludes that there may be legal defenses available to it that are
different from or in addition to those available to the Indemnitor, or that
another conflict of interest exists or is likely to occur in the defense of such
Third Party Claim, then in any of such cases, the Indemnitee may assume primary
responsibility for the defense or settlement of the Third Party Claim, and may
select legal counsel reasonably acceptable to the Indemnitor to conduct the
defense of such claims. If the Indemnitee assumes and undertakes a defense or
settlement of a Third Party Claim in accordance with the immediately preceding
sentence, the Indemnitor shall be liable to the Indemnitee for any reasonable
attorneys' fees and expenses incurred by the Indemnitee in connection with such
matter, after receiving notice from the Indemnitee to the effect that it intends
to take advantage of the provisions set forth in the immediately preceding
sentence; provided, however, that the Indemnitor shall continue to have the
right to participate in the defense of any such Third Party Claim and, if it so
chooses, to employ separate counsel in connection therewith, but the fees,
costs, and expenses related to such participation shall be at the expense of and
paid by the Indemnitor. In the event the Indemnitee assumes primary
responsibility for the defense of the Third Party Claim as provided in the first
sentence of this Section 11.06(c), the Indemnitor shall continue to pay the
legal fees and expenses of counsel for the Indemnitee and the Indemnitor shall
not have the right to direct the defense of such Third Party Claim on behalf of
the Indemnitee. The Indemnitee shall have the right, with the consent of the
Indemnitor (which consent shall not be unreasonably withheld), to settle or
compromise any such Third Party Claim on terms satisfactory to it.
A-59
Section 11.07. Indemnification Holdback.
(a) Establishment of the Indemnification Holdback. At the
Closing and without any act of Seller, cash equal to the Indemnification
Holdback will be held back from the Purchase Price by Holdco pursuant to Section
3.02(b), and not delivered to Seller, such amount to be governed by the terms
set forth herein.
(b) Recourse to the Indemnification Holdback. The
Indemnification Holdback shall be available to compensate Holdco Indemnitees for
any and all Damages to which they are entitled to indemnification under this
Article XI.
(c) Distribution of Indemnification Holdback.
(i) At 5:00 p.m., Eastern Time, on the twelve (12) month
anniversary of the Closing Date (the "First Release Date"), Holdco shall release
from the Indemnification Holdback and shall pay to Seller cash in an amount
equal to the First Release Amount minus the aggregate amount (determined in the
reasonable judgement of Holdco) of any pending claims for Damages made by Holdco
on or before the First Release Date. As claims for Damages made on or before the
First Release Date are resolved, Holdco shall pay to Seller the amount by which
(1) the remaining portion of the First Release Amount withheld pursuant to the
preceding sentence exceeds (2) the aggregate amount of any claims for Damages
made on or before the First Release Date which are pending at such time. The
term "First Release Amount" means Two Million Dollars ($2,000,000) minus the
aggregate amount of any reduction in the Indemnification Holdback made by Holdco
pursuant to Section 11.07(d) on or before the First Release Date.
(ii) At 5:00 p.m., Eastern Time, on the eighteen (18)
month anniversary of the Closing Date (the "Second Release Date"), any amount
remaining in the Indemnification Holdback (after reductions made by Holdco
pursuant to Sections 11.07(c)(i) and 11.07(d)) that is not subject to pending
claims for Damages made by Holdco, shall be released from the Indemnification
Holdback and paid to Seller in cash. As any such pending claims for Damages are
resolved, Holdco shall deliver to Seller the amount by which (1) the remaining
portion of the Indemnification Holdback, if any, exceeds (2) the aggregate
amount of any claims for Damages which are pending at such time.
(iii) When any amounts are paid to Seller pursuant to
Sections 11.07(c)(i) and (ii), Holdco shall also pay Seller interest on such
amounts from the Closing Date to the payment date at the prime rate as reported
in The Wall Street Journal from time to time during the period that Holdco has
held such amounts. Any such amounts payable to Seller under this Section 11.07
shall be paid by Holdco in immediately available funds by wire transfer or
cashiers check.
(d) Claims Upon Indemnification Holdback. Upon delivery by
Holdco to Seller of a certificate signed by any officer of Holdco (an "Officer's
Certificate"): (i) stating that a Holdco Indemnitee has paid Damages hereunder,
and (ii) specifying in reasonable detail the individual items of Damages
included in the amount so stated, the date each such item was paid and the basis
for payment of such Damages, Holdco shall, subject to the provisions of Section
A-60
11.07(c) hereof, be entitled to reduce the amount of the Indemnification
Holdback cash in an amount equal to such Damages.
(e) Objections to Claims. Holdco shall not reduce the amount
of the Indemnification Holdback pursuant to Section 11.07(d) hereof unless (i)
Holdco shall have received written authorization from Seller to make such
reduction, or (ii) thirty (30) days shall have elapsed from the date of delivery
of the Officer's Certificate to Seller. After such authorization or expiration
or such thirty (30) day period, Holdco shall be entitled to reduce the amount of
the Indemnification Holdback in accordance with Section 11.07(d) hereof, unless
Seller shall object in a written statement to the claim made in the Officer's
Certificate, and such statement shall have been delivered to Holdco prior to the
expiration of such thirty (30) day period (in which case Holdco's right to
reduce the amount of the Indemnification Holdback shall be determined under
Section 11.07(f) below).
(f) Resolution of Conflicts. In the event that Seller objects
in writing to any claim or claims made in any Officer's Certificate within
thirty (30) days of receipt thereof, Seller and Holdco shall attempt promptly
and in good faith to agree upon the rights of the respective parties with
respect to each of such claims. If Seller and Holdco should so agree, a
memorandum setting forth such agreement shall be prepared and signed by both
parties. Holdco shall be entitled to rely on any such memorandum to remove cash
from the Indemnification Holdback in accordance with the terms thereof. If no
such agreement can be reached after good faith negotiation, Holdco shall be
entitled to make such reduction; provided that Seller retains the right to
contest such reduction in a proceeding in any court having competent
jurisdiction and located in Delaware or New York.
ARTICLE XII
GENERAL PROVISIONS
Section 12.01. Notices. All notices, requests and other
communications to any party hereunder shall be in writing (including facsimile
or similar writing) and shall be given:
(a) if to Holdco, to:
Charter Communications Holding Company, LLC
12405 Powerscourt Drive
St. Louis, MO 63131
Attention: Curtis S. Shaw
Senior Vice President, General Counsel and
Secretary
Facsimile No.: (314) 965-8793
with a copy to:
Paul, Hastings, Janofsky & Walker LLP
399 Park Avenue
New York, NY 10022
Attention: John Turitzin, Esq.
Facsimile No.: (212) 319-4090
A-61
(b) if to Seller, to:
High Speed Access Corp.
10901 West Toller Drive
Littleton, CO 80127
Attention: Daniel J. O'Brien
Facsimile No.: (720) 922-2805
with a copy to:
Chrysalis Ventures, LLC
1650 National City Tower, 101 S. Fifth Street
Louisville, KY 40202
Attention: David A. Jones, Jr.
Facsimile No.: (502) 583-7648
and to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, NY 10153
Attention: Howard Chatzinoff, Esq.
Facsimile No.: (212) 310-8007
or such other address or facsimile number as such party may hereafter specify
for the purpose by written notice to the other parties hereto. Each such notice,
request or other communication shall be effective (i) if given by facsimile,
when such facsimile is transmitted to the fax number specified in this Section
12.01 and the appropriate fax confirmation is received or (ii) if given by any
other means, when delivered at the address specified in this Section 12.01.
Section 12.02. Entire Agreement. This Agreement and the other
Transaction Documents constitute the entire agreement among the parties with
respect to the subject matter hereof and thereof and supersede all prior
agreements and understandings, both written and oral, between the parties with
respect to such subject matter.
Section 12.03. Severability. If any provision of this
Agreement (or any portion thereof) or the application of any such provision (or
any portion thereof) to any Person or circumstance is held by a court of
competent jurisdiction to be invalid, illegal or unenforceable in any respect,
(i) such invalidity, illegality or unenforceability shall not affect any other
provision hereof (or the remaining portion thereof) or the application of such
provision to any other persons or circumstances, and (ii) the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that the transactions contemplated hereby are fulfilled to the extent
possible.
Section 12.04. Third Party Beneficiaries. Neither this
Agreement, nor the Confidentiality Agreement nor any other agreement
contemplated hereby or thereby (or any
A-62
provision hereof or thereof) is intended to confer any rights or remedies on any
Person other than the parties hereto or thereto.
Section 12.05. Assignment. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any party
hereto without the prior written consent of the other party, except that Holdco
may assign to any Affiliates of Holdco the right to acquire part or all of the
Acquired Assets hereunder; provided, however, that any such assignment shall not
release Holdco from any obligation or liability hereunder (including any right
or obligation under Article XI). Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and assigns.
Section 12.06. Specific Performance. The parties recognize in
the event that Seller should refuse to perform under the provisions of this
Agreement, monetary damages alone will not be adequate. Holdco shall therefore
each be entitled, in addition to any other remedies that may be available,
including monetary damages, to obtain specific performance of the terms of this
Agreement. In the event of any action to enforce this Agreement specifically,
Seller waives the defense that there is an adequate remedy at law.
Section 12.07. Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York
applicable to contracts made and to be performed entirely in the State of New
York, regardless of the Legal Requirement that might otherwise govern under
applicable principles of conflict of laws.
Section 12.08. Waiver of Jury Trial. Each of the parties
hereto hereby irrevocably waives any and all right to trial by jury in any
action or proceeding in connection with this Agreement or any transaction
contemplated hereby.
Section 12.09. Exhibits and Schedules. The Exhibits and
Schedules attached to and delivered with this Agreement are a part of this
Agreement the same as if fully set forth herein and all references herein to any
Section of this Agreement shall be deemed to include a reference to any Schedule
named therein.
Section 12.10. No Strict Construction. Holdco and Seller
hereby acknowledge that (i) Holdco and Seller jointly and equally participated
in the drafting of this Agreement and all other agreements contemplated hereby,
(ii) both Holdco and Seller have been adequately represented and advised by
legal counsel with respect to this Agreement and the transactions contemplated
hereby, and (iii) no presumption shall be made that any provision of this
Agreement shall be construed against either party by reason of any role in the
drafting of this Agreement or any other agreement contemplated hereby.
Section 12.11. Counterparts; Effectiveness. This Agreement may
be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received counterparts hereof signed by all of the other parties hereto.
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IN WITNESS WHEREOF, the parties have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of the
date first written above.
HIGH SPEED ACCESS CORP.
By: /s/ Daniel J. O'Brien
------------------------
Name: Daniel J. O'Brien
Title: President & CEO
CHARTER COMMUNICATIONS HOLDING COMPANY, LLC
By: /s/ Curtis S. Shaw
-----------------------------
Name: Curtis S. Shaw
Title: Senior Vice President,
General Counsel &
Secretary
A-64
GLOSSARY OF DEFINED TERMS
DEFINED TERMS ON PAGE
Accounts Payable.......................................................................................A-2
Accounts Receivable....................................................................................A-2
Acquired Assets........................................................................................A-11
Acquired Current Assets................................................................................A-2
Acquisition Proposal...................................................................................A-38
Adjusted Accounts Receivable...........................................................................A-2
Adjustment Holdback....................................................................................A-16
Adjustment Item........................................................................................A-17
Affiliate..............................................................................................A-2
Apportioned Obligations................................................................................A-44
Approved Leave of Absence..............................................................................A-40
Arapahoe Facility......................................................................................A-34
Assigned Security Deposits.............................................................................A-2
Assigned Voice & Data Circuits.........................................................................A-2
Assumed Capital Lease Liabilities......................................................................A-3
Assumed Capital Leases.................................................................................A-2
Assumed Contracts......................................................................................A-3
Assumed Current Liabilities............................................................................A-3
Assumed Liabilities....................................................................................A-13
Assumed Operating Lease Liabilities....................................................................A-3
Assumed Operating Leases...............................................................................A-3
Assumed Real Estate Lease Liabilities..................................................................A-3
Assumed Real Estate Leases.............................................................................A-3
Beneficiary............................................................................................A-43
Benefit Plans..........................................................................................A-3
Billing Letter Agreement...............................................................................A-1
Business...............................................................................................A-1
Business Day...........................................................................................A-3
Cable Modem Business...................................................................................A-1
Capital Leases.........................................................................................A-3
Cash Amount............................................................................................A-16
CCI....................................................................................................A-1
CCI Receivables........................................................................................A-2
Charter Ventures.......................................................................................A-1
Charter Warrants.......................................................................................A-22
Closing................................................................................................A-20
Closing Date...........................................................................................A-20
Closing Statement......................................................................................A-17
CMB Business Records...................................................................................A-3
CMB Claims.............................................................................................A-4
CMB Employee Schedule..................................................................................A-38
GLOSSARY OF DEFINED TERMS
DEFINED TERMS ON PAGE
CMB Employees.........................................................................................A-38
CMB Intellectual Property.............................................................................A-4
CMB Sites.............................................................................................A-4
Code..................................................................................................A-4
Confidential Information..............................................................................A-45
Confidentiality Agreement.............................................................................A-34
Contracts.............................................................................................A-4
Copyrights............................................................................................A-6
Corrections...........................................................................................A-17
Customer Care Matters.................................................................................A-4
Damages...............................................................................................A-51
DGCL..................................................................................................A-24
Disagreement Notice...................................................................................A-17
Employee Claims.......................................................................................A-4
Environmental Law.....................................................................................A-5
ERISA.................................................................................................A-5
Excluded Assets.......................................................................................A-12
Excluded Damages......................................................................................A-52
Excluded Liabilities..................................................................................A-13
Excluded Stockholders.................................................................................A-4
Expenses..............................................................................................A-43
Final Allocation......................................................................................A-20
First Release Amount..................................................................................A-55
First Release Date....................................................................................A-55
Fixtures and Equipment................................................................................A-5
Full Turnkey Agreement................................................................................A-5
GAAP..................................................................................................A-5
Governmental Authority................................................................................A-5
Hazardous Substances..................................................................................A-5
Hired Employee Costs..................................................................................A-5
Hired Employees.......................................................................................A-39
Holdco................................................................................................A-1
Holdco Indemnitees....................................................................................A-51
Houlihan Lokey........................................................................................A-6
Houlihan Lokey Opinion................................................................................A-6
HSA Common Stock......................................................................................A-6
HSR Act...............................................................................................A-6
HSR Date..............................................................................................A-6
Indemnification Holdback..............................................................................A-16
Indemnifying Party....................................................................................A-53
Independent Accounting Firm...........................................................................A-19
Information...........................................................................................A-30
Intellectual Property.................................................................................A-6
GLOSSARY OF DEFINED TERMS
DEFINED TERMS ON PAGE
Intercompany Payments..................................................................................A-6
Launch Fees............................................................................................A-6
Legal Requirement......................................................................................A-7
Lehman.................................................................................................A-30
Lehman Opinion.........................................................................................A-7
Liabilities............................................................................................A-7
License Agreement......................................................................................A-1
Liens..................................................................................................A-7
Losses.................................................................................................A-7
Management Agreement...................................................................................A-1
Marks..................................................................................................A-6
Maskworks..............................................................................................A-6
Material Adverse Effect................................................................................A-7
Material Contract......................................................................................A-7
Maximum Sick Time Accrual..............................................................................A-40
Maximum Vacation Accrual...............................................................................A-40
Merrill Lynch..........................................................................................A-32
Modem Inventory........................................................................................A-8
Non-CCI Receivables....................................................................................A-2
Offer Schedule.........................................................................................A-38
Officer's Certificate..................................................................................A-55
Operating Equipment Leases.............................................................................A-8
Other Current Assets...................................................................................A-8
Other Current Liabilities..............................................................................A-8
Other Inventory........................................................................................A-8
Patents................................................................................................A-6
Permits................................................................................................A-8
Permitted Liens........................................................................................A-8
Person.................................................................................................A-9
Post-Employment Hiring Prohibition.....................................................................A-30
Prepayments............................................................................................A-9
Proxy Statement........................................................................................A-25
Purchase Price.........................................................................................A-16
Real Estate Leases.....................................................................................A-9
Review Schedule........................................................................................A-39
Schedule 13E-3.........................................................................................A-31
Second Disagreement Notice.............................................................................A-18
Second NSA Agreement...................................................................................A-9
Second Release Date....................................................................................A-55
Security Deposits......................................................................................A-9
Seller.................................................................................................A-1
Seller Indemnitees.....................................................................................A-52
Seller Requisite Vote..................................................................................A-24
GLOSSARY OF DEFINED TERMS
DEFINED TERMS ON PAGE
Seller Stockholder Meeting............................................................................A-35
Seller's Board........................................................................................A-23
Series D Preferred Stock..............................................................................A-9
Settlement Date.......................................................................................A-19
Software..............................................................................................A-6
Subsidiaries..........................................................................................A-9
Superior Proposal.....................................................................................A-38
Taking................................................................................................A-15
Tax or Taxes..........................................................................................A-9
Technology and Know-How...............................................................................A-9
Third Party Claim.....................................................................................A-53
Threshold Amount......................................................................................A-51
Trade Secrets.........................................................................................A-6
Transaction Documents.................................................................................A-10
Transactions..........................................................................................A-10
Transfer Tax or Transfer Taxes........................................................................A-10
Transfer Tax Returns..................................................................................A-44
Voting Agreement......................................................................................A-1
Vulcan................................................................................................A-1
WARN Act..............................................................................................A-10
ANNEX B
LEHMAN BROTHERS
September 21, 2001
The Board of Directors
High Speed Access Corp.
4100 E. Mississippi Avenue
Suite 1150
Denver, CO 80246
Members of the Board of Directors:
We understand that High Speed Access Corp. (the "Company") intends to
enter into an Asset Purchase Agreement (the "Agreement"), with Charter
Communications Holding Company LLC and Charter Communications Inc.
(collectively, "Charter") pursuant to which Charter will purchase from the
Company certain of the assets of the Cable Modem Business (as defined in the
Agreement) in exchange for consideration consisting of approximately (i) $81.1
million in cash, as adjusted by the Adjustment Items (as defined in the
Agreement) (ii) the cancellation of all of the 75,000 shares of the Company's
Series D Senior Convertible Preferred Stock held by Charter immediately prior to
the effectiveness of the transactions contemplated by the Agreement and (iii)
the Amended and Restated Securities Purchase Warrant dated as of May 12, 2000
(the "Proposed Transaction"). We further understand that (i) simultaneously with
the execution of the Agreement, the Company and Charter will enter into a
Management Agreement (the "Management Agreement"), pursuant to which Charter
will perform certain services previously performed by the Company relating to
the Cable Modem Business, and (ii) the Adjustment Items are not expected to
reduce the cash portion of the consideration substantially in excess of $6.0
million. The terms and conditions of the Proposed Transaction are set forth in
more detail in the Agreement.
We have been requested by the Board of Directors of the Company (the
"Board of Directors") to render our opinion with respect to the fairness, from a
financial point of view, to the Company of the consideration to be received by
the Company in the Proposed Transaction. We have not been requested to opine as
to, and our opinion does not in any manner address, the Company's underlying
business decision to proceed with or effect the Proposed Transaction. In
addition, our opinion does not in any manner address (i) the use of proceeds
from the Proposed Transaction, including the amount of proceeds to be
distributed to the stockholders in the event that the Board of Directors of the
Company determines that such proceeds should be delivered to such stockholders
of the Company, if any, or (ii) the viability of the Company's remaining
businesses following consummation of the Proposed Transaction.
In arriving at our opinion, we reviewed and analyzed: (1) the Agreement
and the specific terms of the Proposed Transaction, (2) the Annual Report on
Form 10-K of the Company for the fiscal year ended December 31, 2000 and the
Quarterly Report on Form 10-Q of the Company for the quarterly period ended June
30, 2001 and such other publicly available information concerning the Company
that we believe to be relevant to our analysis, (3) the results of the efforts
by (i) the Company, J.P. Morgan and Lehman Brothers to solicit indications of
interest from third parties with respect to an investment in the Company, or
(ii) the Company and Lehman Brothers to solicit indications of interest from
third parties with respect to other strategic transactions, including a sale,
with the Company, (4) Charter's operational and financial relationships with the
Company and its governance rights with respect to the Company and the
implications of those relationships and rights on the Company's ability to raise
B-1
additional capital, from third party investors or to enter into other strategic
transactions, (5) financial and operating information with respect to the
business, operations and prospects of the Company and the Cable Modem Business
(as defined in the Agreement) in particular, furnished to us by the Company, (6)
a comparison of the historical financial results and present financial condition
of the Cable Modem Business with those of other companies we deemed relevant,
(7) a comparison of the financial terms of the Proposed Transaction with the
financial terms of certain other recent transactions that we deemed relevant,
(8) the pro forma impact of the Proposed Transaction on the current and future
financial position of the Company, (9) alternatives available to the Company in
the absence of the Proposed Transaction to fund the future capital and operating
requirements of the Cable Modem Business, and (10) the value of the Cable Modem
Business and other assets of the Company in the event of a liquidation of the
Company, in comparison to the obligations to the holders of the preferred
securities and other liabilities and obligations of the Company. In addition, we
have had discussions with the management of the Company concerning its industry,
business, operations, assets, financial condition and prospects and have
undertaken such other studies, analyses and investigations as we deemed
appropriate.
In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial forecasts of the
Company, upon advice of the Company we have assumed that such forecasts have
been reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
financial performance of the Company. In addition, we have discussed with the
management of the Company certain somewhat more conservative assumptions and
estimates which resulted in the Company providing us with certain downward
adjustments to the forecasts of the Company for our consideration. In addition,
we have not been requested to make, and have not made or obtained, an
independent evaluation or appraisal of the assets or liabilities of the Company.
Our opinion necessarily is based upon market, economic and other conditions as
they exist on, and can be evaluated as of, the date of this letter.
Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the consideration to be
received by the Company in the Proposed Transaction is fair to the Company.
We have acted as financial advisor to the Board of Directors in
connection with the Proposed Transaction and will receive from the Company a fee
for our services, a portion of which is contingent upon the consummation of the
Proposed Transaction. In addition, the Company has agreed to indemnify us for
certain liabilities that may arise out of the rendering of this opinion. We have
performed various investment banking services for the Company in the past
(including serving as lead manager for the Company's initial public offering)
and have received customary fees for such services. In the ordinary course of
our business, we actively trade in the equity securities of the Company for our
own account and for the accounts of our customers and, accordingly, may at any
time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors and is
rendered to the Board of Directors in connection with its consideration of the
Proposed Transaction. This opinion is not intended to be and does not constitute
a recommendation to any stockholder of the Company as to how such stockholder
should vote with respect to the Proposed Transaction.
Very truly yours,
LEHMAN BROTHERS
/s/ LEHMAN BROTHERS
B-2
ANNEX C
[HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC. LETTERHEAD]
September 21, 2001
To The Special Committee
of the Board of Directors
High Speed Access Corporation
To The Board of Directors
High Speed Access Corporation
Dear Directors:
We understand that High Speed Access Corporation (the "Company") is
considering selling ("the Sale") a portion of its assets (the "Assets") to
Charter Communications Holding Company, LLC for an aggregate consideration of
(i) $81.1 million, consisting of cash which is subject to certain adjustments
and the assumption of certain liabilities, (ii) the cancellation of 75,000
shares of the Company's Series D Senior Convertible Preferred Stock and (iii)
the cancellation of the Amended and Restated Securities Purchase Warrant dated
as of May 12, 2000. The consideration described in clause (i) of the preceding
sentence is referred to herein as the "Cash and Assumption Consideration". Such
transaction and other related transactions disclosed to Houlihan Lokey are
referred to collectively herein as the "Transaction."
You have requested our opinion (the "Opinion") as to the matters set
forth below. The Opinion does not address the Company's underlying business
decision to effect the Transaction. We have not been requested to, and did not,
solicit third party indications of interest in acquiring all or any part of the
Company. Furthermore, at your request, we have not negotiated the Transaction or
advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses
and inquiries as we have deemed necessary and appropriate under the
circumstances. Among other things, we have:
reviewed the Company's annual reports to stockholders and on
Form 10-K for the fiscal years ended December 31, 1999 and 2000 and
quarterly reports on Form 10-Q for the two quarters ended June 30,
2001, and Company-prepared interim financial statements for the period
ended July 31, 2001, which the Company's management has identified as
being the most current financial statements available;
Reviewed a pro forma balance sheet and the stated value of the
Assets and of certain liabilities to be sold by the Company in the
Transaction.
reviewed the Asset Purchase Agreement between High Speed
Access Corporation and Charter Communications Holding Company, LLC,
draft dated September 20, 2001;
met with certain of the senior management of the Company to
discuss the operations, financial condition, future prospects and
projected operations and performance of the Company and the Assets;
C-1
reviewed forecasts and financial projections prepared by the
Company's management with respect to the Company and the Assets for the
years ended December 30, 2001 through 2010;
reviewed the historical market prices and trading volume for
the Company's publicly traded securities;
reviewed certain other publicly available financial data for
certain companies that we deem comparable to the Company, and publicly
available prices and premiums paid in other transactions that we
considered similar to the Transaction; and
conducted such other studies, analyses and inquiries as we
have deemed appropriate.
We have relied upon and assumed, without independent verification, that
as of the date hereof the financial forecasts and projections provided to us
have been reasonably prepared and reflect the best currently available estimates
of the future financial results and condition of the Company, and that as of the
date hereof there has been no material change in the assets, financial
condition, business or prospects of the Company since the date of the most
recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion
that the Cash and Assumption Consideration constitutes fair consideration and
reasonably equivalent value for the Assets.
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
/s/ HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
C-2
Annex D
MERRILL LYNCH & CO
September 7, 2001
Board of Directors
Charter Communications, Inc.
12444 Powerscourt Drive
Suite 100
St. Louis, MO 63131
Members of the Board of Directors:
Charter Communications Holding Company, LLC (the "Acquiror"), a
subsidiary of Charter Communications, Inc. (the "Parent"), and High Speed Access
Corp. (the "Company") propose to enter into an Asset Purchase Agreement (the
"Agreement") pursuant to which the Acquiror or one or more of its direct or
indirect subsidiaries would purchase from the Company (the "Asset Purchase") the
Acquired Assets (as defined in the Agreement), but excluding the Excluded Assets
(as defined in the Agreement), which are part of the Company's Cable Modem
Business (as defined in the Agreement) for (a) an amount in cash equal to (i)
$81.1 million, less (ii) certain assumed liabilities consisting of debt and
capital leases, subject to certain purchase price adjustments, (b) the
cancellation of the Charter Warrants (as defined in the Agreement), and (c)
75,000 shares of convertible preferred stock, par value $0.01 per share (the
"Series D Preferred Stock") of the Company (collectively, the "Asset Purchase
Consideration"). In addition, the Acquiror, the Parent and Vulcan Ventures
Incorporated ("Vulcan") propose to enter into a Purchase Agreement (the
"Purchase Agreement") pursuant to which immediately prior to such closing the
Acquiror or one or more of its direct or indirect subsidiaries would purchase
(the "Stock Purchase") 38,000 shares of Series D Preferred Stock owned by Vulcan
and certain other consideration for $8 million in cash (the "Stock Purchase
Consideration" and, together with the Asset Purchase Consideration, the
"Consideration") which shares of Series D Preferred Stock would represent a
portion of the Asset Purchase Consideration. The Asset Purchase and the Stock
Purchase, taken together, are referred to as the "Transactions".
You have asked us whether, in our opinion (i) the Consideration to be
paid by the Parent and the Acquiror pursuant to the Transactions, taken
together, is fair from a financial point of view to the Parent, and (ii) the
Stock Purchase Consideration is fair from a financial point of view to the
Parent when viewed in the context of the Transactions, taken together.
In arriving at the opinion set forth below, we have, among other
things:
(1) Reviewed certain publicly available business and financial
information relating to the Company and the Cable Modem
Business that we deemed to be relevant;
(2) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets,
liabilities and prospects of the Cable Modem Business and the
D-1
Company, as well as the amount and timing of the cost savings
expected to result from the Asset Purchase (the "Cost Savings")
furnished to us by the Company and the Parent, respectively;
(3) Conducted discussions with members of senior management and
representatives of the Company and the Parent concerning the
matters described in clauses 1 and 2 above, as well as their
respective businesses and prospects before and after giving
effect to the Transactions and the Cost Savings;
(4) Reviewed the market prices and valuation multiples for the
Company's common stock, par value $0.01 per share (the "Company
Common Stock");
(5) Reviewed the results of operations of the Cable Modem Business
and the Company and compared them with those of certain
publicly traded companies that we deemed to be relevant;
(6) Compared the proposed financial terms of the Asset Purchase
with the financial terms of certain other transactions which we
deemed to be relevant;
(7) Participated in discussions and negotiations among
representatives of the Company and the Parent and their
financial and legal advisors regarding the Asset Purchase;
(8) Reviewed the potential pro forma impact of the Transactions on
the Parent and the Acquiror and considered the potential
adverse impact to the Parent and the Acquiror of customer loss
and increased customer churn in the event the Asset Purchase is
not consummated;
(9) Reviewed a draft dated September 7, 2001 of the Agreement, a
draft dated September 7, 2001 of the Purchase Agreement, a
draft dated September 7, 2001 of the Services and Management
Agreement between the Company and the Parent (the "Management
Agreement") and a draft dated September 7, 2001 of the Voting
Agreement among the Company, Charter Communications Ventures,
LLC, Vulcan and the directors and former directors of the
Company listed on the signature pages thereof (the "Voting
Agreement");
(10) Reviewed the terms of the Series D Preferred Stock as set forth
in the certificate of designations, including, without
limitation, the voting rights and the liquidation preference of
the Series D Preferred Stock; and
(11) Reviewed such other financial studies and analyses and took
into account such other matters as we deemed necessary,
including our assessment of general economic, market and
monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy
and completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Cable Modem Business or the Company or been furnished with
any such evaluation or appraisal. In addition, we have not assumed any
obligation to conduct any physical inspection of the properties or facilities of
the Cable Modem Business or the Company. With respect to the financial forecast
information and the Cost Savings information furnished to or discussed with us
by the Company or the
D-2
Parent, we have assumed that they have been reasonably prepared and reflect the
best currently available estimates and judgment of the Company's or the Parent's
management as to the expected future financial performance of the Company or the
Parent, as the case may be, and the Cost Savings. In preparing our opinion, we
have also considered that the holders of two-thirds of the outstanding shares of
the Series D Preferred Stock, voting as a separate class, are required to
approve the Asset Purchase and that Vulcan owns a majority of such shares. We
have also assumed that the final form of the Agreement, the Purchase Agreement,
the Management Agreement and the Voting Agreement will be substantially similar
to the last draft reviewed by us.
Our opinion is necessarily based upon market, economic and other
conditions as they exist and can be evaluated on, and on the information made
available to us as of, the date hereof. We have assumed that in the course of
obtaining the necessary regulatory or other consents or approvals (contractual
or otherwise) for the Transactions, no restrictions, including any divestiture
requirements or amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the Transactions.
We are acting as financial advisor to the Parent in connection with the
Asset Purchase and will receive a fee from the Parent for our services, a
significant portion of which is contingent upon the consummation of the
Transactions. As you are aware, we did not participate in negotiations with
respect to the terms of the Stock Purchase, we were not requested to and did not
provide advice concerning the structure, the specific amount of the Stock
Purchase Consideration, or any other aspects of the Stock Purchase, or to
provide services other than the delivery of this opinion. In addition, the
Parent has agreed to indemnify us for certain liabilities arising out of our
engagement. We have, in the past, provided financing services to the Parent and
may continue to do so and have received, and may receive, fees for the rendering
of such services. In addition, in the ordinary course of our business, we may
actively trade the Company Common Stock and other securities of the Company, as
well as securities of the Parent and certain of its direct or indirect
subsidiaries for our own account and for the accounts of customers and,
accordingly, may at any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of
the Parent. Our opinion does not address the merits of the underlying decision
by the Parent and the Acquiror to engage in the Transactions or in any other
earlier transaction with the Company. In that regard, in rendering our opinion,
with your consent, we have not taken into consideration the terms of any earlier
transaction between the Parent or the Acquiror, on the one hand, and the
Company, on the other, including, but not limited to, the terms upon which an
affiliate of the Parent purchased from the Company shares of the Series D
Preferred Stock.
D-3
We are not expressing any opinion herein as to the prices at which the
common stock of the Parent will trade following the announcement or consummation
of the Transactions.
On the basis of and subject to the foregoing, we are of the opinion
that, as of the date hereof (i) the Consideration to be paid by the Parent and
the Acquiror pursuant to the Transactions, taken together, is fair from a
financial point of view to the Parent, and (ii) the Stock Purchase Consideration
is fair from a financial point of view to the Parent when viewed in the context
of the Transactions, taken together.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
D-4
PROXY PROXY
HIGH SPEED ACCESS CORP.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR STOCKHOLDERS MEETING ON NOVEMBER __, 2001
The undersigned hereby appoints Daniel J. O'Brien and Charles E.
Richardson, III, and each or either of them, as true and lawful agents and
proxies, with full power of substitution in each, to represent the undersigned
in all matters coming before the Special Meeting of stockholders of High Speed
Access Corp. to be held at the principal executive offices of the company at
10901 West Toller Drive, Littleton, Colorado, 80127 on November __, 2001 at
10:00 a.m., Mountain Time, and any postponements or adjournments thereof, and to
vote all shares owned of record by the undersigned as designated as follows:
1. Approval of the sale of substantially all of the assets of High
Speed Access Corp., pursuant to the Asset Purchase Agreement,
dated September 28, 2001, between High Speed Access Corp. and
Charter Communications Holding Company, LLC and the transactions
contemplated thereby, as described in, and attached to, the
accompanying proxy statement,.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2 The transaction of such other matters as may properly come
before the Special Meeting or any adjournment or postponement
thereof, in the discretion of the proxies, including an
adjournment or postponement for the purpose of soliciting
additional votes in favor of the proposed asset sale.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
PLEASE DATE AND SIGN ON THE REVERSE SIDE
All of the proposals set forth above are proposals of the company. None
of the proposals is related to or conditioned upon approval of any other
proposal. In their discretion, the proxies are authorized to vote with respect
to any other matters that may come before the meeting or any adjournments
thereof.
WHEN PROPERLY EXECUTED, THIS PROXY WILL BE VOTED IN THE MANNER
SPECIFIED ABOVE BY THE STOCKHOLDER. TO THE EXTENT CONTRARY SPECIFICATIONS ARE
NOT GIVEN, THIS PROXY WILL BE VOTED FOR THE PROPOSALS IN ITEMS 1 AND 2 WITH THE
DISCRETIONARY AUTHORITY SET FORTH IN THE ACCOMPANYING PROXY STATEMENT.
Dated _____________________________, 2001
PLEASE SIGN EXACTLY AS NAME APPEARS BELOW
-----------------------------------------
Signature
-----------------------------------------
Signature
(JOINT OWNERS SHOULD EACH SIGN,
ATTORNEYS-IN-FACT, EXECUTORS,
ADMINISTRATORS, CUSTODIANS, PARTNERS
OR CORPORATION OFFICERS SHOULD GIVE
FULL TITLE).
PLEASE DATE, SIGN, AND RETURN THIS PROXY
IN THE ENCLOSED ENVELOPE PROMPTLY. NO POSTAGE
IS NECESSARY IF MAILED IN THE UNITED STATES.