<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1999
REGISTRATION NO. 333-74667
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
HIGH SPEED ACCESS CORP.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 7370 61-1324009
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
4100 EAST MISSISSIPPI AVENUE
DENVER, COLORADO 80246
(303) 256-2000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
------------------------
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<S> <C>
Copy to:
MR. RON PITCOCK, SR. MR. W. KENT OYLER, III
PRESIDENT CHIEF OPERATING OFFICER
HIGH SPEED ACCESS CORP. HIGH SPEED ACCESS CORP.
4100 EAST MISSISSIPPI AVENUE 1000 W. ORMSBY AVENUE
DENVER, COLORADO 80246 LOUISVILLE, KENTUCKY 40210
(303) 256-2000 (502) 515-3333
</TABLE>
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
------------------------
Copies to:
<TABLE>
<S> <C>
RICHARD R. PLUMRIDGE, ESQ. JEREMY W. DICKENS, ESQ.
JOHN E. HAYES III, ESQ. WEIL, GOTSHAL & MANGES LLP
BRUCE E. CUNNINGHAM, ESQ. 767 FIFTH AVENUE
BROBECK, PHLEGER & HARRISON LLP NEW YORK, NEW YORK 10153
1125 17TH STREET, SUITE 2525 (212) 310-8000
DENVER, COLORADO 80202
(303) 293-0760
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
This registration statement covers the registration of 14,950,000 shares of
common stock offered by the registrant pursuant to an underwritten public
offering, which includes 1,950,000 shares of common stock issuable upon exercise
of the Underwriters' over-allotment option. This registration statement also
covers up to 1,808,407 shares of common stock to be offered to Cisco Systems,
Inc., Com21, Inc. and Microsoft Corporation in a concurrent offering that is not
underwritten. The concurrent offering consists of $7.5 million of common stock
offered to Cisco, $1 million of common stock offered to Com21, and $10 million
of common stock offered to Microsoft, in each case at the offering price, net of
the underwriting discount. Therefore, this registration statement contains two
forms of prospectus: one to be used in connection with the public offering and
the other to be used in connection with the concurrent offerings to Cisco, Com21
and Microsoft. The public offering prospectus and the concurrent offering
prospectus are identical in all respects except for the front cover pages, the
tables of contents, the descriptions of the plan of distribution and the
descriptions of legal matters. The alternate pages of the concurrent offering
prospectus are included herein after the final page of the public offering
prospectus and are labeled "Alternate Page for Concurrent Offering Prospectus."
Final forms of each prospectus will be filed with the Securities and Exchange
Commission under Rule 424(b).
<PAGE> 3
THIS INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 24, 1999
PROSPECTUS
13,000,000 SHARES
[HIGH SPEED ACCESS LOGO]
COMMON STOCK
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This is our initial public offering of shares of common stock. We are offering
13,000,000 shares. No public market currently exists for our shares.
We propose to list the shares on the Nasdaq National Market under the symbol
"HSAC." Anticipated Price Range $11.00 to $13.00 per share.
INVESTING IN THE SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 7.
<TABLE>
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PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discount....................................... $ $
Proceeds to High Speed Access Corp.......................... $ $
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 1,950,000
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any.
In addition to the shares offered in this prospectus, Cisco Systems, Inc. has
agreed to purchase $7,500,000 of our common stock, Com21, Inc. has agreed to
purchase $1,000,000 of our common stock and Microsoft Corporation has agreed to
purchase $10,000,000 of our common stock, in each case at the offering price,
net of the underwriting discount, in a concurrent registered offering.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
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LEHMAN BROTHERS J.P. MORGAN & CO.
Joint Lead Managers
BANC OF AMERICA SECURITIES LLC
CIBC WORLD MARKETS
, 1999
<PAGE> 4
[ARTWORK TO BE PROVIDED]
Description of Graphic for inside front cover.
[Map of the United States showing homes affiliated but not deployed,
homes deployed but not marketed and homes marketed, with the caption
"HSA's Cable System Affiliations."]
<PAGE> 5
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Sale of Shares to Cisco, Com21 and
Microsoft........................... 18
Use of Proceeds....................... 18
Dividend Policy....................... 18
Dilution.............................. 19
Capitalization........................ 20
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of
Operations.......................... 24
Business.............................. 30
Management............................ 45
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Certain Transactions.................. 55
Principal Stockholders................ 58
Description of Securities............. 61
United States Federal Income Tax
Consequences to Non-U.S. Holders.... 65
Shares Eligible for Future Sale....... 68
Underwriting.......................... 69
Legal Matters......................... 71
Experts............................... 71
Available Information................. 71
Reports to Stockholders............... 72
Glossary of Technical Terms........... A-1
Index to Financial Statements......... F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
This preliminary prospectus is subject to completion prior to this offering.
Among other things, this preliminary prospectus describes our company as we
currently expect it to exist at the time of the offering.
See the section of this prospectus entitled "Risk Factors" for a discussion
of certain factors that you should consider before investing in our common
stock. All trademarks and trade names appearing in this prospectus are the
property of their respective holders. Many of the technical terms we use in this
prospectus, which are commonly used in our industry, are explained in the
"Glossary of Technical Terms."
Unless otherwise indicated, all information in this prospectus:
- Reflects the conversion of all of our preferred stock into common stock
upon the closing of this offering;
- Reflects a 1.55-for-1 split of our common stock;
- Assumes a price to public of $12.00 per share, and a price to Cisco,
Com21 and Microsoft of $11.16 per share;
- Assumes the filing of our amended and restated certificate of
incorporation, which, among other things, will authorize 10 million
shares of undesignated preferred stock, 400 million shares of common
stock and 100 million shares of limited voting Class A common stock; and
- Assumes no exercise of the underwriters' over-allotment option.
References in this prospectus to "HSA," "we," "our," and "us" refer to High
Speed Access Corp., a Delaware corporation. High Speed Access Corp. was
incorporated in Delaware on April 2, 1998. Our principal executive offices are
located at 4100 East Mississippi Avenue, Denver, Colorado 80246. Our telephone
number at that address is (303) 256-2000. Our principal operating offices are
located at 1000 W. Ormsby Avenue, Louisville, Kentucky 40210. Our telephone
number at that location is (502) 515-3333. INFORMATION CONTAINED ON OUR WEB SITE
DOES NOT CONSTITUTE PART OF THIS PROSPECTUS.
Until , 1999, all dealers selling shares of the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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[THIS PAGE INTENTIONALLY LEFT BLANK]
ii
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PROSPECTUS SUMMARY
HIGH SPEED ACCESS CORP.
We are a leading provider of high speed Internet access via cable modem to
residential and commercial end users in exurban areas, which we define as cable
systems with fewer than 100,000 homes passed. We believe that we provide the
most comprehensive turnkey solution available to the cable operator in exurban
markets, whereby the cable operator may outsource the services required to
provide Internet access and other ancillary services. Our service enables
subscribers to receive Internet access at speeds substantially faster than
traditional Internet access at minimal cost to the cable operator. We enter into
long term exclusive contracts with cable operators to provide them with our
service. In exchange for providing us access to their customers, we pay our
cable partners a portion of the monthly fees we receive from the end users, the
ultimate residential or business consumers of our services.
We target exurban markets, defined 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 exurban market encompasses
approximately 48 million homes, or approximately one-half of the homes passed by
cable in the United States. We have exclusive agreements to provide our services
to 20 cable operators, covering 51 systems and approximately 982,000 homes
passed. We also have non-binding letters of intent to provide these services to
another 14 operators representing an additional 23 systems and approximately
303,000 homes passed. We have commenced full operations in 21 systems covering
approximately 319,000 homes passed, where we are marketing our services to end
users. We have initiated operations in another 21 systems covering an additional
402,000 homes, and have approximately 3,900 high speed end users.
Vulcan Ventures, Incorporated, an affiliate of Microsoft co-founder Paul
Allen, beneficially owns 54.2% of our common stock before the offering. Vulcan
also owns Charter Communications, Inc., one of the ten largest cable system
operators in the United States. Charter has agreed to provide us with exclusive
access to at least 750,000 homes passed, and has an equity incentive to provide
us up to an additional 5 million homes passed.
We recently entered into a non-binding letter of intent with ServiceCo LLC,
the entity that provides Road Runner's cable Internet access and content
aggregation services, and we and ServiceCo are currently in the process of
negotiating a definitive agreement. ServiceCo is a joint venture among
affiliates of Time Warner, Inc., MediaOne Group, Inc., Microsoft Corporation,
Compaq Corp. and Advance/Newhouse. This letter of intent contemplates that we
will provide our services to cable systems designated by ServiceCo and us, and
enter into a revenue sharing arrangement among HSA, ServiceCo and the cable
operator. We also would grant ServiceCo a warrant to purchase one share of
common stock at a price of $5 per share for each home passed that we jointly
designate to receive our services, up to a maximum of 5 million homes. In
addition, ServiceCo would be entitled to provide Road Runner content in these
designated systems.
We seek to provide our services to the rapidly expanding number of
households and businesses in the United States that are online. According to
industry analysts, there were 26.5 million households with Internet access in
the United States in 1998. Industry analysts expect this number to grow to
nearly 58.4 million households by the end of 2002. One recent industry report
estimated that, by the end of 2002, 15.8 million U.S. households will have
broadband Internet access, having transmission speeds with bandwiths greater 128
Kilobits per second. We believe that cable modems will become the leading method
of broadband Internet access for residential end users. Because cable modems can
operate at peak transmission speeds of up to 10 megabits per second, compared
with 56 kilobits per second for standard telephone modems, cable modem users
will be better able to use increasingly complex entertainment and commercial
service offerings that integrate voice, video and data on the Internet. In
addition, a cable modem provides the potential for an always-on connection to
the Internet, eliminating the inconvenience associated with the timing out of a
telephone modem connection and generally avoiding the need for dial-up
procedures. We believe that many businesses located in our target markets also
will find our scalable,
1
<PAGE> 8
cable-based Internet access to be the most cost-effective solution for their
Internet needs because of the limited availability and high cost of obtaining
competing high speed telephone circuitry in many exurban markets.
BENEFITS TO THE CABLE OPERATOR
To take advantage of the increased usage of the Internet, many cable
operators are seeking a rapid and cost-effective means of providing high speed
Internet access to their customers. We have developed a comprehensive solution
that provides the following benefits:
- Full turnkey solution requiring minimal effort by the cable operator;
- Rapid implementation of high speed access in cable systems that are
either upgraded or non-upgraded for two-way data transmission
capabilities;
- Source of additional revenues with minimal associated operating or
capital cost; and
- Dedicated onsite local and national end user marketing provided by us.
Our exclusive focus on high speed Internet access enables the cable
operator, who may otherwise lack the necessary experience and resources, to
provide broadband Internet access quickly and cost effectively. We have
developed a standardized implementation and engineering process based on our
experience in the 42 systems we have installed to date, of which 21 are in full
operation. As a result, we generally are able to commence full operations in a
system within 90 days after we have entered into a contract with our cable
partner.
STRATEGY
Our strategy has the following key elements:
- Focus on the exurban market where there is less competition and cable
operators have a greater need for our turnkey services;
- Rapidly expand our base of cable partners;
- Offer a full turnkey value proposition to the cable operator and create
long term partnerships;
- Provide a range of products and services to residential and commercial
end users;
- Increase end user penetration through dedicated marketing and local
content;
- Leverage economies of scale inherent in our business;
- Leverage the media and cable industry experience of our investors,
directors and management; and
- Selectively explore international expansion and domestic acquisition
opportunities.
HISTORY, SPONSORSHIP AND STRATEGIC RELATIONSHIPS
In April 1998, Broadband Solutions, one of our founding investors,
sponsored our acquisition of High Speed Access Network, Inc. of Denver, Colorado
and CATV.net, Inc. of Louisville, Kentucky. In November 1998, Vulcan Ventures
invested $20 million in our company. In April 1999, Vulcan purchased 5 million
shares of our Series C convertible preferred stock for $5.00 per share, which
will be converted into 7.75 million shares of our common stock upon completion
of the offering. Vulcan's subsidiary, Charter Communications, has entered into
an agreement giving us exclusive access to at least 750,000 homes passed in its
exurban markets. Charter also has warrants to purchase up to an additional 7.75
million shares of our common stock, for $3.23 per share, which become
exercisable at the rate of 1.55 shares per home passed committed to us by
Charter in excess of 750,000. Vulcan has substantial investments in media,
Internet and new media companies, including Go2Net, Inc., USA Networks, ZDTV,
Beyond.com, N2K, Inc., Northpoint Communications, Inc., Wink Communications,
Value America, Inc. and Priceline.com. Certain of the principals of Broadband
Solutions, which beneficially owns 29.2% of our
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<PAGE> 9
common stock before the offering, co-founded and invested in Premier Parks Inc.,
Regal Cinemas, Inc. and Regent Communications, Inc. (subsequently sold to Jacor
Communications). The investor group that founded High Speed Access Network, Inc.
includes cable television pioneer Joseph Gans, III.
Concurrently with this offering, Cisco, and Com21, two of our major
equipment suppliers, have agreed to purchase $7.5 million and $1.0 million,
respectively, of our common stock at the initial public offering price, net of
the underwriting discount. Additionally, Microsoft, a strategic marketing
partner, has agreed to purchase $10 million of our common stock at the initial
public offering price, net of the underwriting discount. We believe that both
our sponsor and strategic relationship groups and their knowledge of, and
extensive connections in, the media, Internet and cable industries help position
us to compete in the high speed cable modem Internet access market.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about us and our industry
that address, among other things, the demand for high speed Internet access in
exurban markets and our ability to expand our business, develop additional
revenue sources and create strategic relationships. These statements may be
found in the sections of this prospectus entitled "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," and in this prospectus
generally. These forward-looking statements involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of many factors, as more fully described
in the "Risk Factors" section and elsewhere in this prospectus.
THIS SUMMARY HIGHLIGHTS SOME OF THE INFORMATION FROM THIS PROSPECTUS AND
MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU.
3
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THE OFFERING
Common Stock Offered............. 13,000,000 shares
Common Stock Offered to Cisco.... 672,043 shares
Common Stock Offered to Com21.... 89,606 shares
Common Stock Offered to
Microsoft........................ 896,057 shares
Total Common Stock Offered....... 14,657,706 shares
Use of Proceeds.................. We intend to use the net proceeds of this
offering to fund operating losses and
capital expenditures to be incurred in the
deployment of our services, and for working
capital and other general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol.................. "HSAC"
Excluding the underwriters' over-allotment option, 51,932,872 shares of
common stock will be outstanding after the offering. These shares are comprised
of the following:
- 14,657,706 shares of common stock issued in this offering.
- 37,275,166 shares of common stock held by current stockholders.
We also may issue shares of common stock pursuant to our stock option
plans, as follows:
- Under our 1998 stock option plan, we have granted options to purchase
839,325 shares at a weighted average exercise price of $1.67 per share,
all of which will become exercisable upon completion of the offering. No
more options will be granted under our 1998 stock option plan.
- Under our 1999 stock option plan, we have reserved 3.1 million shares for
issuance. We have granted options to purchase 46,500 of these shares at
an exercise price of $3.23 per share, and 21,000 of these shares at an
exercise price equal to the initial public offering price per share. None
of the options granted under the 1999 stock option plan is currently
exercisable. In addition, we expect to issue options for an additional
465,065 shares at an exercise price equal to the initial public offering
price contemporaneously with the offering.
- Under our 1999 non-employee director stock option plan, we have reserved
465,000 shares for issuance. We have granted options to purchase 189,875
shares at an exercise price of $3.23 per share, all of which are
currently exercisable.
In addition, we have issued or may issue warrants to purchase shares of
common stock, as follows:
- Charter has warrants to purchase up to 7.75 million shares of our common
stock at an exercise price of $3.23 per share. These warrants became
exercisable at the rate of 1.55 shares per home passed committed to us by
Charter in excess of 750,000. See "Certain Transactions."
- Microsoft has a warrant to purchase 250,000 shares of our common stock at
an exercise price of 125% of the initial public offering price. This
warrant will provide Microsoft the right to purchase one additional share
of our common stock for each additional 10 homes passed above 2.5 million
homes passed Comcast commits to us by May 1, 2002.
- A non-binding letter of intent we recently signed with ServiceCo LLC, the
entity that provides Road Runner's cable Internet access and content
aggregation services, contemplates that we will grant warrants to
purchase one share of our common stock at a price of $5 per share for
each home passed that we jointly designate to receive our services, up to
a maximum of 5 million shares.
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The following table sets forth our summary financial data. You should read
this information together with the financial statements and the notes to those
statements appearing elsewhere in this prospectus and the information under
"Selected Financial Data" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The combined pro forma data for the year ended December 31, 1998 gives
effect to our acquisition of CATV.net, Inc. and High Speed Access Network, Inc.
as if those acquisitions had occurred on January 1, 1998.
The pro forma basic and diluted net loss per share for the historical
periods April 3, 1998 through December 31, 1998 and for the three months ended
March 31, 1999 give effect to the assumed conversion of our Series A and Series
B convertible preferred stock into shares of common stock at the date the shares
of convertible preferred stock were issued. The pro forma basic and diluted net
loss per share for the combined pro forma year ended December 31, 1998 assumes
that (a) our Series A convertible preferred stock had been issued on January 1,
1998 and immediately converted into shares of common stock and (b) that our
Series B convertible preferred stock had been immediately converted into common
stock upon the respective dates of issuance of the Series B convertible
preferred stock. As a result of such assumed conversions, dividends and
accretion of redemption value of the preferred stock are excluded from the net
loss available to common stockholders.
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMBINED
PRO FORMA THREE MONTHS
APRIL 3, 1998 YEAR ENDED ENDED
(INCEPTION) TO DECEMBER 31, MARCH 31,
DECEMBER 31, 1998 1998 1999
----------------- ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue........................................ $ 337 $ 450 $ 299
Costs and expenses:
Operating costs.................................. 2,067 2,401 2,123
Engineering...................................... 2,266 2,372 1,485
Sales and marketing.............................. 3,696 4,078 2,038
General and administrative....................... 2,323 2,616 1,286
Non-cash compensation expense from the issuance
of stock options.............................. 947 1,523
---------- ---------- ----------
Total costs and expenses................. 10,352 12,414 8,455
---------- ---------- ----------
Loss from operations............................... (10,015) (11,964) (8,156)
Interest income, net............................... 40 41 119
---------- ---------- ----------
Net loss........................................... (9,975) (11,923) (8,037)
Accretion of redemption value of mandatorily
redeemable convertible preferred stock and
mandatorily redeemable convertible preferred
stock dividends.................................. (120,667) (120,667) (105,750)
---------- ---------- ----------
Net loss available to common stockholders.......... $ (130,642) $ (132,590) $ (113,787)
========== ========== ==========
Basic and diluted net loss per share............... $ (21.07) $ (21.39) $ (18.35)
Pro forma basic and diluted net loss per share
(unaudited)...................................... $ (.71) $ (.76) $ (.27)
Weighted average shares outstanding used in basic
and diluted per share calculation................ 6,200,000 6,200,000 6,200,000
Weighted average shares outstanding used in pro
forma basic and diluted per share calculation
(unaudited)...................................... 14,091,935 15,680,904 29,450,000
</TABLE>
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The pro forma column in the Balance Sheet Data below is adjusted to give
effect to the sale for $5.00 per share of $25 million of our Series C
convertible preferred stock to Vulcan Ventures in April 1999 and a $60 million
charge to accumulated deficit to increase the carrying value of the preferred
stock to its redemption value.
The pro forma as adjusted column in the Balance Sheet Data below is
adjusted to give effect to the pro forma adjustments, as well as:
- The automatic conversion upon completion of the offering of all
outstanding shares of Series A, Series B and Series C convertible
preferred stock into 31,000,000 shares of common stock;
- The issuance of 75,166 shares of common stock to the holders of our
Series A and Series B convertible preferred stock as a payment in kind
for outstanding dividends.
- The sale of an estimated 1,657,706 shares of common stock in the
aggregate to Cisco, Com21 and Microsoft at an assumed price of $12.00 per
share net of the underwriting discount.
- The sale of 13,000,000 shares in this offering at an assumed price of
$12.00 per share, after deducting underwriting discounts and offering
expenses.
<TABLE>
<CAPTION>
MARCH 31, 1999
DECEMBER 31, -----------------------------------
1998 PRO FORMA
ACTUAL ACTUAL PRO FORMA AS ADJUSTED
------------ --------- --------- -----------
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BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 17,888 $ 7,350 $ 32,350 $193,930
Working capital.................................. 14,162 1,459 26,459 188,039
Total assets..................................... 27,504 23,297 48,297 209,877
Notes payable -- related parties and capital
lease obligations, less current portion........ 749 806 806 806
Mandatorily redeemable convertible preferred
stock.......................................... 149,250 255,000 340,000 --
Total stockholders' (deficit) equity............. (126,427) (238,934) (298,934) 202,646
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, APRIL 29,
1998 1999 1999
------------ --------- ---------
<S> <C> <C> <C>
OTHER DATA:
Systems under contract...................................... 41 46 51
Homes passed under contract................................. 863,000 912,000 982,000
Homes marketed(1)........................................... 145,000 319,000 319,000
Residential cable modem end users........................... 1,619 3,169 3,510
</TABLE>
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(1) Homes marketed represents the number of homes passed in systems where we
have installed our equipment and are marketing our services to end users.
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RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before deciding to invest in our common stock. If any of the
following risks actually occur, our business and financial results could be
materially and adversely affected. In that case, the trading price of our common
stock could decline and you could lose all or part of your investment.
RISKS RELATED TO OUR OPERATIONS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED OPERATING
HISTORY.
Our predecessor companies began offering services to cable operators in
October 1997. We have recognized limited revenues since our inception. In
addition, our senior management team and other employees have worked together at
our company for only a short period of time. Consequently, we have a limited
operating history upon which you can evaluate our business.
WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES.
Since our founding, we have not been profitable. We have incurred
substantial costs to create and introduce our broadband Internet access
services, to operate these services, and to grow our business. We incurred net
losses of approximately $18 million from April 3, 1998 (Inception) through March
31, 1999. Our limited operating history and our ambitious growth plans make
predicting our operating results, including operating expenses, difficult.
We expect to incur substantial losses and experience substantial negative
cash flows from operations for at least the next several years as we expand our
business. The principal costs of expanding our business will include:
- Substantial direct and indirect selling, marketing and promotional costs;
- System operational expenses, including the lease of our Internet
backbone, a very high-capacity, long-distance line that can carry large
amounts of Internet traffic and data from one regional network to another
which has a traffic capacity in excess of our current needs;
- Costs incurred in connection with higher staffing levels to meet our
growth;
- The acquisition and installation of the equipment, software and
telecommunications circuits necessary to enable our cable partners to
offer our services; and
- Costs in connection with acquisitions, divestitures, business alliances
or changing technologies.
If any of these costs or expenses is not accompanied by an increase in
revenues, then our business and financial results could be materially and
adversely affected.
WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR BUSINESS MODEL IS UNPROVEN.
Our success depends on continued growth in the use of the Internet and high
speed access services. Although Internet usage and popularity have grown
rapidly, we cannot be certain that this growth will continue in its present
form, or at all. Critical issues concerning the increased use of the
Internet--including security, reliability, cost, ease of access and quality of
service--remain unresolved and are likely to affect the development of the
market for our services. Relatively few companies currently offer cable-based
Internet access, and we do not believe any of those has been profitable.
Moreover, many industry analysts believe that Internet access providers will
become increasingly reliant upon revenues from content due to competitive
pressures to provide low cost or even free Internet access.
The success of our business ultimately will depend upon the acceptance of
our services by end users, who will purchase or rent a cable modem from us and
pay both installation fees and monthly access charges for our services. We have
launched full operations in only 22 cable systems and we have
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approximately 3,510 cable modem end users. Additionally, although our primary
service offering is high bandwidth Internet access, we currently derive a
substantial portion of our revenues from standard dial-up Internet access, which
we offer as a feeder for our high speed offerings. We cannot predict whether
demand for our high speed Internet access services will develop, particularly at
the volume or prices we need to become profitable.
OUR ABILITY TO ATTRACT AND RETAIN END USERS DEPENDS ON MANY FACTORS WE CANNOT
CONTROL.
Our ability to increase the number of our end users, and our ability to
retain end users, will depend on a number of factors, many of which are beyond
our control. These factors include:
- Our ability to enter into and retain agreements with cable operators;
- The speed at which we are able to deploy our services, particularly if we
cannot obtain on a timely basis the telecommunications circuitry
necessary to connect our cable headend equipment, equipment located in a
central distribution point in a cable television system, to our Internet
backbone;
- Our success in marketing our service to new and existing end users;
- Competition, including new entrants advertising free or lower priced
Internet access and/or alternative access technologies;
- Whether our cable partners maintain their cable systems or upgrade their
systems from one-way to two-way service;
- The quality of the customer and technical support we provide; and
- The quality of the content we offer.
In addition, our service is currently priced at a premium to many other
online services and many end users may not be willing to pay a premium for our
service. Because of these factors, our actual revenues or the rate at which we
will add new end users may differ from past increases, the forecasts of industry
analysts, or a level that meets the expectations of investors.
OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY BE
BELOW THE EXPECTATIONS OF ANALYSTS AND INVESTORS.
Our revenues and expenses, and in particular our quarterly revenues,
expenses and operating results, have varied in the past and may fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. These factors include:
- The pace of the rollout of our service to our cable partners, including
the impact of substantial capital expenditures and related operating
expenses;
- The rate at which we enter into contracts with cable operators for
additional systems;
- The rate at which end users subscribe to our services;
- Changes in revenue splits with our cable partners;
- Price competition in the Internet and cable industries;
- Capital expenditures and costs related to infrastructure expansion;
- The rate at which our cable partners convert their systems from one-way
to two-way systems;
- End user turnover rates;
- Our ability to protect our systems from telecommunications failures,
power loss and software-related system failures;
- Changes in our operating expenses including, in particular, personnel
expenses;
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- The introduction of new products or services by us or our competitors;
- Our ability to enter into strategic alliances with content providers; and
- Economic conditions specific to the Internet and cable industries, as
well as general economic and market conditions.
In addition, our operating expenses are based on our expectations of the
future demand for our services and are relatively fixed in the short term. We
may be unable to adjust spending quickly enough to offset any unexpected demand
shortfall. A shortfall in revenues in relation to our expenses could have a
material and adverse effect on our business and financial results.
You should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of public
market analysts and investors. In that event, the price of our common stock is
likely to fall.
WE MAY NOT BE ABLE TO ESTABLISH OR MAINTAIN ACCEPTABLE RELATIONSHIPS WITH CABLE
OPERATORS.
Our success depends, in part, on our ability to gain access to cable
customers. We gain that access through agreements with our cable partners. There
can be no assurance that we will be able to establish or maintain relationships
with cable operators. Even if we are able to establish and maintain those
relationships, there can be no assurance that we will be able to do so on terms
favorable to us or in the quantities we need to become profitable. In addition,
our failure to form partnerships with a large number of cable operators as
quickly as possible permits other cable-based broadband service providers to
enter into exclusive agreements and effectively exclude us from the systems
covered by those agreements. Furthermore, in order to rapidly deploy our
services within a market, we typically begin installation of our equipment and
related telecommunications circuits prior to the execution of final
documentation. If we are unable to finalize our contractual relationship with a
cable operator, if the exclusive relationship between us and our cable partners,
or between our cable partners and their cable customers, is impaired, or if we
do not become affiliated with a sufficient number of cable operators, our
business and financial results could be materially and adversely affected.
OUR LARGEST CABLE PARTNER CAN TERMINATE ITS CONTRACT WITH US.
Our largest cable partner is Charter Communications. Charter is owned by
Vulcan Ventures, which beneficially owns 54.2% of our common stock before the
offering. Charter has committed to provide us exclusive access to at least
750,000 homes passed. Charter has equity incentives to provide us additional
homes passed, although it is not obligated to do so. Under our network services
agreement, Charter can terminate our exclusivity rights, on a system-by-system
basis, if we fail to meet performance benchmarks or otherwise breach our
agreement, including our commitment to provide content designated by Vulcan.
Moreover, Charter can terminate our agreement, for any reason, as long as it
purchases the associated cable headend equipment and modems at book value and
pays us a termination fee based on the net present value of the revenues we
otherwise would earn for the remaining term of the agreement from those end
users subscribing to our services as of the date of termination. There can be no
assurances we will meet the benchmarks related to our customer penetration rates
or that Charter will not decide to terminate our agreement for any other reason.
If Charter were to terminate this agreement, in whole or for any material
system, our business and financial results would be materially and adversely
affected.
OUR AGREEMENTS WITH VULCAN VENTURES COULD CONSTRAIN OUR ABILITY TO GENERATE
REVENUES FROM PROVIDING CONTENT AND FUTURE SERVICES OUR END USERS MAY DEMAND.
Under our programming content agreement with Vulcan Ventures, Vulcan has
the right to require us to carry, on an exclusive basis in all cable systems we
serve, content it designates. Vulcan content may include start-up and related
web pages, electronic programming guides, other multimedia information and
telephony services. We will not share in any revenues Vulcan may earn through
the content or telephony
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services it provides. We must provide all equipment necessary for the delivery
of Vulcan content, although Vulcan will reimburse us for any costs we incur in
excess of $3,000 per cable headend. Vulcan cannot charge us for any Vulcan
content through November 25, 2008; after that date we will be obligated to pay
Vulcan for this content at the lowest fee charged to any Internet service
provider who subscribes to Vulcan content.
Vulcan has the right to prohibit us from providing content or telephony
services that compete with Vulcan content in Vulcan's discretion and can require
us to remove competing content. Many industry analysts believe that Internet
access will become increasingly reliant upon revenues from content due to
competitive pressures to provide low cost or even free Internet access. If
Vulcan were to require us to remove our content or substitute its telephony
services for any we might provide, we could lose a source of additional revenues
and might not recover all related costs of providing our content or telephony
services. Vulcan's ability to prohibit us from providing content and telephony
services means that Vulcan's interests are not necessarily aligned with those of
our other stockholders.
ANY AGREEMENT THAT WE MAY SIGN WITH ROAD RUNNER MAY NOT BENEFIT US.
We recently entered into a non-binding letter of intent with ServiceCo LLC,
the entity that provides Road Runner's cable Internet access and content
aggregation services. The letter of intent contemplates that we will provide our
services as a Road Runner subcontractor to cable operators that we and Road
Runner jointly designate to receive our services. We can offer no assurances
that we will be able to reach a definitive agreement with ServiceCo or that, if
reached, a definitive agreement will be of material benefit to us. In addition,
we may not be able to meet the system deployment schedule ultimately proposed by
Road Runner. Moreover, while we expect that only a portion of the homes
contemplated under the letter of intent will be deployed on a partial turnkey
basis, Road Runner could ask us to deploy more partial turnkey homes than we
anticipate. In a partial turnkey solution, we will deliver fewer services and
possibly incur lower costs than in a full turnkey solution, but will also earn a
smaller percentage of the subscription revenue. Since the letter of intent
contemplates that Road Runner will earn one warrant per home passed in cable
systems designated to receive service regardless of whether we deploy a partial
or full turnkey solution, our stockholders could suffer dilution in exchange for
potentially less profitable homes.
INVESTORS MAY SUFFER SUBSTANTIAL DILUTION FROM OTHER TRANSACTIONS.
As an inducement to cause Charter Communications to commit additional
systems to us, we have granted Charter warrants to purchase up to 7.75 million
shares of our common stock at an exercise price of $3.23 per share. These
warrants become exercisable at the rate of 1.55 shares for each home passed
committed to us by Charter in excess of 750,000. To the extent that Charter
becomes eligible to exercise all or a significant portion of these warrants, our
stockholders will experience substantial dilution. In addition, we have granted
Microsoft a warrant to purchase 250,000 shares of our common stock at an
exercise price of 125% of the initial public offering price, with additional
warrants issuable for homes passed above 2.5 million homes committed to us by
Comcast. Our letter of intent with ServiceCo LLC contemplates our granting of
warrants to purchase one share of our common stock at a price of $5 per share up
to a maximum of 5 million shares. In the future, we also may issue additional
stock or warrants to purchase our common stock in connection with our efforts to
expand the distribution of our services. Stockholders could face additional
dilution from these possible future transactions.
DARWIN, OUR FORMER DIGITAL SUBSCRIBER LINE TECHNOLOGY DIVISION, AND OUR
PRINCIPAL STOCKHOLDERS ARE NOT RESTRICTED FROM PROVIDING COMPETING HIGH SPEED
INTERNET ACCESS SERVICES.
In March 1999, we transferred all of the assets used in our digital
subscriber line technology division to Darwin Networks, Inc., a newly-formed
subsidiary, and distributed all of the Darwin common stock to our current
stockholders. Darwin's digital subscriber line technology is an alternative
method of providing high speed Internet access to end users using the telephone
infrastructure. Although Darwin is at an early stage of its development, if
Darwin were to deploy this technology successfully in future partnerships with
wireline telephone providers in markets where we provide our high speed Internet
access, Darwin could
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become one of our competitors. Furthermore, although we will have a warrant to
purchase one million shares of Darwin's common stock, representing approximately
a 20% interest in Darwin on a fully-diluted basis immediately after the
spin-off, if Darwin is successful, our current stockholders, and not those
investing in us in this offering, will realize a greater proportion of Darwin's
success. Neither Darwin nor our principal stockholders, Vulcan Ventures and
Broadband Solutions, will be restricted from providing competing high speed
digital subscriber line Internet access. See "Certain Transactions."
ONE-WAY CABLE SYSTEMS INCREASE OUR OPERATING COSTS AND MAY NOT PROVIDE THE
QUALITY NECESSARY TO ATTRACT CUSTOMERS.
Although our service can operate in one-way cable systems, where data can
be transmitted at high speeds from the cable headend to the end user, the end
user in a one-way system can only transmit data back to the cable headend via a
standard phone line. Because we must support the telephone return component of
the system, we incur higher operating costs in one-way systems. Presently only
one-third of the systems where we are or will soon operate our services are
two-way systems. Over time, however, we expect most, if not all, of our cable
partners to upgrade and or rebuild their plants to provide increased bandwidth
and two-way capabilities. We believe faster uploads and the elimination of phone
line return costs make our service more valuable and may lead to higher customer
penetration rates, which in turn benefits the cable operator through higher
revenue. However, upgrading a cable system can be expensive and time-consuming
for the cable operator. Moreover, we do not require our cable partners to make
these upgrades and they have no legal obligation to do so. Consequently, if our
cable partners do not upgrade to two-way capability at the rate we anticipate,
our financial results may be negatively affected.
IF WE ARE UNABLE TO EFFECTIVELY MANAGE OUR GROWTH, WE MAY EXPERIENCE OPERATING
INEFFICIENCIES AND HAVE DIFFICULTY MEETING DEMAND FOR OUR SERVICES.
To manage our anticipated growth, we must continue to implement and improve
our operational, financial and management information systems; hire, train and
retain additional qualified personnel; continue to expand and upgrade core
technologies; and effectively manage our relationships with our end users,
suppliers and other third parties. Our expansion could place a significant
strain on our services and support operations, sales and administrative
personnel, and other resources. In fact, our predecessor companies had
inadequate accounting controls and procedures in place. While we believe that we
generally have adequate controls and procedures in place for our current
operations, our billing software is not adequate to meet our growth plans. We
are in the process of replacing our billing software with an integrated billing
and customer care software system that we believe is capable of meeting our
planned future needs. We could also experience difficulties meeting demand for
our services. Additionally, if we are unable to provide training and support for
our products, the implementation process will be longer and customer
satisfaction may be lower. Our growth plan may include acquisitions. If we
acquire a company, we could have difficulty assimilating its operations, or
assimilating and retaining its key personnel. In addition if the demand for our
service exceeds our ability to provide our services on a timely basis, we may
lose customers. There can be no assurance that our systems, procedures or
controls will be adequate to support our operations or that our management will
be capable of exploiting fully the market for our products and services. The
failure to manage our growth effectively could have a material adverse effect on
our business and financial results.
IF WE ARE UNABLE TO INCREASE THE CAPACITY AND MAINTAIN THE SPEED OF OUR NETWORK,
WE MAY NOT BE ABLE TO ATTRACT OR RETAIN END USERS.
We face risks related to our ability to increase the transmission capacity
of our network to meet expected end user levels while maintaining superior
performance. While peak downstream data transmission speeds, speeds of the data
transmission from service provider to the customer, across the cable
infrastructure approach 10 Mbps in each 6 megahertz (Mhz) channel, actual
downstream data transmission speeds are likely to be significantly slower,
depending on a variety of factors, including bandwidth capacity constraints
between the cable headend and the Internet backbone, the type and location of
content, Internet traffic, the number of active end users on a given
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cable network node, the number of 6 Mhz channels allocated to us by our cable
partner, the capabilities of the cable modems used and the service quality of
the cable partners' facilities. The actual data delivery speed that an end user
realizes also will depend on the end user's hardware, operating system and
software configurations. There can be no assurance that we will be able to
achieve or maintain a speed of data transmission sufficiently high to enable us
to attract and retain our planned number of end users, especially as the number
of the end users grows. Because end users will share the available capacity on a
cable network node, a single local area distribution point connected via
fiber-optic lines to a cable headend, we may underestimate the capacity we need
to provide in order to maintain peak transmission speeds. A perceived or actual
failure to achieve or maintain sufficiently high speed data transmission could
significantly reduce end user demand for our services or increase costs
associated with customer complaints and have a material adverse effect on our
business and financial results.
OUR NETWORK MAY BE VULNERABLE TO SECURITY RISKS AND UNAUTHORIZED ACCESS TO THOSE
SYSTEMS COULD CAUSE INTERRUPTIONS, DELAYS OR CESSATION OF SERVICE TO OUR END
USERS.
Despite our implementation of industry-standard security measures, our or
our cable partners' networks may be vulnerable to unauthorized access, computer
viruses and other disruptive problems. Internet and online service providers in
the past have experienced, and in the future may experience, interruptions in
service as a result of the accidental or intentional actions of Internet users.
Because the cable infrastructure is a shared medium, it is inherently more
vulnerable to security risks than dedicated telephony technologies such as
digital subscriber lines. Moreover, we have no control over the security
measures that our cable partners and end users adopt. Unauthorized access could
also potentially jeopardize the security of confidential information stored in
the computer systems maintained by us and our end users. These events may result
in liability to us or harm to our end users. Eliminating computer viruses and
alleviating other security problems may require interruptions, delays or
cessation of service to our end users, which could have a material adverse
effect on our business and financial results. In addition, the threat of these
and other security risks may deter potential end users from purchasing our
services, which could have a material adverse effect on our business and
financial results.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND IT MAY NOT BE AVAILABLE ON
ACCEPTABLE TERMS.
The development of our business may require significant additional capital
in the future to fund our operations, to finance the substantial investments in
equipment and corporate infrastructure needed for our planned expansion, to
enhance and expand the range of services we offer and to respond to competitive
pressures and perceived opportunities, such as investment, acquisition and
international expansion activities. To date, our cash flow from operations has
been insufficient to cover our expenses and capital needs. There can be no
assurance that additional financing will be available on terms favorable to us,
or at all. Moreover, Charter can require any lender with liens on our equipment
placed in Charter head ends to deliver to Charter a non-disturbance agreement as
a condition to such financings. We can offer no assurance that we will be able
to obtain secured equipment financing for Charter systems subject to such a
condition or that a potential lender will be able to negotiate acceptable terms
of non-disturbance with Charter. If adequate funds are not available on
acceptable terms, we may be forced to curtail or cease our operations. Moreover,
even if we are able to continue our operations, the failure to obtain additional
financing could have a material and adverse effect on our business and financial
results and may need to delay the deployment of our services. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS ARE NOT YEAR
2000 COMPLIANT.
We have engaged a third-party consultant to complete a Year 2000 assessment
study by the end of May 1999, and plan to implement all necessary remediation
measures by the end of the third quarter of 1999. We are also seeking
verification from our cable partners, vendors and suppliers that they are Year
2000 compliant. Following this assessment study and after contacting these cable
partners, vendors and licensors, we will be better able to make a complete
evaluation of our Year 2000 readiness to
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determine what costs will be necessary to be Year 2000 compliant, and to
determine whether contingency plans need to be developed. Our inability to
correct a significant Year 2000 problem, if one exists, could result in an
interruption in, or a failure of, certain of our normal business activities and
operations. In addition, a significant Year 2000 problem concerning our high
speed access services could cause our users to consider seeking alternate
providers of Internet access. Any significant Year 2000 problem could require us
to incur significant unanticipated expenses to remedy these problems and could
divert management's time and attention, either of which could have a material
adverse effect on our business, results of operation and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance" for information on our state of readiness,
potential risks and contingency plans regarding the Year 2000 issue.
WE MAY BECOME SUBJECT TO RISKS OF INTERNATIONAL OPERATIONS.
We are currently at the early stages of evaluating international expansion
opportunities. If we expand internationally, we would become subject to the
risks of conducting business internationally, including:
- Foreign currency fluctuations, which could result in reduced revenues or
increased operating expenses;
- Inability to locate qualified local partners and suppliers;
- The burdens of complying with a variety of foreign laws and trade
standards;
- Tariffs and trade barriers;
- Difficulty in accounts receivable collection;
- Potentially longer payment cycles;
- Foreign taxes;
- Unexpected changes in regulatory requirements, including the regulation
of Internet access; and
- Uncertainty regarding liability for information retrieved and replicated
in foreign countries.
If we expand internationally, we will also be subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships. There can be no assurance that the risks
associated with our proposed international operations will not materially and
adversely affect our business and financial results.
RISKS RELATED TO THE MARKET FOR HIGH SPEED INTERNET ACCESS
OUR CABLE PARTNERS COULD SELL THEIR SYSTEMS OR BE ACQUIRED, WHICH COULD CAUSE US
TO LOSE CUSTOMERS.
In recent years, the cable television industry has undergone substantial
consolidation. If one of our cable partners is acquired by a cable operator that
already has a relationship with one of our competitors or that does not enter
into a contract with us, we could lose the ability to offer our cable modem
access services in the systems formerly served by our cable partner, which could
have a material and adverse effect on our business and financial results. Many
of the cable operators with whom we have contracts operate multiple systems,
thus increasing the risk to us if they are acquired. Moreover, it is common in
the cable industry for operators to swap systems, which could cause us to lose
our contract for a swapped system. Even though many of our contracts obligate
our cable partners to pay us a termination fee if they sell their system to
another operator who does not assume our contract, the potential termination fee
may not be adequate to ensure that the successor operator assumes our contract,
or to compensate us fully for the loss of future business in that system.
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OUR CABLE PARTNERS COULD LOSE THEIR FRANCHISES, WHICH WOULD CAUSE US TO LOSE
CUSTOMERS.
Cable television companies operate under franchises granted by local or
state authorities that are subject to renewal and renegotiation from time to
time. A franchise is generally granted for a fixed term ranging from five to 15
years, although in many cases the franchise is terminable if the franchisee
fails to comply with the material provisions of its franchise agreement. No
assurance can be given that the cable operators that have contracts with us will
be able to retain or renew their franchises. The non-renewal or termination of
any of these franchises would result in the termination of our contract with the
applicable cable operator.
WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN THE VERY COMPETITIVE MARKET FOR
OUR SERVICES.
We face competition from many competitors with significantly greater
financial, sales and marketing resources, larger customer bases, longer
operating histories, greater name recognition and more established relationships
with advertisers, content and application providers and/or other strategic
partners than we have. We expect the level of this competition to intensify in
the future. We face competition from other cable modem service providers for
partnerships with cable operators and from providers of other types of data and
Internet services for end users. Due to this intense competition, there may be a
time-limited market opportunity for our cable-based high speed access services.
There can be no assurance that we will be successful in achieving widespread
acceptance of our services before competitors offer services similar to our
current offerings, which might preclude or delay purchasing decisions by
potential customers.
Our competitors in the cable-based Internet access market are those
companies that have developed their own cable-based services and market those
services to cable system operators. Other competitors in the cable-based
Internet access market are those companies seeking to establish distribution
arrangements with cable system operators in exurban markets and/or provide
one-way system capability. In addition, other cable system operators have
launched their own cable-based Internet services that could limit the market for
our services. Widespread commercial acceptance of any of these competitors'
products could significantly reduce the potential customer base for our
services, which could have a material adverse effect on our business and
financial results.
We also compete with traditional Internet service providers and other
competing broadband technologies including ISDNs, DSLs, wireless and satellite
data services. Moreover, competitors include long distance inter-exchange
carriers, regional Bell operating companies and other local exchange carriers.
Many of these carriers are offering diversified packages of telecommunications
services, including Internet access, and could bundle these services together,
putting us at a competitive disadvantage. Widespread commercial acceptance of
any of these competing technologies or competitors' products could significantly
reduce the potential customer base for our services, which could have a material
adverse effect on our business and financial results. See
"Business -- Competition."
OUR MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL CHANGE AND OUR SERVICES COULD
BECOME OBSOLETE OR FAIL TO GAIN MARKET ACCEPTANCE.
The market for our services is characterized by rapid technological
advances, evolving industry standards, changes in end user requirements and
frequent new service introductions and enhancements. For example, the North
American cable industry has adopted a set of interface specifications, known as
"DOCSIS," for hardware and software to support cable-based data delivery using
cable modems. Our ability to adapt to rapidly changing technology and industry
standards, such as DOCSIS, and to develop and introduce new and enhanced
products and service offerings will be significant factors in maintaining or
improving our competitive position and our prospects for growth. If technologies
or standards applicable to our services become obsolete or fail to gain
widespread consumer acceptance, then our business and financial results will be
materially and adversely affected.
We currently anticipate that we will use a significant portion of the
proceeds from this offering to acquire headend, cable modem and other related
capital equipment. The technology underlying that equipment is continuing to
evolve. It is possible that the equipment we acquire could become obsolete
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prior to the time we would otherwise intend to replace it, which could have a
material adverse effect on our business and financial results.
WE DEPEND ON A DATA TRANSMISSION INFRASTRUCTURE LARGELY MAINTAINED BY THIRD
PARTIES OR SUBJECT TO DISRUPTION BY EVENTS OUTSIDE OUR CONTROL.
Our success will depend upon the capacity, reliability and security of the
infrastructure used to carry data between our end users and the Internet. A
significant portion of that infrastructure is owned by third parties.
Accordingly, we have no control over its quality and maintenance. For example,
we rely on our cable partners to maintain their cable infrastructures. We also
rely on other third parties to provide a connection from the cable
infrastructure to the Internet. Currently, we have transit agreements with
UUNet, a division of MCI WorldCom, and others to support the exchange of traffic
between our data servers, the cable infrastructure and the Internet. Our
operations also depend on our ability to avoid damages from fires, earthquakes,
floods, power losses, telecommunications failures, network software flaws,
transmission cable cuts, Year 2000 problems and similar events. The occurrence
of any of these events could interrupt our services. The failure of the Internet
backbone, our servers, or any other link in the delivery chain, whether from
operational disruption, natural disaster or otherwise, resulting in an
interruption in our operations could have a material adverse effect on our
business and financial results.
WE MAY BE HELD LIABLE FOR DEFAMATORY OR INDECENT CONTENT, AS WELL AS INFORMATION
RETRIEVED OR REPLICATED.
In part, our business involves supplying information and entertainment to
customers over the cable systems of our cable system partners. Accordingly we
face the same types of risks that apply to all businesses that publish or
distribute information, such as potential liability for defamation, libel,
invasion of privacy and similar claims, as well as copyright or trademark
infringement and similar claims. A number of third parties have claimed that
they hold patents covering various forms of online transactions or online
technologies. In addition, our errors and omissions and liability insurance may
not cover potential patent or copyright infringement claims and may not
adequately indemnify us for any liability that may be imposed.
The law relating to the liability of Internet and online service providers
for information carried or disseminated through their networks is unsettled.
There are some federal laws regarding the distribution of obscene or indecent
material over the Internet under which we are subject to potential liability.
These risks are mitigated by two federal laws. One, passed in 1996, immunizes
Internet service providers from liability for defamation and similar claims for
materials the Internet service provider did not create, but merely distributed.
The other, passed in 1998, creates a "safe harbor" from copyright infringement
liability for Internet service providers who comply with its requirements, which
we intend to do. These laws apply only in the United States; if we expand our
operations to other countries, our potential liability under the laws of those
countries could be greater.
WE MAY BECOME SUBJECT TO BURDENSOME GOVERNMENT REGULATION.
The part of our business that involves installing and maintaining the
equipment used by cable systems to transmit high-speed data in a
computer-accessible format is not regulated, but cable businesses are. Changes
in cable regulations, as they relate to our service, could negatively affect our
business in several ways. First, cable operators usually classify our service as
a "cable service." If our service is not considered a cable service, some cable
franchising authorities, in most cases usually cities or counties, might claim
that our cable partners need a separate franchise to offer it. This franchise
may not be obtainable on reasonable terms, or at all. In the alternative, even
if the service is treated as cable service, local franchising authorities may
seek to impose "non-discrimination" or "open access" obligations on our cable
partners as a condition of franchise transfer or renewal. Also, even if our
service is not considered a cable service, it might be treated as a
"telecommunications service," which could subject our cable partners, and
possibly us, to federal and state regulation as "telecommunications carriers."
This could negatively affect our business in various ways. For example, if we or
our cable partners were either classified as telecommunications common carriers,
or otherwise subject to common carrier-like access and non-discrimination
requirements in the provision of our Internet over cable service, we or they
could potentially
15
<PAGE> 22
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 plants, and this service may be regulated in the future as a common
carrier telecommunications service. Moreover, we or our cable partners might
then have to get a "telecommunications franchise" from some localities, which
might not be available on reasonable terms, or at all. In addition, our
contracts with our cable partners make us the exclusive supplier of high-speed
data on the cable systems where our service is offered. Firms such as America
Online and large telephone companies are seeking to have regulators ban such
exclusive arrangements. If such arrangements are banned, we could face
additional competition from other Internet access providers using the cable
system to connect to their customers, which could have a material adverse effect
on our business and financial results. Finally, any future regulatory decisions
that make DSL technology services easier for competing telephone companies to
deploy over normal telephone lines, and less expensive for customers to buy,
could negatively affect our business.
WE DEPEND ON OUR KEY PERSONNEL AND MAY HAVE DIFFICULTY ATTRACTING AND RETAINING
THE SKILLED EMPLOYEES WE NEED TO EXECUTE OUR GROWTH PLANS.
Our future success depends on the continued service of our key personnel,
especially our President, Chief Operating Officer and Chief Technology Officer.
We do not carry key person life insurance on most of our personnel. Given our
early stage and plans for rapid expansion, the loss of the services of any of
our executive officers or the loss of the services of other key employees could
have a material adverse effect on our business and financial results. Our future
success also depends on our ability to attract, retain and motivate highly
skilled employees, particularly engineering and technical personnel. Competition
for employees in our industry is intense. We may not be able to retain our key
employees or attract, assimilate or retain other highly qualified employees in
the future. From time to time we have experienced, and we expect to continue to
experience in the future, difficulty in hiring and retaining highly skilled
employees.
RISKS RELATED TO THE OFFERING
BECAUSE OF OUR RELATIONSHIP WITH VULCAN VENTURES, NEW INVESTORS WILL HAVE LITTLE
INFLUENCE OVER MANAGEMENT DECISIONS.
Vulcan will beneficially own approximately 38.8% of our outstanding common
stock following the completion of the offering. Vulcan's wholly-owned
subsidiary, Charter Communications, also has warrants to purchase up to an
additional 7.75 million shares of our common stock, which become exercisable at
the rate of 1.55 shares per home passed committed to us by Charter, in excess of
750,000. Accordingly, Vulcan will be able to significantly influence and
possibly exercise control over most matters requiring approval by our
stockholders, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also have the effect
of delaying or preventing a change in control. In addition, conflicts of
interest may arise as a consequence of Vulcan's control relationship with us,
including:
- conflicts between Vulcan, as our controlling stockholder, and our other
stockholders, whose interests may differ with respect to, among other
things, our strategic direction or significant corporate transactions,
- conflicts related to corporate opportunities that could be pursued by us,
on the one hand, or by Vulcan, on the other hand, or
- conflicts related to existing or new contractual relationships between
us, on the one hand, and Vulcan and its other affiliates, on the other
hand.
In particular, Vulcan is the owner of Charter, currently our largest cable
partner. Additionally, Vulcan has the exclusive right to provide or designate
the first page our end users see when they log on to our service and, if it
provides that first page, will be entitled to all of the related revenues.
Moreover, Vulcan can
16
<PAGE> 23
prohibit us from providing content that competes with content it chooses to
provide, and can prohibit us from providing telephony services if it chooses to
provide those services. See "Certain Transactions."
THE FUTURE SALE OF SHARES MAY HURT OUR MARKET PRICE.
A substantial number of shares of our common stock are available for resale
within a short period of time after the offering. If our stockholders sell
substantial amounts of our common stock in the public market following the
offering, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity securities in the future at
times and prices that we deem appropriate. See "Shares Eligible for Future
Sale."
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK; OUR STOCK PRICE IS LIKELY
TO BE HIGHLY VOLATILE.
Prior to the offering, there has been no public market for our common
stock. We cannot predict the extent to which investor interest in us will lead
to the development of an active trading market in our stock or how liquid that
market might become. The initial public offering price for the shares will be
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in any future
trading market. The stock market has experienced extreme price and volume
fluctuations. In particular, the market prices of the securities of
Internet-related companies have been especially volatile. In the past, companies
that have experienced volatility in the market price of their stock have been
the object of securities class action litigation. If we were the object of
securities class action litigation, it could result in substantial costs and a
diversion of our management's attention and resources.
WE WILL HAVE BROAD DISCRETION IN USING THE PROCEEDS OF THIS OFFERING.
Our management will have broad discretion over the allocation of the net
proceeds from the offering as well as over the timing of their expenditure. As a
result, investors will be relying upon management's judgment with only limited
information about its specific intentions for the use of the proceeds.
WE HAVE ANTI-TAKEOVER PROVISIONS.
Certain provisions of our certificate of incorporation, our bylaws and
Delaware law, in addition to the concentration of ownership in Vulcan, could
make it difficult for a third party to acquire us, even if doing so might be
beneficial to you or our other stockholders.
NEW INVESTORS WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION.
Investors purchasing shares in the offering will incur immediate and
substantial dilution in net tangible book value per share. To the extent
outstanding options and warrants to purchase common stock are exercised in the
future, there will be further dilution to new investors. See "Dilution."
17
<PAGE> 24
SALE OF SHARES TO CISCO, COM 21 AND MICROSOFT
Cisco, Com21 and Microsoft have each agreed to purchase shares of our
common stock concurrently with the offering. Cisco and Com21 are two of our
major equipment suppliers, and we recently entered into a strategic marketing
relationship with Microsoft. Each of them will purchase shares at the initial
public offering price per share, net of the underwriting discount. In addition,
each has represented that it will be purchasing such shares for investment and
not with a view to resale, and has agreed to a 180-day lock-up following the
completion of the offering. The aggregate purchase prices they will pay and the
numbers of shares of our common stock they would purchase based on the estimated
public offering price of $12.00, net of the underwriters discount, are as
follows:
<TABLE>
<CAPTION>
INVESTMENT SHARES
----------- ---------
<S> <C> <C>
Cisco....................................................... $ 7,500,000 672,043
Com21....................................................... $ 1,000,000 89,606
Microsoft................................................... $10,000,000 896,057
----------- ---------
$18,500,000 1,657,706
=========== =========
</TABLE>
We believe the sale of shares to Cisco, Com21 and Microsoft will enhance
our ongoing relationships with these key strategic partners and such strategic
relationships better position us to compete in the high speed cable modem
Internet access market.
USE OF PROCEEDS
We estimate the net proceeds to us from the offering, after deducting the
underwriting discounts and offering expenses payable by us, and the sale of
$18.5 million of our common stock in the concurrent offering to Cisco, Com21 and
Microsoft, will be approximately $161.6 or $183.3 if the underwriters' exercise
their over-allotment option in full, assuming an initial public offering price
of $12.00 per share.
We expect to use the net proceeds of the offering to fund capital
expenditures to be incurred in the deployment of our services in new and
existing cable systems, to fund operating losses, and for working capital and
other general corporate purposes. We may also use a portion of the proceeds for
acquisitions or other investments. However, we have no present understanding or
agreement relating to any material acquisition or investment.
We have not yet determined the amount of net proceeds to be used
specifically for each of the foregoing purposes. Accordingly, management will
have significant flexibility in applying the net proceeds of the offering.
Pending their use, we intend to invest the net proceeds of the offering in high
quality, interest-bearing instruments. See "Risk Factors -- Risks Related to the
Offering -- We will have broad discretion in using the proceeds of this
offering."
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
inception and we do not expect to pay cash dividends for the foreseeable future.
We currently intend to retain future earnings, if any, to finance the expansion
of our business.
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<PAGE> 25
DILUTION
As of March 31, 1999, our net tangible book value on a pro forma basis
giving effect to the sale of $25 million of preferred stock in April 1999 and
the conversion of all our convertible preferred stock into common stock upon
consummation of the offering was $37.3 million or $1.00 per share of common
stock. "Net tangible book value" per share represents the amount of our total
tangible assets reduced by the amount of our total liabilities, divided by the
number of shares of common stock outstanding. Immediate dilution is the
difference between the purchase price per share paid by a new investor and the
net tangible book value of each share immediately after the offering. As of
March 31, 1999, our net tangible book value, on a pro forma basis as further
adjusted for the sale of the 13,000,000 shares offered in the offering after
deducting the underwriting discounts and commissions and other estimated
offering expenses and an estimated 1,657,706 shares in the aggregate to be sold
to Cisco, Com21 and Microsoft and application of the net proceeds from such
sales of $161.6 million, would have been approximately $3.83 per share. This
represents an immediate increase of $2.83 per share to existing shareholders and
an immediate dilution of $8.17 per share to new investors which represents a
significant disparity between the price paid by new investors for the shares
sold in the offering and the net tangible book value of such shares. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of March
31, 1999............................................. $1.00
Increase attributable to Cisco, Com21 and Microsoft.... .32
Increase attributable to new investors................. 2.51
-----
Net tangible book value per share after the offering........ 3.83
------
Dilution per share to new investors......................... $ 8.17
======
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1999,
the differences between the total consideration paid and the average price per
share paid by existing stockholders and new investors with respect to the number
of shares of common stock purchased from us based on the assumed initial public
offering price:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 37,275,166 71.8% $ 58,200,000 25.0% $ 1.56
Cisco, Microsoft and Com21...... 1,657,706 3.2% 18,500,000 8.0% 11.16
New investors................... 13,000,000 25.0% 156,000,000 67.0% 12.00
---------- ----- ------------ ----- ------
Total...................... 51,932,872 100.0% $232,700,000 100.0% $ 4.48
========== ===== ============ ===== ======
</TABLE>
The foregoing tables and calculations exclude options and warrants which,
if exercised, would cause further dilution, which are more fully described on
page 4. See "Summary -- The Offering."
19
<PAGE> 26
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999. Our
capitalization is presented:
- On an actual basis; and
- On a pro forma basis to reflect the sale to Vulcan Ventures at $5.00
per share of 5 million shares of Series C convertible preferred stock
in April 1999 and a $60 million charge to accumulated deficit to
increase the carrying value of the preferred stock to its redemption
value.
- On a pro forma as adjusted basis to reflect:
- the sale of the 13,000,000 shares offered hereby at an assumed
initial public offering price of $12.00 per share, after deducting
underwriting discounts and estimated offering expenses payable by
us;
- the sale of an estimated 1,657,706 shares of common stock in the
aggregate to Cisco, Com21 and Microsoft at the assumed initial
public offering price of $12.00, net of the underwriting discount;
- the automatic conversion of all outstanding shares of Series A,
Series B and Series C convertible preferred stock into 31,000,000
shares of common stock concurrently with the completion of the
offering; and
- the issuance of 75,166 shares of common stock to the holders of our
Series A and Series B convertible preferred stock as a payment in
kind for outstanding dividends.
20
<PAGE> 27
You should read this information in conjunction with our financial
statements appearing elsewhere in this prospectus, and with the sections of the
prospectus entitled "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 7,350 $ 32,350 $ 193,930
========= ========= =========
Notes payable -- related parties and capital lease
obligations, less current portions...................... $ 806 $ 806 $ 806
--------- --------- ---------
Mandatorily redeemable convertible preferred stock:
Series A, $.01 par value, 5,000,000 shares
designated, issued and outstanding on an actual
basis and pro forma basis; no shares authorized,
issued or outstanding on a pro forma as adjusted
basis.............................................. 85,000 85,000 --
Series B, $.01 par value, 10,000,000 shares
designated, issued and outstanding on an actual
basis and pro forma basis; no shares authorized,
issued or outstanding on a pro forma as adjusted
basis.............................................. 170,000 170,000 --
Series C, $.01 par value, 5,000,000 shares designated
and no shares issued or outstanding on an actual
basis; 5,000,000 shares issued and outstanding on a
pro forma basis; no shares authorized, issued or
outstanding on a pro forma as adjusted basis....... -- 85,000 --
Stockholders' (deficit) equity:
Preferred stock, $.01 par value, 20,000,000 shares
authorized, 20,000,000 shares designated on an
actual basis and a pro forma basis; 10,000,000
shares authorized, none designated, issued and
outstanding on a pro forma as adjusted basis....... -- -- --
Common stock, $.01 par value, 77,500,000 shares
authorized on an actual basis and a pro forma
basis; 6,200,000 shares issued and outstanding on
an actual basis and pro forma basis; 400,000,000
shares authorized on a pro forma as adjusted basis;
51,932,872 shares issued and outstanding on a pro
forma as adjusted basis............................ 62 62 519
Class A common stock, no shares authorized on an
actual basis and pro forma basis; 100,000,000
shares authorized on a pro forma as adjusted basis;
none issued and outstanding on a pro forma as
adjusted basis.....................................
Additional paid-in capital........................... 7,856 7,856 508,979
Deferred compensation................................ (1,481) (1,481) (1,481)
Accumulated deficit.................................. (245,371) (305,371) (305,371)
--------- --------- ---------
Total stockholders' (deficit) equity............ (238,934) (298,934) 202,646
--------- --------- ---------
Total capitalization....................... $ 16,872 $ 41,872 $ 203,452
========= ========= =========
</TABLE>
The foregoing table does not include options and warrants, which are more fully
described on page 4. See "Summary -- The Offering."
21
<PAGE> 28
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The balance sheet data at December 31, 1998 and the statement of operations
data for the period from April 3, 1998 (Inception) through December 31, 1998
have been derived from financial statements audited by PricewaterhouseCoopers,
LLP, independent accountants appearing elsewhere in this prospectus.
We prepared the unaudited pro forma financial information for the year
ended December 31, 1998 by combining the historical results of the two companies
we acquired, High Speed Access Network, Inc. and CATV.net, Inc., with our
historical results. We have presented this information to give you a better
picture of what our business might have looked like if we had acquired both of
these companies as of January 1, 1998. These companies may have performed
differently if they had been combined with our operations. You should not rely
on the unaudited pro forma information as being indicative of the historical
results that we would have had after the acquisitions or the future results that
we will experience.
The selected financial data at March 31, 1999 and for the three months then
ended have been derived from unaudited financial statements appearing elsewhere
in this prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, which we consider necessary for
the fair presentation of our financial position and results of operations for
this period. Operating results for the three months ended March 31, 1999 are not
necessarily indicative of the results that we will experience for the entire
year. Historical results are not necessarily indicative of the results to be
expected in the future.
The pro forma basic and diluted net loss per share for the historical
period April 3, 1998 through December 31, 1998 and for the three months ended
March 31, 1999 gives effect to the assumed conversion of our Series A and Series
B convertible preferred stock into shares of common stock at the date the shares
of convertible preferred stock were issued. The pro forma basic and diluted net
loss per share for the combined pro forma year ended December 31, 1998 assumes
that (a) our Series A convertible preferred stock had been issued on January 1,
1998 and immediately converted into shares of common stock and (b) that our
Series B convertible preferred stock had been immediately converted into common
stock upon the respective dates of issuance of the Series B convertible
preferred stock. As a result of such assumed conversions, dividends and
accretion of redemption value of the preferred stock are excluded from the net
loss available to common stockholders.
<TABLE>
<CAPTION>
COMBINED
APRIL 3, 1998 PRO FORMA THREE MONTHS
(INCEPTION) YEAR ENDED ENDED
TO DECEMBER 31, 1998 DECEMBER 31, 1998 MARCH 31, 1999
-------------------- ----------------- --------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................................ $ 337 $ 450 $ 299
Costs and expenses:
Operating costs........................ 2,067 2,401 2,123
Engineering............................ 2,266 2,372 1,485
Sales and marketing.................... 3,696 4,078 2,038
General and administrative............. 2,323 2,616 1,286
Non-cash compensation expense from the
issuance of stock options............ 947 1,523
---------- ---------- ----------
Total costs and expenses.......... 10,352 12,414 8,455
---------- ---------- ----------
Loss from operations........................ (10,015) (11,964) (8,156)
Interest income, net........................ 40 41 119
---------- ---------- ----------
Net loss.................................... (9,975) (11,923) (8,037)
</TABLE>
22
<PAGE> 29
<TABLE>
<CAPTION>
COMBINED
APRIL 3, 1998 PRO FORMA THREE MONTHS
(INCEPTION) YEAR ENDED ENDED
TO DECEMBER 31, 1998 DECEMBER 31, 1998 MARCH 31, 1999
-------------------- ----------------- --------------
<S> <C> <C> <C>
Accretion of redemption value of mandatorily
redeemable convertible preferred stock and
mandatorily redeemable convertible
preferred stock dividends................. (120,667) (120,667) (105,750)
---------- ---------- ----------
Net loss available to common stockholders... $ (130,642) $ (132,590) $ (113,787)
========== ========== ==========
Basic and diluted net loss per share........ $ (21.07) $ (21.39) $ (18.35)
Pro forma basic and diluted net loss per
share (unaudited)......................... (.71) (.76) $ (.27)
Weighted average shares outstanding used in
basic and diluted per share calculation... 6,200,000 6,200,000 6,200,000
Weighted average shares outstanding used in
pro forma basic and diluted per share
calculation (unaudited)................... 14,091,935 15,680,904 29,450,000
</TABLE>
The pro forma column in the Balance Sheet Data below is adjusted to give
effect to the sale for $5.00 per share of $25 million of our Series C
convertible preferred stock to Vulcan Ventures in April 1999 and a $60 million
charge to accumulated deficit to increase the carrying value of the Preferred
Stock to its redemption value;
The pro forma as adjusted column in the Balance Sheet Data below is
adjusted to give effect to the pro forma adjustments as well as:
- The automatic conversion upon completion of the offering of all
outstanding shares of Series A, Series B and Series C convertible
preferred stock into 31,000,000 shares of common stock;
- The sale of an estimated 1,657,706 shares of common stock in the
aggregate to Cisco, Com21 and Microsoft at an assumed price of $12.00 per
share, net of the underwriting discount; and
- The sale of 13,000,000 shares in this offering at an assumed price of
$12.00 per share, after deducting underwriting discounts and offering
expenses.
- The issuance of 75,166 shares of common stock to the holders of Series A
and Series B convertible preferred stock as a payment in kind for
outstanding dividends.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
DECEMBER 31, 1998 ACTUAL PRO FORMA AS ADJUSTED
----------------- --------- --------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 17,888 $ 7,350 $ 32,350 $193,930
Working capital........................... 14,162 1,459 26,459 188,039
Total assets.............................. 27,504 23,297 48,297 209,877
Notes payable -- related parties and
capital lease obligations, less current
portion................................. 749 806 806 806
Mandatorily redeemable convertible
preferred stock......................... 149,250 255,000 340,000 --
Total stockholders' (deficit) equity...... (126,427) (238,934) (298,934) 202,646
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 MARCH 31, 1999 APRIL 29, 1999
----------------- -------------- --------------
<S> <C> <C> <C>
OTHER DATA:
Systems under contract............................ 41 46 51
Homes passed under contract....................... 863,000 912,000 982,000
Homes marketed(1)................................. 145,000 319,000 319,000
Residential cable modem end users................. 1,619 3,169 3,510
</TABLE>
- ---------------
(1) Homes marketed represents the number of homes passed in systems where we are
actively offering our cable modem Internet access services.
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<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the financial statements included in
this prospectus. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ significantly
from those anticipated in these forward-looking statements as a result of
factors including, but not limited to, those set forth under "Risk Factors" and
included in other portions of this prospectus.
OVERVIEW
We are a leading provider of high speed Internet access via cable modem to
residential and commercial end users in exurban areas. We generate revenue
primarily from the monthly fees we receive from end users for our cable
modem-based Internet access service and for the traditional dial-up services we
offer as part of our end user acquisition strategy. We report these revenues net
of the percentage split we pay to our cable partners. For promotional purposes,
we often provide new end users with 30 days of free Internet access when they
subscribe to our services. As a result, our revenue does not reflect new end
users until the end of the promotional period. We also receive revenues from
renting cable modems to end users. Although we also earn revenues from the
one-time fees we charge for the installation of the cable modem at the end
user's home or business, we frequently waive this fee.
Our revenue from dial-up services currently is a significant part of our
total revenue. However, we expect this business mix to shift over time as our
dial-up end users migrate to high speed Internet access and as end users
generally become aware of the benefits of high speed Internet access. Moreover,
although we expect cable modem rentals to be a significant part of our revenue
during the next two years, we expect our cable modem rental income to decline as
cable modems become commercially available at lower costs through retail stores
and as they become standard features of personal computers. However, we will
save the cost of purchasing and installing cable modems for end users. In the
future we expect to earn revenues from the local content we provide and from
additional services such as Internet telephony.
Our expenses consist of the following:
- Operating costs, which consist primarily of salaries for help desk and
network operations center employees; telecommunications expenses,
including charges for Internet backbone and telecommunications circuitry;
allocated cost of facilities; costs of installing cable modems for our
end users; and depreciation and maintenance of equipment. In one-way
cable systems, we must support the telephone return path from the local
telephone company's central office to the cable headend. Accordingly, we
incur greater telecommunications costs in a one-way system than we incur
in a two-way system. Consequently, the rate at which our cable partners
upgrade their systems to two-way capability will affect our operating
margins. We expect our operating costs to grow significantly as we roll
out services in new systems. Many of our operating costs are relatively
fixed in the short term. However, as we add new end users we will be able
to spread these costs over a larger revenue base, and, accordingly,
decrease our costs per subscriber and improve our operating margins.
- Engineering expenses, which consist primarily of salaries and related
costs for network design and installation of the telecommunications and
data network hardware and software; system testing and project management
expenses; allocated cost of facilities; and depreciation and maintenance
on the equipment used in our engineering processes. We expect our
engineering expenses to grow significantly as we introduce our services
in new markets and expand our network.
- Sales and marketing expenses, which consist primarily of salaries,
commissions and related personnel expenses and costs associated with the
development of sales and marketing materials, database market analytics,
direct mail and telemarketing. We expect that our sales and marketing
expenses will increase significantly as we pursue our growth strategy.
24
<PAGE> 31
- General and administrative expenses, which consist primarily of salaries
for our executive, administrative, finance and human resource personnel;
amortization of goodwill; and fees for professional services. We expect
to hire additional support personnel and to incur other additional
expenses associated with being a public company, including costs of
directors' and officers' insurance, and increased legal and accounting
fees.
- Non-cash compensation expense from the issuance of stock options which
equals the excess of the fair market value of our stock at the time of
grant over the exercise price of the stock options granted to employees
and directors amortized over the vesting period.
RESULTS OF OPERATIONS FOR THE PERIOD APRIL 3, 1998 (INCEPTION) TO DECEMBER 31,
1998 AND FOR THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
On April 3, 1998, we acquired CATV.net, Inc. and High Speed Access Network,
Inc. in a transaction recorded under the purchase method of accounting. We had
no operations prior to that acquisition. Accordingly, the following discussion
reflects our results of operations since April 3, 1998.
Revenues. Net revenue consists primarily of net monthly subscription fees for
cable modem-based and traditional dial-up Internet services, and cable modem
rental income. Total net revenue was $337,000 for the period April 3, 1998
(Inception) to December 31, 1998 ("Inception Period") and $299,000 for the first
quarter of 1999. For the Inception Period, cable modem based subscription fees
contributed approximately 45% of the net revenue, traditional dial up services
contributed 35% and cable modem rental and installation fees each contributed
approximately 10%. For the first quarter of 1999, cable modem based subscription
fees contributed approximately 48% of our net revenue, traditional dial up
services contributed 35%, cable modem rental fees contributed 15% and
installation charges contributed 2%.
Costs and Expenses
Operating. Operating costs were $2.1 million for the Inception Period and
$2.1 million for the first quarter of 1999. During each period, we incurred
significant personnel cost to staff our network operations center and help desk
on a full-time basis. Telecommunications expenses were significant for the
periods as we rolled out our service to new markets.
Engineering. Engineering expenses were $2.3 million for the Inception
Period and $1.5 million for the first quarter of 1999. During each period we
hired additional technical personnel to support the installation of cable
headend hardware and software in our cable partners' systems. We also incurred
significant expenses for network design, system testing and project management,
and for evaluation of new equipment and possible new product offerings.
Sales and Marketing. Sales and marketing expenses were $3.7 million for the
Inception Period and $2.0 million for the first quarter of 1999. During the
periods we incurred substantial sales and marketing expenses, primarily due to
the expansion of our sales force, related travel and entertainment expenses, and
marketing activities associated with gaining residential and commercial end
users and new cable partners, including expenditures for trade shows and
advertising.
General and Administrative. General and administrative expenses were $2.3
million for the Inception Period and $1.3 million for the first quarter of 1999.
During the periods we hired personnel to implement procedures and controls to
support our planned expansion and to administer finance, legal and human
resource functions. General and administrative expenses also included
amortization of goodwill of $626,000 for the Inception Period and $212,000 for
the first quarter of 1999 resulting from our acquisitions of CATV.net and High
Speed Access Network.
Non-cash Compensation from the issuance of Stock Options. Non-cash
compensation expense from the issuance of stock options for the first quarter of
1999 was $1.5 million which represents the excess of the fair market value of
our common stock over the exercise price of the stock options granted. This
expense is principally related to 189,875 options issued to our directors in
January 1999 which immediately
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vested. In addition, we will recognize expense in future periods, principally
related to the issuance of 140,740 options to employees in January 1999. The
amount of this compensation expense is recognized over the vesting period of the
option, which is generally five years. Upon completion of this offering, a
non-cash stock compensation charge of approximately $1.1 million will be
recognized for stock options which vest contemporaneously with the offering.
We also could incur material non-cash charges related to the issuance of
warrants to our cable partners. We will recognize an addition to equity for the
fair value of any warrants issued, and recognize the related expense over the
term of the service agreement with the cable operator. The amount of any such
charges is not determinable until such warrants are earned.
Net Interest Income. Net interest income was $40,000 for the Inception
Period and $119,000 for the first quarter of 1999. Net interest income
represents interest earned by us on our cash and short-term cash investments,
less interest expense on capital lease obligations and notes payable.
Income Taxes. At December 31, 1998, we had net operating loss
carryforwards for federal and state tax purposes of approximately $8.5 million,
which will expire at various times through 2018. At December 31, 1998, we had a
net deferred tax asset of $3.8 million relating principally to our net operating
loss. Our ability to realize the value of our deferred tax asset depends on our
future earnings, if any, the timing and amount of which are uncertain. We have
recorded a valuation allowance for the entire net deferred tax asset as a result
of those uncertainties. Accordingly, we did not record any income tax benefit
for net losses incurred from April 3, 1998 (Inception) through March 31, 1999.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data for our
four most recent fiscal quarters. This information has been derived from our
unaudited financial statements. In our opinion, this information has been
prepared on the same basis as the annual consolidated financial statements and
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for such periods.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS
APRIL 3, 1998 ENDED ENDED ENDED
TO SEPTEMBER 30, DECEMBER 31, MARCH 31,
JUNE 30, 1998 1998 1998 1999
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Net revenues.......................... $ 91 $ 101 $ 145 $ 299
Costs and expenses:
Operating costs..................... 261 673 1,133 2,123
Engineering......................... 398 705 1,163 1,485
Sales and marketing................. 657 1,434 1,605 2,038
General and administrative.......... 564 784 975 1,286
Non-cash compensation expense from
the issuance of stock options.... -- -- -- 1,523
------- ------- ------- -------
Total costs and expenses.... 1,880 3,596 4,876 8,455
------- ------- ------- -------
Loss from operations.................. (1,789) (3,495) (4,731) (8,156)
Interest income (expense), net........ (4) (11) 55 119
------- ------- ------- -------
Net loss before accretion of
redemption value of
mandatorily redeemable
convertible preferred
stock and mandatorily
redeemable convertible
preferred stock
dividends................. $(1,793) $(3,506) $(4,675) $(8,037)
======= ======= ======= =======
</TABLE>
Net revenues increased in each quarter as a result of the expansion of our
services.
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Quarterly expenses increased sequentially as a result of increased business
activities. As our Internet access service has been initiated in additional
geographic areas, we have incurred added marketing, customer service, personnel,
and telecommunications expenses. Total cost and expenses for the first quarter
of 1999 increased 173% in comparison to the quarter ended December 31, 1998. The
company increased its business activities and expanded its workforce due to the
rollout of our services in the Charter systems and to increase our capacity to
rollout service into new markets. Also, a $1.5 million non-cash charge related
to the grant of compensatory stock options contributed to the increase in
expenses. We believe continued expansion of our operations, as well as expansion
of our Internet backbone network, is critical to the achievement of our goals
and we anticipate that these costs and expenses will continue to increase in
each quarter for the foreseeable future.
Our operating results have varied on a quarterly basis during our short
operating history and may fluctuate significantly in the future. In addition,
the results of any quarter do not indicate the results to be expected for a full
fiscal year. Finally, as a result of the foregoing factors, our annual or
quarterly results of operations may be below the expectations of public market
analysts or investors, in which case the market price of the common stock could
be materially and adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
We had significant negative cash flows from operating activities for the
period ended December 31, 1998 and for the first quarter of 1999. Cash used in
operating activities was $7.2 million for the Inception Period and $4.8 million
for the first quarter of 1999. In 1998, the use of cash was primarily due to a
net loss of $10.0 million and an increase in current assets of $142,000, offset
by non-cash expenses of $1.3 million and increases in accounts payable, accrued
expenses and other current liabilities of $1.6 million. In the first quarter of
1999, the use of cash was primarily due to a net loss of $8.0 million, offset by
non-cash expenses of $2.4 million and $800,000 in net changes in assets and
liabilities.
Cash used in investing activities was $3.3 million for the Inception Period
and $5.7 million for the first quarter of 1999. Cash used for investing
activities for these periods was primarily the result of capital expenditures.
Capital expenditures were $4.2 million for the Inception Period and $5.5 million
for the first quarter of 1999. The principal capital expenditures incurred
during these periods were for the purchase of headend data network hardware and
software, cable modems and equipment necessary for monitoring our network. The
higher level of capital expenditures during the first quarter of 1999 reflects
our expansion into new markets. During the Inception Period, $907,000 of the
capital expenditures were funded with cash acquired in the acquisition of
CATV.net and High Speed Access Network.
Cash provided by financing activities was $28.4 million for the Inception
Period resulting primarily from $27.6 million in net proceeds from the issuance
of convertible preferred stock. Cash used by financing activities for the first
quarter of 1999 was $17,000 resulting from payments on long-term debt and
capital lease repayments.
We expect to experience substantial negative cash flow from operating
activities and negative cash flow from investing activities for at least the
next several years due to continued deployment of our services into new markets
and the enhancement of our network and operations. Our future cash requirements
will depend on a number of factors including:
- The pace of the rollout of our service to our cable partners, including
the impact of substantial capital expenditures and related operating
expenses;
- The rate at which we enter into contracts with cable operators for
additional systems;
- The rate at which end users subscribe to our services;
- Changes in revenue splits with our cable partners;
- Price competition in the Internet and cable industries;
- Capital expenditures and costs related to infrastructure expansion;
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- The rate at which our cable partners convert their systems from one-way
to two-way systems;
- End user turnover rates;
- Our ability to protect our systems from telecommunications failures,
power loss and software-related system failures;
- Changes in our operating expenses including, in particular, personnel
expenses;
- The introduction of new products or services by us or our competitors;
- Our ability to enter into strategic alliances with content providers; and
- Economic conditions specific to the Internet and cable industries, as
well as general economic and market conditions.
We expect to incur approximately $20 million of capital expenditures in 1999
principally related to the installation of headend data network hardware and
software, cable modems, central network hardware and software for e-mail,
network monitoring and web hosting and a billing and customer care system.
Actual capital expenditures will be significantly affected by the rate at which
end users subscribe for our cable modem Internet access services, which requires
us to purchase a cable modem for each new end user, as well as by the pace of
the roll out of our systems, which requires us to purchase headend data network
hardware and software.
Since inception, we have financed our operations primarily through a
combination of private sales of equity securities and capital equipment leases.
At March 31, 1999, the primary source of our liquidity was $7.3 million of cash
and cash equivalents. We believe that the net proceeds from this offering,
together with existing cash, $18.5 million in proceeds from the sale of common
stock to Cisco, Com21 and Microsoft, $25 million in proceeds from the sale of 5
million shares of Series C preferred stock to Vulcan Ventures in April 1999,
proceeds from a $3.0 million loan facility entered into in April 1999 and
capital lease financing will be sufficient to meet our working capital
requirements, including operating losses, and capital expenditure requirements
for the next 18 months, assuming we achieve our business plan. There can be no
assurance that we will be able to raise additional capital, should that become
necessary, on terms acceptable to us or at all. The sale of additional equity or
convertible debt securities may result in additional dilution to our
stockholders. If financing is not available at terms acceptable to us,
management has the intent and the ability to reduce expenditures so as to delay
the need for additional financing.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998 the AICPA issued Statement of Position 98-5, Reporting on the
Costs of Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for fiscal
years beginning after December 15, 1998, provides guidance on the financial
reporting of start-up costs and organization costs. It requires costs of start
up activities and organization costs to be expensed as incurred. As the Company
has expensed these costs historically, the adoption of this standard is not
expected to have a significant impact on the Company's results of operations,
financial position or cash flows.
In June 1998 the FASB issued Accounting for Derivatives and Hedging
Activities (SFAS 133), which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 1999. As the Company
does not currently engage or plan to engage in derivative or hedging activities,
there will be no impact to the Company's results of operations, financial
position or cash flows upon the adoption of SFAS 133.
YEAR 2000 COMPLIANCE
We may realize exposure and risk if the systems upon which we are dependent
to conduct our operations are not Year 2000 compliant. Should any of our "date
dependent" equipment, circuits or software fail as a result, our services could
be severely affected. Our potential areas of exposure include
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information technology, including computers and software that we purchase or
licenses from third parties, and non-information technology, such as telephone
systems and other equipment that we acquire and use internally. Other potential
areas of exposure include the systems of business partners upon whom our
services are dependent, including our cable partners and their RF-cable TV
plants, and Internet backbone providers and telephone companies.
We have engaged a third party consultant to perform a Year 2000 assessment
study. The planning, inventory, and business impact analysis portions of our
Year 2000 assessment project are complete.
- We have tested most of our internal PC-based or other local area computer
networks, and expect to complete the balance of this testing by May 31,
1999. We have identified only minor issues that we will remediate by
routine upgrades, patches and replacements by the end of the second
quarter 1999.
- We have begun and are continuing to interview and seek verification from
our cable affiliates that the cable plants over which our service
operates are Year 2000 compliant. Our major cable partner, Charter
Communications, Inc., has indicated that it expects to be fully Year 2000
compliant by August 31, 1999. Our other cable partners are in various
states of Year 2000 readiness and planning, but we believe the risk posed
to our services by our cable partners' head end equipment to be slight.
To the extent our cable partners are not presently compliant, we are
asking them to provide us with a description of their plans to become so.
To the extent that our cable affiliates fail to provide certification
that they are Year 2000 compliant by August 30, 1999, we will reassess
the possible impact on our business and the nature of our electronic
interdependencies at that time, and take appropriate remediation action
to the extent possible.
- We are also verifying that the equipment, systems and services of our
other vendors and suppliers provide to us are Year 2000 compliant. To
date, virtually all of the non-software vendors and suppliers that we
consider vital to our operations have certified Year 2000 compliant
status to us, or have indicated that they will do so by July 31, 1999. To
the extent that vendors fail to provide certification that they are Year
2000 compliant by August 30, 1999, we expect to terminate and replace
those relationships.
We expect to resolve our Year 2000 compliance issues primarily through
normal upgrades of hardware and software, or, when necessary, through
replacement of existing software with Year 2000 compliant applications. We
estimate that our total cost to develop and implement our Year 2000 compliance
assessment plan will not exceed $250,000, which will be funded from cash on
hand.
Although we believe that we can quickly address any difficulties that may
arise, in the event that our Web-hosting servers and network facilities are not
Year 2000 compliant, all or portions of our Internet access services, including
our web sites, could be unavailable to deliver services to our cable affiliates
and customers. This in turn could expose us to claims and liabilities of unknown
and potentially material proportions. We are currently working on specific
contingency plans to deal with the worst-case scenario that might occur if
technologies we are dependent upon are not Year 2000 compliant and fail to
operate effectively, and expect to have those plans in place by the end of the
second quarter of 1999. But if our present efforts to address our potential Year
2000 compliance issues are not successful, or if our cable partners, vendors,
and other third parties with which we conduct business do not successfully
address these issues, our business and financial results could be materially and
adversely affected.
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BUSINESS
OVERVIEW
We are a leading provider of high speed Internet access via cable modem to
residential and commercial end users in exurban areas. We believe that we
provide the most comprehensive turnkey service available in exurban markets. Our
service enables subscribers to receive Internet access at speeds substantially
faster than traditional Internet access at minimal cost to the cable operator.
We enter into long term exclusive contracts with cable operators to provide them
with our service. In exchange for providing us access to their customers, we pay
our cable partners a portion of the monthly fees we receive from the end users.
We have exclusive agreements to provide our services to 20 cable operators,
covering 51 systems and approximately 982,000 homes passed. The term "homes
passed" refers to the number of homes that potentially can be served by a cable
system. We also have non-binding letters of intent with another 14 operators
representing an additional 23 systems and approximately 303,000 homes passed.
Under these letters of intent we have the exclusive right to negotiate with
these operators for a limited period of time to provide our services. We have
commenced full operations in 21 systems covering approximately 319,000 homes
marketed, initiated operations in another 21 systems covering an additional
402,000 homes, and have approximately 3,900 high speed end users.
Vulcan Ventures, Incorporated, an affiliate of Microsoft co-founder Paul
Allen, beneficially owns 54.2% of our common stock before the offering. Vulcan
also owns Charter Communications, Inc., one of the ten largest cable system
operator in the United States. Charter has agreed to provide us with exclusive
access to at least 750,000 homes passed and Charter has an equity incentive to
provide us up to an additional 5 million homes passed.
We recently signed a letter of intent with ServiceCo LLC, which provides
the Road Runner high speed online and content aggregation services. Under the
non-binding letter of intent, we and ServiceCo have agreed to negotiate in good
faith toward an agreement under which we would provide our turnkey service as a
Road Runner subcontractor to cable systems we jointly designate. In connection
with this agreement, we also expect to grant Road Runner warrants to purchase up
to 5 million shares of our common stock at an exercise price of $5 per share
based upon the number of homes passed to which we provide our joint services.
MARKET OPPORTUNITY
We seek to provide our services to the rapidly expanding number of
households and businesses in the United States that are online. According to
industry analysts, there were 26.5 million households with Internet access in
the United States in 1998. Industry analysts expect this number to grow to
nearly 58.4 million households by the end of 2002. One recent industry report
estimated that, by the end of 2002, 15.8 million U.S. households will have
broadband Internet access. We believe that cable modems will become the leading
method of high speed Internet access for residential end users.
Our target exurban market, defined as cable systems with fewer than 100,000
homes passed, encompasses approximately 48 million of the 95.4 million U.S.
households passed by the cable infrastructure. Our target market also includes
businesses and other establishments, such as hospitals, hotels, local
governments, universities and colleges, churches, and multiple dwelling units.
We have exclusive agreements giving us the right to provide high speed Internet
access to approximately 982,000 homes passed and we have letters of intent
relating to approximately 303,000 additional homes passed.
Of the 48 million homes passed in the exurban market, approximately 27.8
million are within systems owned by operators who have entered into agreements
for high speed Internet access with @Home or Road Runner. Although several of
the operators who have contracted with @Home and Road Runner have committed all
of their systems to them, we believe that some of these operators have
contracted with @Home and Roadrunner on a system-by-system basis. We believe we
have an opportunity to provide our services to those operators in their
uncommitted systems. For example, Marcus Cable, prior to the
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announcement of its acquisition by Charter, had entered into an agreement with
@Home covering its Ft. Worth, Texas cable system and had entered into a letter
of intent with us for its Eau Claire, Wisconsin system. Moreover, even when an
operator has committed all its systems to one of our competitors, we believe
there is still an opportunity for us to provide our service in some of these
exurban markets by partnering with the cable operator directly or with another
high speed Internet access provider.
The remaining 19.1 million households in our target exurban market,
excluding markets we have under contract or letter of intent, are located in
systems owned by operators that are using one of our smaller competitors, not
currently providing high speed Internet access, or providing an internally
developed high speed Internet access service without the assistance of an
outsourced high speed access provider. We believe that our full turnkey solution
is particularly appealing for those operators not yet offering high speed
Internet access. In addition, operators currently providing their own Internet
access may prefer to use our services to eliminate the capital and operating
costs associated with providing high speed Internet access.
The foregoing discussion of our target exurban market is based on data
compiled by Warren Publishing's 1998 Cable and TV Factbook and is as of October
1997. Since October 1997, there have been numerous changes in the cable
industry, including continued consolidation and cable system swaps. However,
based on management's knowledge of the cable industry, we do not believe these
subsequent events have materially changed the size or composition of, or
competitive conditions in, the exurban market.
THE HSA SOLUTION
We believe our full turnkey service is uniquely responsive to the needs of
cable operators and end users in the large and currently underserved exurban
market. We earn our revenues primarily from monthly subscription fees paid by
the end user, a portion of which we share with our cable partners. Therefore, to
be successful, we must provide an attractive service to both our cable partners
and to our end users.
CABLE OPERATOR
Our management team has extensive experience in all aspects of the cable
business, including sales and marketing, engineering, operations and product
development. We believe this experience provides a unique perspective that has
allowed us to tailor our solution to meet the needs of cable operators.
Full Turnkey Solution Requiring Minimal Effort by the Cable Operator. We
believe we offer the most comprehensive solution of its kind available to cable
operators. We are responsible for all aspects of our Internet access system. Our
local cable partners' only responsibilities are to provide space in the headend
for our equipment, allow us to access the necessary bandwidth to provide our
services and maintain the integrity and performance of the cable plant.
Specifically, we provide:
- Detailed roll-out plan and network design;
- Purchase and installation of the telecommunications and data network
hardware and software necessary to offer our services;
- System testing and project management;
- Arrangements for the installation of a cable modem at the end user's home
or business;
- Connection to, and maintenance of, our Internet backbone system;
- On-going local and corporate-level sales and marketing efforts;
- 24-hour, seven-days-a-week help desk assistance for end users;
- 24-hour, seven-days-a-week monitoring of our network and our cable
partner's cable plant; and
- Direct customer billing.
Rapid Implementation of High Speed Access In Either Upgraded or
Non-Upgraded Systems. We believe we provide not only the most comprehensive
means for a cable operator to implement high speed access services, but also one
of the most expedient. Implementation generally begins immediately after we sign
a letter of intent for network services. Based on our extensive experience in
the 42 cable systems we
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have installed to date and our standardized implementation and engineering
process, we target full implementation within 90 days after the cable operator
authorizes us to deploy our services, and often are able to complete it sooner.
In addition, because we do not require the cable operator to upgrade its system
to two-way capability, we can deploy one-way broadband access to some
communities sooner than many of our competitors. However, two-way capability
allows a cable operator to provide other valuable services, such as interactive
program guides, impulse pay-per-view, video on demand and telephony. Our
services and the related revenue may serve as an impetus for a cable operator to
upgrade its system to two-way capability, which could have other benefits for
the operator.
Source of Additional Revenues With Minimal Associated Operating or Capital
Cost. In addition to splitting monthly fees with the cable operator, we offer
cable operators incremental revenue opportunities from local content provided
through our services. We also provide non-cable services such as residential
Internet access through dial-up and other feeder technologies, as well as
commercial Internet access, the revenues from which we also share with our cable
partners. As with our cable-based access services, we bear the capital and
operating costs associated with providing these services. In addition, we also
expect to provide our cable partners with revenue streams from future broadband
services, such as Internet telephony services, video conferencing, home alarm,
child care and utility monitoring, local and community-based e-commerce and
interactive video games.
Dedicated On Site and National End User Marketing Provided by Us. Our
management team has experience in marketing high speed Internet access and,
unlike our major competitors, we assume primary responsibility for selling our
services to end users. Our dedicated national marketing effort includes the
development of sales and marketing materials, database market analytics, direct
mail and centralized telemarketing. Additionally, we typically maintain a local
manager and sales staff in each service area to focus on commercial sales and to
coordinate with corporate-level residential sales and marketing programs.
Additional Benefits to the Cable Operators. We provide cable operators
24-hours-a-day, seven-days-a-week network monitoring. We continuously
troubleshoot and monitor for problems over the cable infrastructure that could
cause an interruption of cable service or Internet access. Our product enables
the local cable operator to provide, generally under its own name, high speed
Internet access services and local content and community information equal to or
exceeding similar services offered in many major metropolitan areas. We believe
our services will increase cable penetration and enhance the operator's
reputation in the community, which may make it easier for the operator to obtain
renewal of its cable franchise.
END USERS
Residential
We believe our services are attractive to residential end users for the
following reasons:
High Speed Access. We offer the end user Internet access at transmission
speeds up to 10 Mbps compared to standard 56 Kbps dial-up access. Our high speed
access allows end users to more efficiently use bandwidth-intensive multimedia
applications such as interactive games, high-quality audio and distance learning
and online commerce applications such as retailing, financial services and
online software distribution.
User Friendly, Always-on Internet Access. In a two-way cable system, we
provide the end user with Internet access that is always on, eliminating the
inconvenience associated with timing out of telephone modem connections, and
generally avoiding the need for dial-up procedures. Additionally, unlike
standard dial-up access, the high bandwidth nature of cable allows our end users
to maintain full use of their telephone and television while online.
Superior Price/Performance. Cable-based Internet access is a competitively
priced alternative to other high speed technologies such as ISDN, DSL, wireless
and satellite. In two-way cable systems, the cost of our service to the end user
is approximately the cost of standard dial-up Internet access plus the
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cost of an additional phone line. In addition, cable based Internet access is
capable of significantly faster speeds than competing technologies, and is
better suited for the exurban market where ISDN and DSL service offerings are
limited.
Local Content and Online Communities. We aggregate and provide local
content online. We believe local content will be popular in communities where
local news and information may not be available online or from a single source.
We focus on local news, sports, weather, education, government and community
events that may not be available online or from a single source. We intend to
create local online communities using customized home pages, community chat
rooms and local e-commerce sites.
Commercial
Our services provide the commercial end user in exurban markets with the
most cost effective solution available for high speed Internet access as a
result of our scalable bandwidth and the capabilities of the cable plant. Our
target commercial market includes businesses, local governments, hospitals,
hotels, universities and colleges, churches and multiple dwelling units. The
benefits for commercial end users include:
Reliable, Low-cost Internet Gateway. Our technology provides high quality,
reliable Internet access suitable for commercial end users often at a
significant savings to telephone-based Internet access options. In some of our
markets, for example, the only other broadband alternative for businesses is the
installation of expensive circuitry by the local telephone company.
Scalable Bandwidth. We have the ability to offer varying bandwidths to a
commercial end user, depending on its needs. We currently offer bandwidths of up
to 10 Mbps for our commercial customers. We plan to provide greater bandwidth
offerings over time, based on demand.
Value Added Business Services. Our high bandwidth capability allows us to
offer commercial end users value added services such as virtual private
networks. Virtual private networks allow a business to extend its corporate
network to remote employees and external organizations. Services such as virtual
private networks allow hospitals, universities and small businesses to have the
benefits of a dedicated wide-area network, including high speed and security, at
a fraction of the cost of a traditional network. For example, in Eau Claire,
Wisconsin, we provide virtual private network services to the University of
Wisconsin for use by students in telecommuting. We also offer commercial
Internet services, such as e-mail, news groups and web hosting. In the future,
our commercial services may include Internet telephony, which is a means of
using the Internet to connect a company's local telephone network to remote
users, such as telecommuters. We also plan to offer commercial end users gateway
telephony, which involves using the Internet for secure, reliable, long-distance
communications.
Alternative Technologies. In markets where we offer our cable-based
services and a commercial end user does not have direct access to the cable
infrastructure, we are "technology agnostic." We are capable of using
alternative technologies such as wireless or DSL connections to link a business
to the cable headend. We intend to deploy these alternative technologies in
partnership with our cable partners.
STRATEGY
Our objective is to be the leading provider of high speed Internet access
in exurban markets. Our strategy has the following key elements:
Focus on the Exurban Market Where There is Less Competition and Cable
Operators Have a Greater Need for Our Turnkey Services. Exurban markets include
small cities and towns, as well as suburban communities with fewer than 100,000
homes passed. We believe the exurban market offers a substantial opportunity
because:
- It represents a large underserved market segment;
- Cable system operators in these markets typically have a greater need for
the full turnkey solution we offer, including our technical expertise and
comprehensive sales and marketing program;
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- Management believes the potential penetration in these markets may be
higher than in urban markets; and
- We can gain the substantial advantage of being first to market in many
exurban cable systems because our services are compatible with two-way,
one-way and migrating cable systems.
Although the exurban market is our primary focus, from time to time we may
consider opportunities to service larger markets to the extent we believe it is
economically attractive to do so. We may also provide services on a less than
full turnkey basis.
Rapidly Expand Our Base of Cable Partners. We have installed 42 systems,
covering 721,000 homes passed, and we have contracts or letters of intent to
deploy our services in an additional 32 systems, covering 564,000 homes passed,
in the United States. We have a dedicated team of experienced cable industry
professionals who are actively marketing to the largest 100 cable multiple cable
system operators, as well as to other independent cable operators. A large
multiple system operator may operate cable systems in both urban and exurban
markets.
Offer a Full Turnkey Value Proposition to the Cable Operator and Create
Long Term Partnerships. We have designed our services to offer substantial value
to cable operators. We believe we provide a more complete and valuable service
than any of our competitors and that our service is particularly well suited to
exurban markets. Based on our full turnkey service, superior marketing and
capital investments we expect to create long-term partnerships with our cable
partners. Once a cable operator implements services under an exclusive
arrangement in a specific cable system, we believe a significant barrier to
entry is created in that system.
Provide a Range of Products and Services to Residential and Commercial End
Users. We strive to deliver a range of products and services to our end users.
We provide our services over one-way systems, two-way systems and systems in the
process of being upgraded. As a "feeder" in those markets where we offer high
speed Internet access, we also offer standard 56 Kbps dial-up access and in the
future may offer other entry level Internet access technologies, such as Web
TV(R)-like broadband access and network computers. Our feeder strategy provides
consumers new to the Internet, or unfamiliar with the benefits of high speed
access, the option of initiating the most basic level of Internet access, and
upgrading their level of service over time. For commercial end users we provide
high speed Internet access with bandwidth alternatives ranging from 500 Kbps to
10 Mbps. We also offer virtual private network services to commercial end users,
as well as commercial Internet service provider facilities, such as e-mail and
web hosting. In the future our commercial services may include Internet
telephony and gateway telephony.
Increase End User Penetration through Dedicated Marketing and Local
Content. We believe our focus on end user marketing, combined with our
specialization in broadband access services, will increase market penetration.
We use traditional marketing techniques such as print, radio, television and
cable system mailers. More importantly, we employ sophisticated database
marketing and telemarketing techniques and employ sales personnel in the field.
We believe our local presence and our local community programming and content,
together with our plans to provide online local content and online local
communities will both attract and retain end users.
Leverage Economies of Scale Inherent in Our Business. As we increase our
installed base of systems, we expect to realize economies of scale at both the
local and national level, the benefits of which we will be able to share with
our cable partners. We actively seek to create a cluster of systems in a
geographic region, allowing us to economically serve a number of smaller cable
systems. Nationally, we can spread the costs of centralized services such as the
network operations center, customer service and help desk over a larger end user
base, obtain better volume pricing discounts for equipment, and lower our
telecommunications cost as the level of traffic increases. As we install more
systems, we gain valuable cumulative experience, which allows us to increase the
rate of penetration, increase the speed and reliability of our system
installations and reduce costs.
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Leverage the Media and Cable Industry Experience of Our Investors,
Directors and Management. We also expect to capitalize on our sponsoring
investors' media and cable industry experience. For example, Vulcan Ventures,
our largest stockholder, owns Charter Communications, one of the ten largest
cable system operator in the United States, and has substantial investments in
media, Internet and new media companies, including Go2Net, Inc., USA Networks,
ZDTV, Beyond.com, N2K, Inc., Northpoint Communications, Inc., Wink
Communications, Inc., Value America, Inc. and Priceline.com. Moreover, certain
of the principals of Broadband Solutions, which founded the company, co-founded
and invested in Premier Parks Inc., Regal Cinemas, Inc. and Regent
Communications, Inc. We believe that our sponsor group and their knowledge of
and extensive connections in the media and cable industries help position us to
compete in the high speed cable modem Internet access market.
Selectively Explore International Expansion and Domestic Acquisition
Opportunities. Although international expansion is not our primary focus, we are
selectively evaluating potential international expansion opportunities as they
become available to capitalize on the growing worldwide demand for high speed
Internet access. If we expand internationally, we will do so only if we can work
with a qualified local partner. In addition, primarily as a customer acquisition
feeder strategy, we will selectively evaluate potential acquisitions of local
Internet service providers in a current cable market to help further expand our
base of potential high speed access end users.
PRODUCTS AND SERVICES
We offer the following products and services:
Residential High Speed Internet Access. We offer our basic high speed
Internet service to residential end users for a monthly fee of typically less
than $40, which approximates the monthly fee for standard dial-up Internet
access plus the cost of a second phone line. Monthly service includes unlimited
access time, multiple e-mail accounts and Web browser software. We also provide
10 hours of standard dial-up Internet access per month to the end user who
wishes to access the Internet while away from home. In addition, we typically
rent cable modems to the residential end user for an additional $9.95 per month.
Almost all of our 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, one-way systems or migrating 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. In pricing our services, we do not differentiate
between end users in one-way and two-way systems, although we incur higher costs
in a one-way system because we must support the telephone return component. As a
cable operator upgrades its system to two-way service, we incur only a minimal
one-time cost because we can reprogram our software remotely. Once a system is
upgraded, our telecommunications costs for that system typically decrease.
Residential Entry Level Internet Access. As a feeder for our high speed
Internet access service, in markets where we provide our cable-based access
service, we also offer standard 56 Kbps dial-up access, and may in the future
offer other entry level Internet access technologies such as Web TV(R)-like
devices and network computers. Our dial-up alternative represents a customer
acquisition strategy that provides consumers new to the Internet, or unfamiliar
with the benefits of broadband access, the option of initiating the most basic
level of Internet access, and upgrading their level of service over time. We
expect that over time end users will upgrade their level of service as they
experience the slow transmission speeds associated with standard dial-up access,
as their needs increase, or as additional bandwidth-intensive multimedia
applications emerge. Monthly fees for feeder services, which we share with our
cable partners, are priced competitively with other "narrowband" Internet
service providers and provide us an incremental source of revenue at very low
cost.
Commercial High-Speed Internet Access. We provide high speed Internet
access to commercial end users for a monthly fee that varies based on the level
of service. Our commercial end users may choose bandwidth alternatives ranging
from 500 Kbps to 10 Mbps. We have the ability to track the end user's usage to
determine when a bandwidth upgrade may be appropriate. We currently offer
e-mail, web hosting, news groups, telecommuting packages and virtual private
network services to commercial customers. In
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<PAGE> 42
markets where we offer our cable-based services, if a business does not have
direct access to the cable infrastructure, we are "technology agnostic." We are
capable of using alternative technologies, such as wireless or DSL connections,
to link commercial end users to the cable headend.
Local Content. We 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.
We believe local content will be popular in communities where local news and
information may not be available online or from a single source. Accordingly, we
use local content as a means of attracting and retaining additional end users
and differentiating our service. We are seeking to enter into agreements with
content providers, local advertisers and local e-commerce merchants under which
we will receive a share of revenue from purchases of goods and services by our
customers. Our ability to provide and earn revenues from content is subject to
our agreements with Vulcan Ventures. See "Risk Factors" and "Certain
Transactions."
Future Services. Our high speed access services may allow end users to take
advantage of numerous other applications and services in the future. Additional
future residential services could include Internet telephony services, various
multimedia applications (such as video conferencing, high-quality audio and
distance learning), home alarm, child care and utility monitoring, e-commerce
applications (such as retailing, financial services and online software
distribution), set-top boxes and interactive video games. Among our planned
commercial services are Internet telephony, video conferencing and gateway
telephony. Additionally, our high bandwidth capability may allow us to offer
other business services when new technologies emerge. Prices for these
additional services will depend upon market conditions and we will negotiate
future revenue sharing arrangements with our cable partners. Our ability to
provide and earn revenues from telephony services is subject to our agreements
with Vulcan Ventures. See "Risk Factors" and "Certain Transactions."
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<PAGE> 43
CABLE PARTNERS AND STRATEGIC ALLIANCES
We began offering cable-based Internet services in late 1997 in Maysville,
Kentucky and St. Mary's County, Maryland. We market our services to
approximately 319,000 homes passed, are implementing services to approximately
402,000 additional homes passed and have contracts and letters of intent
covering an additional 564,000 homes passed to which we expect to provide
service in the future. Many of these letters of intent by their terms have
expired, but negotiations for definitive agreements have continued. Most of our
network services agreements provide for a five-year exclusive term from the date
we commence full operation within the cable system.
The following table summarizes cable partners with whom we have contracts,
the number of homes passed and the areas served by each cable partner's systems
as of April 29, 1999:
<TABLE>
<CAPTION>
HOMES
CABLE PARTNER PASSED AREAS SERVED BY CABLE PARTNERS' SYSTEMS
- ------------- --------- ---------------------------------------
<S> <C> <C>
Network Service Agreements:
City of Covington, Georgia................. 15,000 Covington (Newton County) GA
Coast Communications....................... 3,500 Ocean Shores, WA
Country Cable.............................. 4,000 San Diego, CA (Ramona)
E.T.S. Cablevision, Inc.................... 150 Cypress, TX
E.T.S. Cablevision, Inc.................... 150 Missouri City, TX
Falcon/Capital Cable Partners, L.P......... 5,000 Columbia, MO
Gans Multimedia Partnership................ 6,000 King George County, VA
Gans Multimedia Partnership................ 23,000 St. Mary's, MD
Gans Multimedia Partnership................ 4,350 Tucson, AZ
Genesis Cable Communications, LLC.......... 28,000 Winder, GA
Grafton Cable Communications............... 6,700 Grafton, OH
Irvine Community TV, Inc................... 5,500 Irvine, KY
Limestone Cablevision...................... 6,000 Maysville, KY
Mid-Atlantic Telcom Plus, LLC.............. 6,200 Howard County, MD
Mid-Atlantic Telcom Plus, LLC.............. 1,050 Prince William, VA
Mid-Coast Cable Television, Inc............ 7,950 Edna/El Campo, TX
Nesbe Cable................................ 16,000 Rustburg, VA
Plantation Cablevision..................... 4,000 Greensboro, GA (Eatonton)
Searle Communications, Inc./Tri-Lakes...... 7,500 Monument, CO
Shen Heights TV Association, Inc........... 6,700 Shenandoah, PA
Ultronics, Inc. ........................... 11,000 Chula Vista, CA
Vista Communications....................... 44,000 Smyrna, GA
Western Cable.............................. 5,600 Plainfield, IL
---------
Subtotal....................... 217,350
Charter Service Agreements:
Charter.................................... 33,191 Newnan, GA
Charter.................................... 21,230 Lanett, AL
Charter.................................... 73,877 Eau Claire, WI
Charter.................................... 26,093 LaGrange, GA
Charter.................................... 52,046 Henry Co, GA
Charter.................................... 11,829 Thomaston, GA
Charter.................................... 4,925 Manchester, GA
Charter.................................... 47,030 Albertville, AL
Charter.................................... 10,513 Gunthersville, AL
Charter.................................... 51,415 Morristown, TN
Charter.................................... 15,510 Camp Lejeune, NC
Charter.................................... 43,264 Rosemount, MN
</TABLE>
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<PAGE> 44
<TABLE>
<CAPTION>
HOMES
CABLE PARTNER PASSED AREAS SERVED BY CABLE PARTNERS' SYSTEMS
- ------------- --------- ---------------------------------------
<S> <C> <C>
Charter.................................... 23,858 Hartselle, AL
Charter.................................... 35,499 Johnson City, TN
Charter.................................... 65,938 Hammond, LA
Charter.................................... 11,507 Dublin, GA
Charter.................................... 19,919 Alexander City, AL
Charter.................................... 34,965 Buncombe County, NC
Charter.................................... 16,036 Gaffney, SC
Charter.................................... 24,636 Sanford, NC
Charter.................................... 7,000 Ashland, WI
Charter.................................... 28,000 Onalaska, WI
Charter.................................... 28,000 Bristol, TN
Charter.................................... 11,000 Black Mountain, NC
Charter.................................... 22,638 Waynesville, NC
Charter.................................... 7,000 Red Wing, MN
Charter.................................... 28,251 Erwin-Buies Creek, NC
Charter.................................... 9,650 Union, SC
---------
Subtotal......................... 764,820
---------
Total homes passed under
contract....................... 982,170
Homes passed under Letters of Intent....... 302,909
---------
Total homes passed under contract
and letters of intent.......... 1,285,079
=========
</TABLE>
We have approximately 3,900 high speed cable modem end users and
approximately 3,400 dial-up end users. Approximately 1,506, or 39.0% of our high
speed cable modem end users and approximately 290, or 8.5% of our dial-up end
users are from cable systems affiliated with Charter.
Cisco Systems, Inc. Cisco, one of our major equipment suppliers, has agreed
to purchase $7.5 million of our common stock at the initial public offering
price, net of the underwriting discount, concurrently with this offering.
Road Runner. We recently signed a non-binding letter of intent with
ServiceCo LLC, the entity that provides Road Runner's cable Internet access and
content aggregation service. Under the letter of intent, we and ServiceCo have
agreed to negotiate in good faith toward an agreement under which we would
provide our service as a Road Runner subcontractor to cable systems we jointly
designate to receive our services. In addition to the revenue split we would
share with ServiceCo and the cable operator, we would grant ServiceCo warrants
to purchase one share of our common stock at a price of $5 per share for each
home passed that we jointly designate to receive our services, up to a maximum
of 5 million shares. Additionally, ServiceCo would be entitled to provide its
Road Runner content in the designated systems.
Microsoft. We have a non-binding letter of intent with Microsoft
Corporation covering a number of potential areas of strategic relationship. No
assurance can be given that we will sign a definitive agreement with Microsoft
for any or all of the items of strategic relationship or that a definitive
agreement will be of material benefit to us. Microsoft has agreed to assist us
in marketing HSA services to multiple system cable operators. We also issued a
warrant to Microsoft to purchase 250,000 shares of common stock at 125% of the
initial public offering price, exercisable until May 2004. This warrant will
provide Microsoft the right to purchase one additional share of our common stock
for each additional 10 homes passed above 2.5 million homes Comcast Corp.
commits to us by May 1, 2002. Microsoft has agreed to purchase $10 million of
our common stock concurrently with the offering at the initial public offering
price per share, net of the underwriting discount. Based on the estimated public
offering price, Microsoft would purchase 896,057 shares of our common stock.
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National Cable Television Cooperative. We recently signed an agreement with
the National Cable Television Cooperative, an organization which represents over
950 multiple system operators with approximately 10 million cable customers in
all 50 states. Under the agreement, cable operators who are members of the
cooperative will have the ability to take and offer our services to their
subscribers under standardized terms and conditions.
Vulcan Ventures. Vulcan Ventures, which owns Charter, beneficially owns
54.2% of our common stock before the offering. Charter is one of the ten largest
cable system operator in the United States. Charter has already committed to us
approximately 765,000 homes passed. We granted Vulcan warrants to purchase up to
7.75 million shares of our common stock for $3.23 per share. These warrants,
which Vulcan has assigned to Charter, become exercisable at the rate of 1.55
shares of common stock per home passed committed to us by Charter in excess of
750,000.
Com21, Inc. Com21, one of our major equipment suppliers, has agreed to
purchase $1.0 million of our common stock at the initial public offering price,
net of the underwriting discount, concurrently with the offering.
END USER SALES AND MARKETING
After entering into a network services agreement with a cable operator, we
begin efforts to raise customer awareness and interest in our services. Our
promotional efforts typically include direct mail of standardized marketing
materials, local television and radio advertising, and a public relations and
media campaign. Our cable partners often participate in our promotional efforts.
For example, a cable operator may provide air time for our advertisements or
include our marketing materials in its customer bills. Our selling efforts for
residential end users focus largely on inbound and outbound telemarketing.
Telemarketing may either be conducted in-house or outsourced. We also focus on
local events, such as public on-site demonstrations in shopping malls and
computer stores, as well as demonstrations for educational and civic
organizations. 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. We conduct
our promotional efforts either at the corporate level or through a local manager
and sales staff maintained in each geographic area in which we operate.
In contrast to our residential sales philosophy, we believe commercial
selling is established through personal relationships with the potential
commercial account, together with personal demonstrations of our services.
Commercial selling is conducted largely through our local manager and sales
staff. Moreover, after the installation and initial promotion of our services
are complete, commercial sales becomes the primary ongoing responsibility of our
local manager and sales staff.
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The following table shows as of April 29, 1999, the markets where we are
actively marketing our services, the number and composition of our end users,
our penetration rate and our months in full service in these markets:
<TABLE>
<CAPTION>
END USER PENETRATION RATE
------------------------------------------ ---------------------
HOMES RESIDENTIAL COMMERCIAL RESIDENTIAL MONTHS IN
MARKET MARKETED BROADBAND BROADBAND DIAL-UP TOTAL BROADBAND DIAL-UP SERVICE
- ------ -------- ----------- ---------- ------- ----- ----------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
St. Mary's, MD............... 23,000 527 14 1,900 2,441 2.3% 8.3% 15
Maysville, KY................ 6,000 335 48 -- 383 5.6 0.0 13
Columbia, MO................. 5,000 47 -- -- 47 0.9 0.0 9
Eau Claire, WI............... 49,000.. 800 33 256 1,089 1.6 0.5 8
Rice Lake, WI................ 9,125 173 7 32 212 1.9 0.4 8
Winder, GA................... 28,000 183 1 170 354 0.7 0.6 8
Monument, CO................. 7,500 107 6 32 145 1.4 0.4 5
Newnan, GA................... 25,786 278 -- -- 278 1.1 0.0 5
Burnsville, NC............... 6,000 15 3 121 139 0.3 2.0 4
Myrtle Beach, SC............. 9,000 39 5 80 124 0.4 0.9 4
El Campo, TX................. 5,700 15 4 70 89 0.3 1.2 3
Atlanta, GA.................. N/A -- 204 306 510 0.0 0.0 2
Covington, GA................ 15,000 69 -- 18 87 0.5 0.1 2
Ocean Shores, WA............. 3,500 100 4 172 276 2.9 4.9 2
Plainfield, IL............... 5,600 97 -- 22 119 1.7 0.4 2
Shenandoah, PA............... 6,700 26 2 113 141 0.4 1.7 2
Smyrna, GA................... 44,000 281 -- 1 282 0.6 0.0 2
Chula Vista, CA.............. 11,000 105 -- 2 107 1.0 0.0 1
Grafton, OH.................. 6,700 88 4 43 135 1.3 0.6 1
Irvine, KY................... 5,500 24 2 65 91 0.4 1.2 1
LaGrange, GA................. 26,093 146 13 2 161 0.6 0.0 1
Lanett, AL................... 21,230 55 1 -- 56 0.3 0.0 1
------- ----- --- ----- ----- --- ---
Total.............. 319,434 3,510 351 3,405 7,266 1.1% 1.1%
======= ===== === ===== ===== === ===
</TABLE>
Approximately 53% of our current end users are cable modem users, and 47%
are dial-up users.
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.
Key elements of our network architecture include:
Network Operations Center. Our network operations center staff monitors our
entire data network 24 hours a day, from the cable modem in a home or business,
all the way through our backbone connection to the Internet. Continuous
surveillance of our data network assists in fault identification and correction
as well as capacity management and optimization. We continuously troubleshoot
and monitor for problems over the cable infrastructure that could cause an
interruption of cable service or Internet access. Our
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primary network operations center is located in Louisville, Kentucky, in a
secure building with redundant Internet access equipment and backup power
supplies. We plan to construct a second network operations center. Located in
the network operations center is our data center, which contains servers that
provide critical customer services such as our e-mail, news groups and web
hosting servers. We monitor these redundant servers continuously. We plan to
construct regional data centers as our end user count and geographical
clustering increases. In some cases we also host web pages and e-mail at the
headend in order to enhance network performance.
Backbone and Internet Connections. We have designed a scalable network
architecture that takes advantage of the existing high speed data backbone
operated by UUNet and other well established Internet access providers.
Management believes that it is more advantageous at this time to provision data
backbone services from well established national suppliers than to lease and
manage a new private network. Our current backbone network is fully redundant
and fully meshed, and utilizes high speed routers supporting speeds of up to 622
Mbps. We typically lease telecommunications links between the cable headends and
our backbone connection from the regional Bell operating companies. We plan to
periodically use point-to-point wireless or satellite technology to provide
temporary connections from the cable headend to the backbone during the
implementation of our service.
Cable Headends. We install servers, routers, switches and other network
devices in each cable headend. This equipment is capable of operating even if
connections with the data center or network operations center are lost. Our
major suppliers of cable headend equipment include Cisco, Sun Microsystems,
Com21, Lucent and Terayon. Using these widely available network devices, we
provide the necessary system integration required to install our service at the
cable headend.
To improve the speed of the local network and to balance demands on the
backbone facilities, we utilize caching technologies in the cable headend and in
our data center. We also plan to utilize satellite technology to supplement our
caching efforts. Caching allows us to store popular web content enabling an end
user to access this content more quickly. By using caching technology to move
content closer to the end user, we are able to control our telecommunications
costs and increase the speed of delivery because we refresh this content
periodically, rather than each time an end user seeks access to the content.
Cable Modems and Television Set-Top Boxes. We currently provide a custom
installation CD that allows a cable modem user to install a web browser along
with a selection of popular utility programs. We currently use cable modems
manufactured by Com21 and Terayon, which we either sell or rent to the end user.
The North American cable industry has adopted a set of interface specifications,
known as "DOCSIS," for hardware and software to support cable-based data
delivery using cable modems. We expect that DOCSIS specifications will
facilitate the retail availability of lower cost cable modems, which has three
effects. First, it will save us the cost of purchasing and installing cable
modems for end users. Second, we expect that increased availability of lower
cost cable modems will result in increased demand for our services. Third, we
would also expect a loss of revenue from cable modem rentals. We also expect
computer manufacturers to begin integrating DOCSIS cable modems into their
products. We intend to deploy DOCSIS compliant modems and modem controllers,
when DOCSIS becomes available. In the future, residential end users also may be
able to connect to the Internet via an integrated television set-top box.
CUSTOMER SERVICE AND BILLING
Customer Service. We operate a toll free help desk 24-hours-a-day,
7-days-a-week to provide customer service. The help desk assists end users with
high speed modem questions and problems, as well as basic computer and software
configuration questions and billing inquiries. We also operate and staff a
24-hours-a-day customer service center in our Network Operation Center to handle
problems referred by the help desk. We plan to deploy regional technical and
operating staff to assist our end users and cable partners. Computerized trouble
tickets are opened on all customer service issues, which we track to assure
resolution of all customer service calls received. We also rent cable modems to
our customers and arrange
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<PAGE> 48
for their installation. Currently we charge end users up to $150 to install the
cable modem, however, we frequently waive this fee. We typically rent cable
modems to the end user for $9.95 per month.
Billing. We typically prepare and mail the bill for our services, which we
send to the end user under our cable partner's name and logo. Where we have
billing responsibilities we manage cash and credit card payments and remit a
portion of the amount collected to our cable partners, along with a detailed
accounting. We are installing a new billing system to further enhance our
services.
COMPETITION
We face competition primarily 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 believe the major competitive factors in the market for partnerships
with cable operators include breadth of service, speed and ease of deployment,
revenue sharing arrangements, cash and equity incentives and operating
experience. We believe the major competitive factors in the market to provide
high speed Internet access to end users include financial, marketing and sales
resources, established customer relationships, price, ease of access and use,
transmission speed, reliability of service, quantity and quality of content,
network security and customer support. Moreover, due to intense competition,
there may be a time-limited market opportunity for our cable-based high speed
access. There can be no assurance that we will be successful in achieving
widespread acceptance of our services before competitors offer services similar
to our current offerings, which might preclude or delay purchasing decisions by
potential customers.
For the reasons discussed below, we may not be able to compete successfully
against current or future competitors, and competitive pressures we face could
materially and adversely affect our business and financial results.
Cable-Based Internet Access Market. 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, the ISP Channel, Online System Services, Inc.,
Convergence.com and their respective cable partners, are deploying high speed
Internet access services over cable networks. @Home, through its @Home Solutions
product, has begun to market to systems in the exurban market with at least
20,000 homes passed. We also compete directly with the ISP Channel and
Convergence.com in 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. Many of our
competitors and potential competitors in the market for partnerships with cable
operators, in particular @Home and Road Runner, have substantially greater
financial, sales and marketing resources, larger customer bases, longer
operating histories, greater name recognition and more established relationships
with cable operators, advertisers and content and application providers than we
do.
Other Technologies. Long distance inter-exchange carriers, such as AT&T,
Sprint and MCI WorldCom, have deployed large-scale Internet access networks and
sell Internet access to business and residential customers. The regional Bell
operating companies and other local exchange carriers have also entered this
field and are providing price competitive services. Many of these carriers are
offering diversified packages of telecommunications services, including Internet
access, to residential customers, and could bundle these services together,
which could put us at a competitive disadvantage. Many of these competitors are
offering, or may soon offer, technologies that will compete with some or all of
our high speed data service offerings. Such competing technologies include
integrated services digital networks and digital subscriber lines. Many of our
competitors and potential competitors, particularly regional Bell operating
companies, have substantially greater financial, sales and marketing resources
than we have, and also may compete favorably in terms of price, ease of access
and use, transmission speed and reliability of service. Other potential
competing technologies now being deployed for high speed access include wireless
and satellite data services. Widespread commercial acceptance of digital
subscriber line or other competing
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<PAGE> 49
technologies could significantly reduce the potential customer base for our
services, which could have a material adverse effect on our business and
financial results. Additionally, as a result of the distribution of the Darwin
common stock to our current stockholders, with the exception of the warrant we
will receive from Darwin, the benefits of providing this service will no longer
accrue to our stockholders.
Internet and Online Service Providers. 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 offering the advantages of broadband access, these services
are widely available and inexpensive. Indeed, Internet service providers
recently have announced free Internet access services. 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. Moreover,
America Online recently announced alliances with SBC Communications and Bell
Atlantic to offer AOL's services via digital subscriber line connections to be
installed by these regional Bell operating companies. The pace at which AOL and
its telephone company partners roll out DSL service could limit our ability to
attract and retain end users in areas where our service offerings overlap.
GOVERNMENT REGULATION
Our business has two main parts. First, we will supply information and
entertainment to customers over the cable systems of our cable system partners.
This information and entertainment will include materials that we obtain from
third parties (including Vulcan Ventures and its affiliates) as well as
information generally available on the Internet that our customers will reach by
means of our service. Second, we will 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 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,
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<PAGE> 50
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.
Third, we have exclusive contracts with our cable partners to be the only
supplier of high-speed data on the cable systems where our service is offered. A
variety of parties, including firms with much greater resources than ours, are
trying to have such exclusive arrangements banned. If they are successful, cable
systems might have to accommodate several suppliers of high-speed data services
and we could face additional competition from such other suppliers. We believe
that our exclusive arrangements are very valuable to our business. If such
arrangements are banned, the impact on our business could be severe.
Fourth, regulatory action could create a more favorable environment for our
competitors than exists today. For example, it is possible to send high-speed
data over many normal telephone lines using a technology called "digital
subscriber line" or "DSL." This technology may be used either by the existing
telephone company that owns the telephone lines, or by competing telephone
companies that have the right to lease those lines. Regulatory decisions that
make DSL services easier for competing telephone companies to deploy, and less
expensive for customers to buy, would negatively affect our business.
EMPLOYEES
As of April 15, 1999, we employed 207 people. None of our employees is
subject to any collective-bargaining arrangements, and we consider our relations
with employees to be good.
FACILITIES
Our principal executive office is located in Denver, Colorado, where we
lease approximately 13,000 square feet. Our principal operating office is in
Louisville, Kentucky, where we lease approximately 25,000 square feet. We
believe that our existing facilities are adequate for current requirements and
that additional space can be obtained on commercially reasonable terms to meet
future requirements.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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<PAGE> 51
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our executive officers, key employees and directors, and their ages,
positions and brief biographies, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS
Ron Pitcock........................... 51 President
Kent Oyler............................ 41 Chief Operating Officer and Treasurer
George E. Willett..................... 37 Chief Financial Officer and Assistant
Treasurer
Atul C. Doshi......................... 49 Chief Technology Officer
Ferris Peery.......................... 52 Executive Vice President, Industry
Sales
Christopher P. Britton................ 41 Senior Vice President, Sales and
Marketing
John G. Hundley....................... 39 Vice President, Secretary and General
Counsel
KEY EMPLOYEES
Edward J. Callahan.................... 63 Senior Vice President, Advanced
Technology
Harold E. Cook........................ 60 Senior Vice President, Program
Management
Brenda Fox............................ 54 Senior Vice President, Business
Development
Richard S. George..................... 38 Vice President, International Business
Development
Bill Krempasky, Sr. .................. 64 Senior Vice President, MSO Sales
Thorn Landers......................... 42 Vice President, Consumer Sales
Marian Neely-Carlson.................. 45 Vice President, Corporate
Communications
Richard J. Pulley..................... 49 Vice President, Operations
David T. Richardson................... 34 Vice President, Finance
Jorge Salinger........................ 42 Vice President, Engineering
Tammy L. Smith........................ 39 Vice President, Affiliate Relations
Jeff Tokar............................ 36 Vice President, Affiliate Relations
DIRECTORS
David A. Jones, Jr. .................. 41 Chairman of the Board and Director
Robert S. Saunders.................... 47 Vice Chairman and Director
Irving W. Bailey, II.................. 57 Director
Michael E. Gellert.................... 67 Director
Jerald L. Kent........................ 42 Director
William D. Savoy...................... 34 Director
Stephen E. Silva...................... 39 Director
</TABLE>
Executive Officers
RON PITCOCK co-founded HSA's predecessor, High Speed Access Network, in
July 1997 and has served as our President since April 1998. From 1992 to 1997,
Mr. Pitcock served as Executive Vice President of ANTEC, a cable technology
equipment supplier, where he oversaw sales and marketing of telewire products
and management of U.S. locations. From 1980 to 1992, Mr. Pitcock served in
various capacities with ANTEC, including manager of international sales. Mr.
Pitcock received a B.A. from Corpus Christi State University and a Masters from
Denver University.
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<PAGE> 52
KENT OYLER co-founded HSA's predecessor, CATV.net, in March 1997 and has
served as our Chief Operating Officer since January 1999 and as Chief Executive
Officer from April 1998 to December 1998. From 1982 to 1997, Mr. Oyler was
employed by Henry Vogt Co., a Louisville, Kentucky based manufacturer, where he
held several positions, including Treasurer, Vice President and Chief Financial
Officer. While serving at Henry Vogt, Mr. Oyler founded several independent
entrepreneurial ventures, including six start-up ventures. Mr. Oyler received a
B.S. and an M.B.A. from the University of Louisville.
GEORGE E. WILLETT has served as our Chief Financial Officer since June
1998. From 1997 to 1998, Mr. Willett served as Chief Financial Officer of
American Pathology Resources, Inc. and, from 1994 to 1997, as Chief Financial
Officer of Regent Communications. Previously, Mr. Willett served as corporate
accounting manager for United States Shoe Corporation and held various positions
with Coopers & Lybrand. Mr. Willett received a B.S. from Xavier University.
ATUL C. DOSHI has served as our Chief Technology Officer since January
1999. From 1996 to 1998, Mr. Doshi served as Regional Vice President-Engineering
and Construction for MediaOne Group's National Markets Region. From 1993 to
1996, Mr. Doshi served as Director, Multi-Media Services for MCI. Prior to that
time, Mr. Doshi was responsible for operations and engineering at New York
Telephone, and served as Director of Advanced Engineering at Warner-Amex Cable
Communications. Mr. Doshi received a B.S. from the University of Baroda in
India, and an M.S. from Columbia University.
FERRIS PEERY has served as our Executive Vice President, Industry Sales,
since March 1999. From 1991 to 1999, Mr. Peery served as an Executive Vice
President of ANTEC. Previously, he served as Area Vice President of Anixter
Bros. Wire and Cable Division and as National Sales Manager of Comscope Cable TV
Converters.
CHRISTOPHER P. BRITTON has served as our Senior Vice President, Marketing
and Sales, since July 1998. From 1997 to 1998, Mr. Britton served as Executive
Director and General Director of Enterprise Data Networking, a unit of U S WEST.
From 1996 to 1997, Mr. Britton served as Director of Customer Service and
Operations Support for Business and Government Services at U S WEST, and, from
1994 to 1995, as Director of Strategy and Process Reengineering/Network Services
at Ameritech Telecom. Mr. Britton received a B.A. from the University of
Colorado and an M.B.A. from Northwestern University.
JOHN G. HUNDLEY has served as our Vice President, Assistant Secretary and
General Counsel since May 1998 and as our Secretary since May 1999. From 1997 to
1998, Mr. Hundley served as General Counsel and Vice President of Development
for 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. From 1991 to 1995, Mr. Hundley served as
Vice President of Legal Affairs for Cardinal Group Corporation, and then
Transitional Health Services, a multi-state nursing home operator. Previously,
Mr. Hundley practiced in the corporate transactions and finance group of Brown,
Todd & Heyburn, Louisville, Kentucky. Mr. Hundley received a B.B.A. from the
University of Kentucky and a J.D./M.B.A. from the University of Tennessee.
Key Employees
EDWARD J. CALLAHAN has served as our Senior Vice President, Advanced
Technology, since 1998. From 1995 to 1998, Mr. Callahan served as a consultant
to the telecommunications industry. From 1990 to 1995, Mr. Callahan was employed
by ANTEC, first as Vice President, Research and Development, and later as Vice
President, Technology. Previously, Mr. Callahan served as Vice President of
Research and Development for United Cable Television Corporation and as Director
of Research for American Television and Communications Corporation. Mr. Callahan
received a B.A. from Marist College.
HAROLD E. COOK has served as our Senior Vice President, Program Management,
since January 1999. From 1992 to 1998, Mr. Cook served as a marketing consultant
in the hydraulic equipment industry, prior to which he was employed by NASA
developing guidance platforms. Mr. Cook received a B.S. from the University of
Connecticut.
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<PAGE> 53
BRENDA FOX has served as our Senior Vice President, Business Development,
since March 1999. From 1995 to 1999, Ms. Fox served as Vice President Government
Relations for Continental Cablevision, and its successors, U S WEST. and
MediaOne Group. From 1992 to 1995, Ms. Fox was a Senior Partner of Dow, Lohnes &
Albertson, a law firm specializing in communications law. Previously, Ms. Fox
served as General Counsel and Vice President for Special Policy Projects for the
National Cable Television Association. Ms. Fox received a B.A. from the
University of California at Los Angeles and a J.D. from George Washington
University.
RICHARD S. GEORGE has served as our Vice President, International Business
Development, since April 1999. From 1998 to 1999, Mr. George served as Vice
President of International Business Development for Constellation
Communications, Inc. From 1995 to 1998, Mr. George served as Vice President of
South American Ventures for Continental Cablevision and its successor, MediaOne
Group. From 1992 to 1995, he served as director of the European and C.I.S.
International Ventures Division of Comsat Corporation. From 1989 to 1992, Mr.
George managed marketing and business development in Europe, South America and
Asia for General Dynamics Commercial Launch Services, Inc. Previously, he served
as International Marketing Manager for Martin Marietta Commercial Title, Inc.
Mr. George received a B.A. from American University School of International
Service and an LL.B. from the McGill University School of Law.
BILL KREMPASKY, SR. has served as our Senior Vice President, MSO Sales,
since March 1998. From 1968 to 1998, Mr. Krempasky was employed by ANTEC,
serving most recently as its Executive Vice President of Sales and Marketing.
THORN LANDERS has served as our Vice President, Consumer Sales, since
August 1998. From 1996 to 1998, Mr. Landers served as Vice President of
Marketing at Cox Communications where he was responsible for the launch of high
speed data, cable and telephony services. Prior to 1996, Mr. Landers worked in
marketing and sales at American Express. Mr. Landers received a B.A. from the
University of Colorado and an M.B.A. from the University of Virginia.
MARIAN NEELY-CARLSON has served as our Vice President, Corporate
Communications, since August 1998. From 1997 to 1998, Ms. Neely-Carlson was a
principal in Neely-Carlson Communications, a public relations firm specializing
in the telecommunications industry. Before founding that firm, Ms. Neely-
Carlson served as manager and then Director of Corporate Communications for TCI
from 1995 to 1997. She served as Community Relations Manager in the Tampa Bay
Time Warner Cable Division from 1989 to 1994. Ms. Neely-Carlson holds a B.A. and
an M.A. from George Peabody College at Vanderbilt University.
RICHARD J. PULLEY has served as our Vice President, Operations, since June
1998. From 1988 to 1998, Mr. Pulley was Director of Purchasing for Comcast Cable
Communications. He previously served as director of Materials Management for
Avery Corporation, Sobar Division, and Production Control Manager for Plumb Tool
Company. Mr. Pulley received a B.S. from Shippensburg University.
DAVID T. RICHARDSON has served as our Vice President, Finance, since March
1999. From 1997 to 1999, Mr. Richardson served as Vice President of Finance,
CFO, and Director of Quality Assurance and Regulatory Affairs for Medworks, a
start-up medical device development company in Louisville, Kentucky. From 1996
to 1997, Mr. Richardson served as Controller for Mas-Hamilton Group, Inc. From
1994 to 1996, he served as a senior accountant with Coopers & Lybrand, LLP, and,
from 1987 to 1992 as Assistant Vice President for the U.S. Corporate Division of
Wachovia Bank in Atlanta, Georgia. Mr. Richardson received a B.S. from the
University of Tennessee and an M.B.A. from the University of Virginia and is a
certified public accountant.
JORGE SALINGER has served as our Vice President, Engineering, since
December 1998. From 1994 to 1998, Mr. Salinger served as Senior Director of
Digital Services Engineering at Adelphia Communications Corp. Prior to that, he
served as Assistant Director of Telecommunications at Florida International
University, and held engineering positions at Systems Engineering Consultants,
the National Hurricane
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<PAGE> 54
Center and AT&T's Latin America business division. He received a B.A. and an
M.S. in electrical engineering from Florida International University.
TAMMY L. SMITH has served as our Vice President, Affiliate Relations, since
May 1998. From 1996 to 1998, Ms. Smith served as Director of Product Management
for Ameritech New Media, and from 1993 to 1996 as Corporate Marketing Manager
for TCI. Previously, Ms. Smith was a partner with Smith & Ross Advertising, a
Vice President at DDB Needham Worldwide, and Regional Marketing Manager for
Wendy's International. Ms. Smith received a B.B.M. from Abilene Christian
University.
JEFF TOKAR has served as our Vice President, Affiliate Relations, since
January 1999. From 1996 to 1998, Mr. Tokar served as Director of New Business
and Technology for Marcus Cable. From 1994 to 1996, he served as the Director of
Sales Engineering for ANTEC, prior to which he served as Manager of Systems
Engineering for EMI Communications Corporation. Mr. Tokar received a B.S. from
the United States Military Academy at West Point and an M.S. from Golden Gate
University.
Directors
DAVID A. JONES, JR. has served as a director and our Chairman of the Board
since April 1998. He is Chairman of Chrysalis Ventures, a private equity
management firm in Louisville, Kentucky. Mr. Jones serves as Vice Chairman of
Humana Inc., a managed care company, and as a director of MidAmerica Bancorp and
several private companies. Prior to forming Chrysalis in 1994, Mr. Jones
practiced corporate law in Louisville (1992-1993) and served in the U.S.
Department of State general counsel's office (1988-1992). Mr. Jones earned a
B.A. from Yale University in 1980, and a J.D. from Yale Law School in 1988.
ROBERT S. SAUNDERS has served as a director since April 1998 and became
Vice Chairman of the Board in November 1998. From 1998 to the present, Mr.
Saunders has served as Senior Managing Director of Chrysalis Ventures, a private
equity management firm in Louisville, Kentucky. From 1993 to 1997, Mr. Saunders
served as Chief Planning Officer and Managing Director for Strategic Planning
and Business Development at Providian Capital Management, Inc. From 1988 to
1993, Mr. Saunders was Managing Director of Saunders Capital Group, Inc., a
Boston-based private equity group. From 1986 to 1988, Mr. Saunders was Senior
Vice President for the Krupp Companies in Boston, a privately held financial
services and real estate investment company. Mr. Saunders began his career in
1978 as a business strategy consultant with Boston Consulting Group and joined
Bain & Co. in 1982. Mr. Saunders received a B.A. from Stanford University, an
M.Sc from the London School of Economics, and an M.A. from Harvard University.
IRVING W. BAILEY, II has served as a director of HSA since April 1998. From
1997 to the present, Mr. Bailey has served as President of Bailey Capital
Corporation, a private investment company, and serves as Vice Chairman of Aegon
USA, Inc. From 1981 to 1997, Mr. Bailey served in various executive capacities
with Providian Corporation, and was Chairman and Chief Executive Officer from
1988 to 1997, when it was acquired by Aegon NV. Mr. Bailey is a director of
Computer Sciences Corporation and several private companies and a former
director of BellSouth Telecommunications, Inc. and Providian Corporation. Mr.
Bailey received a B.A. from the University of Colorado and an M.B.A. from New
York University Graduate School of Business.
MICHAEL E. GELLERT has served as a director of HSA since April 1998. From
1967 to the present, Mr. Gellert has served as a General Partner of Windcrest
Partners, New York, New York, a private investment company. Mr. Gellert served
in various capacities with Drexel Burnham Lambert and its predecessors from 1958
to 1989. Mr. Gellert serves as a director of Devon Energy Corp., Humana Inc.,
Premier Parks, Inc., Seacor Smit Inc., Smith Barney World Funds, Smith Barney
Worldwide Securities Ltd., and Smith Barney Worldwide Special Fund NV. Mr.
Gellert received an A.B. from Harvard University and an M.B.A. from the Wharton
School of Finance and Commerce.
JERALD L. KENT, has served as a director of HSA since November 1998. Mr.
Kent co-founded Charter Communications, Inc. and, from 1992 to the present, has
served in various executive capacities at Charter. He has served as President
since 1996 and as Chief Executive Officer since 1997. Previously, Mr. Kent
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served in various executive capacities with Cencom Cable Associates, Inc. He
joined Cencom in 1983 as Senior Vice President of Corporate Development and
served as Executive Vice President and Chief Financial Officer from 1987 to
1992. Mr. Kent serves as a director of Charter and Cable Television
Laboratories, Inc. Mr. Kent received a B.A. and an M.B.A. from Washington
University and is a certified public accountant.
WILLIAM D. SAVOY, has served as a director of HSA since November 1998.
Since 1990, Mr. Savoy has served as President of Vulcan Northwest, Inc. and is
Vice President of Vulcan Ventures, Incorporated, both venture capital firms
wholly-owned by Paul Allen. From 1987 until 1990, Mr. Savoy was employed by
Layered, Inc., a company controlled by Mr. Allen, and became its President in
1988. Mr. Savoy serves as a director of CNET, Inc., Harbinger Corporation,
Metricom, Inc., Telescan, Inc., Ticketmaster Online-CitySearch, Inc., USA
Networks, Inc., and U.S. Satellite Broadcasting Co., Inc. Mr. Savoy received a
B.S. from Atlantic Union College.
STEPHEN E. SILVA has served as a director of HSA since November 1998. From
1995 to the present, Mr. Silva served in various executive capacities at
Charter, where he currently serves as Vice President, Corporate Development and
Technology. From 1985 to 1995, Mr. Silva served in various capacities at
Cabledata, Inc. and its predecessors.
BOARD COMPOSITION
Upon completion of this offering, our board of directors will consist of
three classes that serve staggered three-year terms as follows:
<TABLE>
<CAPTION>
CLASS EXPIRATION MEMBERS
----- ---------- -------
<S> <C> <C>
Class I 2000 Bailey, Silva
Class II 2001 Gellert, Kent
Class III 2002 Jones, Saunders, Savoy
</TABLE>
BOARD COMMITTEES
The executive committee consists of Messrs. Bailey, Gellert, Jones,
Saunders and Savoy. The executive committee has all the authority of the board,
except with respect to items requiring shareholder approval or submission.
The audit committee consists of Messrs. Bailey, Gellert, Jones, Saunders
and Kent. The audit committee makes recommendations to the board of directors
regarding the selection of independent public accountants, reviews the results
and scope of the audit and other services provided by our independent public
accountants and reviews and evaluates our internal control functions.
The compensation committee consists of Messrs. Bailey, Gellert, Jones,
Saunders and Silva. The compensation committee administers the issuance of stock
options under our stock option plans, makes recommendations to the board of
directors regarding the various incentive compensation and benefit plans and
determines salaries for the executive officers and incentive compensation for
employees.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation for serving on
the board of directors or any committee of the board, but directors may be
reimbursed for their reasonable expenses incurred in connection with attendance
at board and committee meetings. However, non-employee directors receive
automatic grants of stock options under one of our option plans. See "Stock
Option Plans -- 1999 Non-Employee Directors Plan".
We have entered into indemnification agreements with each member of the
board of directors providing for the indemnification of directors to the fullest
extent authorized, permitted or allowed by Delaware law.
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<PAGE> 56
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the board of directors or
compensation committee and the board of directors or compensation committee of
any other company.
CONFLICT OF INTEREST TRANSACTIONS
Three of our directors are affiliates of Vulcan and Charter. Conflicts of
interest may arise as a consequence of their relationships with Vulcan and
Charter, including conflicts related to corporate opportunities that could be
pursued by us, on the one hand, or by Vulcan and Charter, on the other hand, or
conflicts related to existing or new contractual relationships between us, on
the one hand, or by Vulcan and Charter, on the other hand. All future
transactions between us and our officers, directors and principal shareholders
and their affiliates will be approved by a majority of the board of directors,
including a majority of the independent and disinterested outside directors.
EXECUTIVE COMPENSATION
The following table sets forth compensation awarded to, earned by or paid
to the two individuals who served as our Chief Executive Officer during 1998. No
other executive officer received annual salary and bonus exceeding $100,000 in
1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION YEAR SALARY
--------------------------- ----- ---------
<S> <C> <C>
Ron Pitcock, President...................................... 1998 $112,792
Kent Oyler, Chief Operating Officer......................... 1998 $ 64,375
</TABLE>
STOCK OPTION PLANS
1998 Stock Option Plan
We adopted the 1998 Stock Option Plan in April 1998 and authorized options
to purchase up to 1,395,000 shares of common stock for issuance under the plan.
Options to purchase 839,325 shares of common stock have been granted under the
plan, at a weighted average exercise price of $1.67 per share, all of which will
become exercisable upon consummation of the offering. The plan provides for
grants of incentive stock options and nonqualified stock options to our
designated employees and directors. In January 1999, the board of directors
elected not to grant additional options under the plan.
Administration of the Plan. The compensation committee of the board of
directors administers and interprets the plan. The compensation committee:
- Determines the individuals to whom grants are made under the plan;
- Determines the type, size and terms of the grants made to each such
individual;
- Determines the time when the grants are made and the duration of any
applicable exercise period; and
- Deals with any other matters arising under the plan.
Grants. Grants under the plan consist of:
- Options intended to qualify as incentive stock options within the meaning
of Section 422 of the Internal Revenue Code; and
- Nonqualified stock options not intended to so qualify.
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<PAGE> 57
The exercise price of shares of common stock underlying options granted
under the plan is determined by the compensation committee and is equal to or
greater than the fair market value of a share of common stock on the date of
grant, as determined by the compensation committee.
A participant may pay the exercise price of shares of common stock
underlying options granted:
(1) in cash;
(2) by delivering shares of common stock owned by the participant; or
(3) by such other method as the compensation committee approves, including
payment through a broker in accordance with specified procedures.
Options vest according to the terms and conditions determined by the
compensation committee and specified in the grant instrument, but in no case at
a rate less than 20% per year over five years from the grant date, subject to
acceleration in certain events, including the closing of an initial public
offering. The term of all options granted under the plan does not exceed ten
years from the date of grant.
Change of Control. Upon a change of control, all outstanding options under
the plan immediately vest. Upon a change of control where we are not the
surviving entity or where we survive only as a subsidiary of another entity, all
outstanding options will be assumed by or replaced with comparable options or
stock by the surviving corporation. A "change of control" is defined to have
occurred:
(1) if any "person", other than persons who are our shareholders as of the
effective date of the plan, acquires all of the then outstanding shares of
common stock;
(2) if we merge or consolidate with another corporation and Broadband
Solutions, LLC will not beneficially own, immediately after the transaction,
shares of the surviving corporation; or
(3) upon the closing of the sale of our common stock in an underwritten
public offering, including this offering.
Tax Consequences. The following description of the tax consequences of
awards under the 1998 stock option plan is based on present federal tax laws and
does not purport to be a complete description of the tax consequences of the
1998 stock option plan.
There are generally no federal tax consequences as to the optionee or to us
upon the grant of an option. On the exercise of an incentive stock option, the
optionee will not recognize any income, and we will not be entitled to a
deduction for tax purposes, although such exercise may give rise to liability
for the optionee under the alternative minimum tax provisions of the Internal
Revenue Code. However, if the optionee disposes of shares acquired upon the
exercise of an incentive stock option within two years of the date of grant or
one year of the date of exercise, the optionee will recognize ordinary income,
and we will be entitled to a deduction for tax purposes in the amount of the
excess of the fair market value of the shares of common stock on the date of
exercise over the option exercise price (or the gain on sale, if less); the
remainder of any gain, and any loss, to the optionee will be treated as capital
gain or loss to the optionee. On the exercise of a nonqualified stock option,
the amount by which the fair market value of common stock on the date of the
exercise exceeds the option exercise price will generally be taxable to the
optionee as ordinary income and will generally be deductible for tax purposes by
us. The disposition of shares acquired upon exercise of a non-qualified option,
or an incentive stock option, if after the one year and two year periods
described above, will generally result in capital gain or loss to the optionee
but will have no tax consequences to us.
Section 162(m). Under Section 162(m) of the Internal Revenue Code, we may
be precluded from claiming a federal income tax deduction for total remuneration
in excess of $1 million paid to the chief executive officer or to any of the
other four most highly compensated officers in any one year. Total remuneration
generally would include amounts received upon the exercise of stock options
granted under the plan. An exception exists, however, for amounts received upon
exercise of stock options pursuant to certain grandfathered plans. Options
granted under the plan satisfy this exception.
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1999 Stock Option Plan
We adopted the 1999 Stock Option Plan in January 1999. The plan provides
for grants of options to our designated employees, officers and directors.
General. The plan authorizes options to purchase up to 3,100,000 shares of
common stock for issuance. The maximum number of shares for which options may be
granted to any individual in any calendar year will not exceed 465,000. If
options granted under the plan expire or are terminated for any reason without
being exercised, the shares of common stock underlying such grant will again be
available for purposes of the plan.
Administration of the Plan. The compensation committee of the board of
directors administers and interprets the plan. The compensation committee will
consist of two or more persons appointed by the board of directors from among
its members, each of whom must be a "non-employee director" as defined by Rule
16b-3 under the Securities Exchange Act of 1934, and an "outside director" as
defined by Section 162(m) of the Internal Revenue Code. The compensation
committee has the sole authority to:
- Determine the employees to whom grants will be made under the plan;
- Determine the type, size and terms of the grants to be made to each
employee;
- Determine the time when the grants will be made and the duration of any
applicable exercise or restriction period, including the criteria for
vesting; and
- Deal with any other matters arising under the plan.
Types of Grants. Grants under the plan may consist of:
- Options intended to qualify as incentive stock options within the meaning
of Section 422 of the Internal Revenue Code; and
- Nonqualified stock options that are not intended to so qualify.
Eligibility for Participation. Grants may be made to any of our employees,
officers and directors. As of April 29, 1999, we had granted options to purchase
46,500 shares at an exercise price of $3.23 per share and 21,000 shares at an
exercise price equal to the initial public offering price per share. In
addition, we expect to issue options for an additional 465,065 shares at an
exercise price equal to the initial public offering price per share
contemporaneously with the offering.
Terms of Options. The exercise price of common stock underlying an option
will be determined by the compensation committee, and may be equal to, greater
than, or less than the fair market value of a share of common stock on the date
of grant, provided that
(a) the exercise price of an incentive stock option will be equal to or
greater than the fair market value of a share of common stock on the date the
incentive stock option is granted, and
(b) the exercise price of an incentive stock option granted to an employee
who owns more than 10% of the common stock may not be less than 110% of the fair
market value of the underlying shares of common stock on the date of grant.
The participant may pay the exercise price:
(1) in cash;
(2) by delivering shares of common stock owned by the participant; or
(3) by any other method the compensation committee approves, including
payment through a broker in accordance with specified procedures.
All options granted under the plan vest at a rate of 20% per year over five
years from the grant date.
The compensation committee will determine the term of each option which may
be up to a maximum of ten years from the date of grant, except that the term of
an incentive stock option granted to an
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<PAGE> 59
employee who owns more than 10% of the common stock may not exceed five years
from the date of grant.
Change of Control. Upon a change of control, where the surviving or
acquiring entity does not assume all outstanding options or replace them with
comparable options, the compensation committee may accelerate the vesting of all
outstanding options as of the participant's next vesting date so that they
become exercisable prior to the consummation of the change of control at such
times and on such conditions as the compensation committee determines.
A change of control is defined to have occurred in the event of:
(1) a dissolution or liquidation of the company;
(2) a merger or consolidation in which we are not the surviving corporation
unless there is no substantial change in the stockholders of the company and
outstanding options are assumed by the successor corporation;
(3) a merger in which we are the surviving company but our stockholders
cease to own any shares in the company;
(4) the sale of substantially all the assets of the company; or
(5) the acquisition, sale or transfer of more than 50% of our outstanding
shares by tender offer or similar transaction (except for acquisitions of more
than 50% of our outstanding shares by Vulcan or an affiliate of Vulcan).
Amendment and Termination of the Plan. The compensation committee may amend
or terminate the plan at any time; except that it may not make any amendment
that requires stockholder approval pursuant to Rule 16b-3 of the Securities
Exchange Act of 1934 or Sections 162(m) or 422 of the Internal Revenue Code
without stockholder approval. The plan will terminate on the tenth anniversary
of its effective date, unless the compensation committee terminates the plan
earlier or extends it with approval of the stockholders.
Tax Consequences. The tax consequences of options granted under the 1999
stock option plan will generally be the same as the tax consequences of options
granted under the 1998 stock option plan.
Section 162(m). Under Section 162(m) of the Internal Revenue Code, we may
be precluded from claiming a federal income tax deduction for total remuneration
in excess of $1 million paid to the chief executive officer or to any of the
other four most highly compensated officers in any one year. Total remuneration
would include amounts received upon the exercise of stock options. An exception
exists, however, for "performance-based compensation," including amounts
received upon the exercise of stock options pursuant to a plan approved by
stockholders that meets certain requirements. The plan has been approved by
stockholders and it is intended that grants of options thereunder meet the
requirements of "performance-based compensation."
1999 NON-EMPLOYEE DIRECTORS PLAN
We adopted the 1999 Non-Employee Directors Plan in January 1999. As of
April 29, 1999, options to purchase 189,875 shares at an exercise price of $3.23
per share were outstanding under the plan. Under the plan, each non-employee
director is automatically granted an option to purchase 27,125 shares of our
common stock on the effective date of the plan, or the date on which the person
first becomes a non-employee director. Subsequent grants of options to purchase
11,625 shares of common stock are made to each non-employee director on the
first business day of each subsequent year, provided the director has served on
the board for at least the prior six months. Additional options may be granted
under the plan from time to time by the compensation committee to reward
extraordinary services by a director, subject to the consent of the remaining
directors.
The plan authorizes up to 465,000 shares of common stock for issuance. If
options granted under the plan expire or are terminated for any reason without
being exercised, the shares of common stock underlying the grant will again be
available for purposes of the plan.
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The compensation committee of the board of directors interprets the plan.
The exercise price of options granted under the plan will be equal to the fair
market value of a share of common stock on the date the option is granted. Each
director's initial grant of options under the plan vests immediately upon grant.
Subsequent options granted to a director under the plan will vest ratably over
the director's then current term of service. Initial options and each subsequent
option granted will have a term of ten years.
EMPLOYMENT AGREEMENTS
Under an employment agreement dated February 23, 1998, Kent Oyler agreed to
be our Chief Executive Officer. Under this employment agreement, Mr. Oyler
receives a base monthly salary of $6,250, and a bonus of up to $40,000 per year
based on performance objectives established at the sole discretion of the
compensation committee. Under the employment agreement, Mr. Oyler has agreed
that he will not compete with us in any manner for a two year period following
the termination of his employment for any reason. The employment agreement can
be terminated at any time. In January 1999, we and Mr. Oyler amended his
agreement to provide for a change in his position to Chief Operating Officer.
Under an employment agreement dated April 3, 1998, Ron Pitcock agreed to be
our President. Under the employment agreement, Mr. Pitcock is entitled to
receive a base monthly salary of $9,167, and a bonus of up to $50,000 per year
based on performance objectives established at the sole discretion of the
compensation committee. Under the employment agreement, Mr. Pitcock has agreed
that he will not compete with us in any manner for a two year period following
the termination of his employment for any reason. The employment agreement can
be terminated at any time.
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CERTAIN TRANSACTIONS
Ron Pitcock and Kent Oyler, both executive officers of HSA, David Gibbs, a
former executive officer of HSA, and Joseph S. Gans, III, a former director of
HSA, were involved in our founding and organization. At its formation in
February 1998, CATV.net, Inc., our subsidiary following our formation in April
1998, issued an aggregate of 1 million shares of common stock to OPM Services,
Inc. and Colorado Limited Partnership, affiliates of Mr. Oyler, and 1 million
shares of common stock to the Gibbs Family Limited Partnership, an affiliate of
Mr. Gibbs. CATV.net issued the shares to OPM Services, the Colorado Limited
Partnership and the Gibbs Family Limited Partnership in exchange for their units
of CATV.net, LLC, in connection with the reorganization of the LLC as a
corporation. The LLC units were originally issued to Mr. Gibbs and Mr. Oyler for
nominal consideration upon the formation of the LLC. Additional units were
issued to Mr. Oyler in consideration of the cancellation of $117,000 due Mr.
Oyler. In April 1998, the shares of CATV.net issued to OPM Services and the
Colorado Limited Partnership were exchanged for 1.55 million shares of our
common stock and the shares of CATV.net issued to the Gibbs Family Limited
Partnership were exchanged for 1.55 million shares of our common stock in
connection with our formation and the reorganization of CATV.net as our
subsidiary. OPM Services, the Colorado Limited Partnership and the Gibbs Family
Limited Partnership are entitled to certain registration rights with respect to
their shares of common stock. See "Description of Securities--Registration
Rights". In April 1998, High Speed Access Network, Inc., our subsidiary
following our formation, issued 980,000 shares of common stock to the Pitcock
Family Limited Partnership, an affiliate of Mr. Pitcock, and 816,000 shares of
common stock to Mr. Gans for nominal consideration. The shares of common stock
of High Speed Access Network issued to the Pitcock Family Limited Partnership
and to Mr. Gans were exchanged for 1.5 million and 1.3 million shares
respectively of our common stock in April 1998 in connection with our formation
and the reorganization of High Speed Access Network as our subsidiary.
Since our formation we have issued 20 million shares of convertible
preferred stock, which will automatically convert into 31 million shares of
common stock upon or immediately prior to the completion of this offering. No
dividends have been declared or paid on the convertible preferred stock;
however, the cumulative, accrued and unpaid dividends on the convertible
preferred stock will be paid in shares of common stock upon conversion of the
preferred stock. We estimate that as of March 31, 1999 the holders of the
convertible preferred stock would have received 75,166 shares of common stock in
payment of the accrued and unpaid dividends. The holders of common stock issued
upon conversion of the convertible preferred stock are entitled to registration
rights. See "Description of Securities--Registration Rights".
From April to November 1998 we sold 5 million shares of Series A
convertible preferred stock to Broadband Solutions, LLC and 2 million shares of
Series B convertible preferred stock to Broadband Solutions II, LLC. The
purchase price of $1.00 per share, $5 million in the aggregate, for the Series A
convertible preferred stock was paid in cash. The purchase price of the Series B
convertible preferred stock of $2.50 per share, $5 million in the aggregate, was
paid in cash and/or in exchange for a note owing to Broadband. In December 1998
and April 1999, Broadband Solutions, LLC and Broadband Solutions II, LLC
distributed the 5 million shares of Series A convertible preferred stock and the
2 million shares of Series B convertible preferred stock to their members. Until
the completion of the offering, Broadband Solutions, LLC will have voting power
with respect to the Series A convertible preferred stock and Series B
convertible preferred stock pursuant to irrevocable proxies granted to it by the
members of Broadband Solutions, LLC and Broadband Solutions II, LLC and by River
Cities Capital Fund Limited Partnership, a former member. David A. Jones, Jr.,
our Chairman of the Board, is the managing member, and Robert S. Saunders, our
Vice Chairman, Irving W. Bailey, II and Michael E. Gellert, directors, are
managers of Broadband Solutions, LLC and Broadband Solutions II, LLC. In
addition, entities controlled by them are members of Broadband Solutions, LLC
and Broadband Solutions II, LLC. These entities are entitled to registration
rights with respect to the shares of common stock to be issued upon conversion
of the convertible preferred stock owned by them. See "Description of
Securities--Registration Rights".
In connection with the sale of the Series A convertible preferred stock to
Broadband Solutions, LLC, we agreed to pay Chrysalis Ventures a consulting fee
of $20,000 per quarter, upon approval by the board
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of directors. Mr. Jones is the Chairman and Mr. Saunders is the Senior Managing
Director of Chrysalis Ventures. In 1998, we accrued $60,000 payable to Chrysalis
Ventures under the consulting agreement.
In November 1998, we entered into a systems access and investment agreement
with Vulcan Ventures and Charter Communications, a programming content agreement
with Vulcan, and a related network services agreement with Charter. Under these
agreements, Charter committed to provide us 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. Charter can terminate our
exclusivity rights, on a system-by-system basis, if we fail to meet performance
benchmarks relating to various equipment maintenance, operations and reporting
obligations or otherwise breach our agreement, including our commitment to
provide content designated by Vulcan. Charter can terminate our agreement, for
any reason, as long as it purchases the associated cable headend equipment and
modems at book value and pays us a termination fee based on the net present
value of the revenues we otherwise would earn for the remaining term of the
agreement from end users subscribing to our services as of the termination date.
During the term of the agreements, we have agreed not to deploy Worldgate(SM),
Web TV(R), digital TV or related products in the market areas of any committed
system or in any area which Charter operates a cable system. The agreements will
continue until we cease to provide services to an end user residing in a home
passed in a committed system.
Concurrently with our entering into these agreements, we issued 8 million
shares of Series B convertible preferred stock to Vulcan at a purchase price of
$2.50 per share, which it acquired for $20 million in cash. Vulcan also
subscribed to purchase 2.5 million shares of our Series C convertible preferred
stock at a purchase price of $5.00 per share on or before November 25, 2000, and
received an option to purchase an additional 2.5 million shares of our Series C
convertible preferred stock at a purchase price of $5.00 per share on or before
November 25, 2000. In April 1999, Vulcan purchased the entire 5 million shares
of Series C convertible preferred stock for $25 million in cash. The shares of
Series B and Series C convertible preferred stock issued to Vulcan will
automatically convert at a price of $3.23 per share into 20.15 million shares of
common stock upon completion of this offering. Vulcan is entitled to
registration rights with respect to the shares of common stock to be issued upon
conversion of the Series B and Series C convertible preferred stock owned by it.
See "Description of Securities--Registration Rights."
As an inducement to Vulcan to cause Charter to commit additional systems to
us, we granted Vulcan warrants to purchase up to 7.75 million shares of our
common stock at a purchase price of $3.23 per share. Vulcan subsequently
assigned the warrants to Charter. The warrants are exercisable by Charter at the
rate of 1.55 shares of common stock for each home passed committed to us by
Charter in excess of 750,000. 3.9 million warrants may be earned by Charter on
or before July 31, 2001 and must be exercised on or before July 31, 2002. 3.9
million warrants may be earned by Charter on or before July 31, 2003 and must be
exercised on or before July 31, 2004. The warrants may be forfeited in certain
circumstances, generally if the number of homes passed in a committed system is
reduced. All shares of common stock issuable upon exercise of the warrants have
registration rights. See "Description of Securities -- Registration Rights".
In February 1998, CATV.net, Inc. and OPM Services, Inc., an entity
controlled by Kent Oyler, our Chief Operating Officer, entered into a services
agreement under which OPM agreed to provide, on CATV's behalf, certain
financial, accounting, professional staffing and legal services. During 1998,
OPM received fees of $71,160 under the agreement. The agreement was terminated
on December 31, 1998.
In October 1997, HSA and Gans Multimedia Partnership, an entity owned by
Joseph S. Gans, III, a founder and former director of HSA, entered into a cable
affiliate agreement under which Gans Multimedia granted us the exclusive right
to provide the customers of three cable systems owned by Gans Multimedia with
high speed Internet access. The agreement has a five year term and provides that
Gans Multimedia will receive 25% of the gross revenues we receive under the
agreement. During 1998, we paid Gans Multimedia $76,116 under the agreement.
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In April 1998, we borrowed $650,000 from Gans Multimedia. The note bears
interest at the rate of 7% per annum. We repaid $150,000 of the principal in
December 1998 and the remaining $500,000 balance matures on April 1, 2001. The
loan is secured by various operating assets we own in St. Mary's County,
Maryland.
In October 1998, Broadband Solutions II, LLC lent us $1 million, pursuant
to a 12% promissory note. Broadband exchanged the note for 400,000 shares of our
Series B convertible preferred stock and $10,750 in cash, representing accrued
and unpaid interest under the note, in November 1998.
In March 1999, we formed Darwin Networks, Inc. a wholly-owned subsidiary,
and transferred to Darwin all of the assets used in our digital subscriber line
technology division in exchange for 4 million shares of Darwin common stock. We
subsequently distributed the 4 million shares of Darwin common stock to our
stockholders. In the distribution, Vulcan received 2,166,667 shares, Broadband
Solutions, LLC received 488,125 shares, Broadband Solutions II, LLC received
423,042 shares, OPM Services received 55,555 shares, the Colorado Limited
Partnership received 111,111 shares, the Gibbs Family Limited Partnership
received 166,667 shares and the Pitcock Family Limited Partnership received
163,333 shares. As of March 31, 1999, the date of the distribution to
stockholders, the outstanding shares of Darwin common stock were valued at
approximately $0.24 per share. The distribution of the Darwin shares to our
existing stockholders resulted in a $549,000 reduction in our net operating loss
carryforward.
In connection with the transaction, we agreed to provide Darwin various
financial, accounting and other professional staff services and will be
compensated for our costs at fair market value. The services agreement is for an
initial six month term, and may be terminated on 30 days notice by us or Darwin.
We also entered into an agreement with Darwin under which Darwin agreed to
provide us the deployment of digital subscriber line technology in our systems,
as needed and requested by us from time to time, at negotiated rates. We also
agreed to loan Darwin up to $500,000 for working capital pursuant to a six month
unsecured revolving credit note bearing interest at the prime rate. The note is
payable by Darwin on September 15, 1999. In connection with the note, Darwin
issued us a warrant to purchase 1 million shares of Darwin common stock at an
exercise price of $5.00 per share. The warrant is exercisable for a period
commencing on March 15, 1999 and ending on the earlier of March 15, 2004 or the
completion of an initial public offering by Darwin. Four of our directors, David
A. Jones, Jr., Michael E. Gellert, Robert S. Saunders and William D. Savoy, are
also directors of Darwin. David F. Gibbs, a current stockholder and former
officer of HSA, is the President of Darwin.
For information regarding the grant of stock options to executive officers
and directors, see "Management--Compensation of Directors," "--Stock Option
Plans" and "Principal Stockholders."
We believe that the above transactions were entered into on terms no more
favorable than they would have been had they been entered into with unrelated
third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of April 29, 1999
with respect to the beneficial ownership of our common stock by:
- each person known by us to own beneficially more than five percent, in
the aggregate, of the outstanding shares of our common stock,
- our directors and each individual who served as our Chief Executive
Officer during 1998, and
- all executive officers and directors as a group.
Share ownership in each case includes shares issuable upon exercise of
outstanding options and warrants that are exercisable within 60 days of April
29, 1999 as described in the footnotes below, but does not include shares of
common stock we will issue in payment of accrued and unpaid dividends on the
outstanding shares of convertible preferred stock upon its conversion to common
stock. Percentages of ownership are calculated pursuant to SEC Rule 13-(d)(1).
The number of shares outstanding after the offering assumes a price to public of
$12.00 per share. The Percent of Ownership after the offering reflects the
distribution of all shares of common stock held by Broadband Solutions, LLC to
its members.
<TABLE>
<CAPTION>
PERCENT OF OWNERSHIP
NUMBER OF SHARES ---------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
---------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Vulcan Ventures, Incorporated.............. 20,172,971(1) 54.2% 38.8%
110 110th Avenue, N.E.
Bellevue, WA 98004
Irving W. Bailey, II....................... 10,877,125(2)(3)(4) 29.2% 3.0%
205 Worth Avenue
Suite 201
Palm Beach, FL 33480
Michael E. Gellert......................... 10,877,125(2)(3)(5) 29.2% 3.0%
122 E. 42nd Street
49th Floor
New York, NY 10168-0137
David A. Jones, Jr. ....................... 10,877,125(2)(3)(6) 29.2% 8.0%
1850 National City Tower
101 South Fifth Street
Louisville, KY 40202
Robert S. Saunders......................... 10,877,125(2)(3)(7) 29.2% *
1850 National City Tower
101 South Fifth Street
Louisville, KY 40202
Robert J. Gellert.......................... 10,850,000(2)(8) 29.2% 3.0%
122 E. 42nd Street
34th Floor
New York, NY 10168-0127
J. David Grissom........................... 10,850,000(2)(9) 29.2% 2.0%
Suite 2510
400 West Market Street
Louisville, KY 40202
Broadband Solutions, LLC................... 10,850,000(2) 29.2% *
1850 National City Tower
101 South Fifth Street
Louisville, KY 40202
</TABLE>
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<TABLE>
<CAPTION>
PERCENT OF OWNERSHIP
NUMBER OF SHARES ---------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
---------------- ------------------ --------------- --------------
<S> <C> <C> <C>
River Cities Capital Fund Limited
Partnership.............................. 2,376,150(10) 6.4% 4.6%
Suite 2250
221 East 4th Street
Cincinnati, OH 45202
W. Kent Oyler, III......................... 1,550,000(11) 4.2% 3.0%
Ron Pitcock, Sr. .......................... 1,519,775(12) 4.1% 3.0%
Jerald L. Kent............................. 27,125(2)(3) * *
William D. Savoy........................... 20,200,096(1)(3)(13) 54.2% 38.9%
Stephen E. Silva........................... 27,125(13) * *
All executive officers and directors as a
group (14 persons)....................... 34,487,996(14) 91.7% 59.4%
</TABLE>
- ---------------
* Represents beneficial ownership of less than one percent of the outstanding
shares of our common stock.
(1) Includes 20,150,000 shares of common stock to be issued upon automatic
conversion of all shares of preferred stock owned by Vulcan, and 22,971
shares of common stock issuable upon the exercise of warrants held by
Charter Communications, an affiliate of Vulcan. In addition, Charter holds
warrants to purchase up to an additional 7,727,029 shares of common stock.
Paul Allen owns 100% of the outstanding shares of Vulcan.
(2) Includes 10,850,000 shares of common stock to be issued upon automatic
conversion of all shares of preferred stock over which Broadband Solutions
has sole voting power pursuant to irrevocable proxies until completion of
this offering, including 1,550,510 shares held by IWB Investments, LP,
1,550,510 shares held by Windcrest Partners, 4,133,661 shares held by JG
Funding, LLC, 115,044 shares held by Saunders Capital Group, LLC, 91,484
shares held by Saunders Capital Group Profit Sharing Plan, 1,032,641 shares
held by J. David Grissom and 2,376,150 shares held by RiverCities Capital
Fund Limited Partnership.
(3) Includes 27,125 shares of common stock issuable upon the exercise of stock
options granted to each of Irving W. Bailey, II, Michael E. Gellert, David
A. Jones, Jr., Robert S. Saunders, Jerald L. Kent, William D. Savoy and
Stephen E. Silva.
(4) Mr. Bailey is a manager of Broadband, and IWB Investments, LP is a member
of Broadband. Mr. Bailey is the president and principal shareholder of IWB
Investments, Inc., the general partner of IWB Investments, LP, and will
have sole voting and investment power over the shares held by IWB
Investments after the offering.
(5) Mr. Gellert is a manager of Broadband, and Windcrest Partners is a member
of Broadband. Mr. Gellert will share voting and investment power over the
shares held by Windcrest Partners after the offering.
(6) Mr. Jones is a manager of Broadband, and JG Funding is a member of
Broadband. Chrysalis Ventures, LLC, of which Mr. Jones is the Chairman and
principal shareholder, will have sole voting and investment power with
respect to the shares held by JG Funding, LLC after the offering.
(7) Mr. Saunders is a manager of Broadband, and each of Saunders Capital Group
and Saunders Capital Group Profit Sharing Plan is a member of Broadband.
Mr. Saunders will have sole voting and investment power over the shares
held by Saunders Capital Group and Saunders Capital Group Profit Sharing
Plan after the offering.
(8) Mr. Gellert is a general partner of Windcrest Partners and will share
voting and investment power over the shares held by Windcrest Partners
after the offering.
(9) Mr. Grissom is a manager and member of Broadband. Mr. Grissom will have
sole voting and investment power over the 1,032,641 shares held by him
after the offering.
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(10) Consists of common stock to be issued upon automatic conversion of all
shares of preferred stock owned by River Cities Capital Fund Limited
Partnership. River Cities has granted Broadband an irrevocable proxy with
respect to such shares, which will expire upon completion of the offering.
Glen Mayfield and Edward T. Robinson are the principals and owners of
Mayson, Inc., which is the general partner of River Cities Management,
Inc., the general partner of River Cities Capital Fund Limited Partnership.
The address of Mr. Mayfield and Mr. Robinson is Suite 2250, 221 East Fourth
Street, Cincinnati, OH 45202.
(11) Consists of 516,666 shares held of record by OPM Services, Inc. and
1,033,334 shares held of record by the Colorado Limited Partnership, both
of which Mr. Oyler controls.
(12) Consists of 1,519,000 shares held of record by the Pitcock Family Limited
Partnership, which Mr. Pitcock controls, and 775 shares of common stock
issuable upon the exercise of stock options held by Mr. Pitcock's spouse
which will become exercisable upon completion of this offering.
(13) Mr. Savoy is the Vice President of Vulcan. Mr. Savoy disclaims beneficial
ownership of shares held by Vulcan, and Vulcan disclaims beneficial
ownership of shares owned by Mr. Savoy.
(14) Includes 189,875 shares of common stock issuable upon the exercise of stock
options, 205,375 shares of common stock issuable upon the exercise of stock
options which will become exercisable upon completion of this offering, and
22,971 shares of common stock issuable upon the exercise of warrants.
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DESCRIPTION OF SECURITIES
At the closing of the offering our authorized capital stock will consist of
400 million shares of common stock, par value $.01 per share, 100 million shares
of Class A common stock, par value $.01 per share, and 10 million shares of
preferred stock, par value $.01 per share. We are a Delaware corporation,
subject to the Delaware General Corporation Law.
COMMON STOCK
Holders of our common stock are entitled to receive, as, when and if
declared by the board of directors from time to time, such dividends and other
distributions in cash, stock or property from our assets or funds legally
available for such purposes subject to the rights of any preferred stock that
may be authorized. Holders of common stock are entitled to one vote for each
share held of record on all matters on which shareholders may vote.
There are no preemptive, conversion, redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable. In the event of our liquidation, dissolution or winding
up, holders of common stock are entitled to share ratably in the assets
available for distribution, subject to the rights of any preferred stock that
may be authorized.
CLASS A COMMON STOCK
Our board of directors, without further action by the stockholders, is
authorized to issue an aggregate of 100 million shares of Class A common stock.
Upon completion of this offering, no shares of Class A common stock will be
outstanding and we have no plans to issue any Class A common stock. Our board of
directors may, by resolution of 66 2/3% of the directors then in office, without
stockholder approval, issue Class A common stock in one or more series and fix
the designations, powers, preferences and rights of the shares, provided that
any series of Class A common stock issued will either be nonvoting or will have
voting rights junior to the common stock and will be pari passu with the common
stock upon liquidation. Issuances of Class A common stock could have the effect
of making it more difficult for a third party to acquire, or could discourage or
delay a third party from acquiring, a majority of our outstanding stock.
PREFERRED STOCK
Our board of directors, without further action by the stockholders, is
authorized to issue an aggregate of 10 million shares of preferred stock. Upon
completion of this offering, no shares of preferred stock will be outstanding
and we have no plans to issue a new series of preferred stock. Our board of
directors may, by resolution of 66 2/3% of the directors then in office, without
stockholder approval, issue preferred stock with dividend rates, redemption
prices, preferences on liquidation or dissolution, conversion rights, voting
rights and any other preferences, which rights and preferences could adversely
affect the voting power of the holders of common stock. Issuances of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions or other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or could discourage or delay a
third party from acquiring, a majority of our outstanding stock.
OPTIONS
Options to purchase a total of 3.1 million shares of common stock may be
granted under the 1999 stock option plan and options to purchase 465,000 shares
of common stock may be granted under the 1999 non-employee directors stock
option plan. There are outstanding options to purchase a total of 257,375 shares
of common stock under these plans and 839,325 shares of common stock under the
1998 stock option plan. Of the total options outstanding, options to purchase
1,029,200 shares will be exercisable upon the closing of this offering. In
addition, we intend to issue options to purchase 465,065 shares of common stock
under the 1999 stock option plan at an exercise price equal to the initial
public offering price per share contemporaneously with this offering. Any shares
issued upon exercise of these options will be immediately available for sale in
the public market 90 days after the date of this prospectus or upon our filing
of a registration statement after the offering relating to our stock option
plans, subject to the
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terms of lock-up agreements entered into between certain of our optionholders
and the underwriters. See "Management--Stock Option Plans" and "Shares Eligible
for Future Sale."
WARRANTS
We are a party to certain warrant agreements that will under certain
circumstances entitle Charter to purchase 7.75 million shares of common stock at
a purchase price of $3.23 per share. The warrants are exercisable on the basis
of 1.55 shares of common stock for each home passed in a Charter cable system in
excess of 750,000 homes passed with respect to which we are retained to provide
high speed Internet access services. The warrants will be forfeited as to 3.9
million shares if they do not become exercisable on or before July 31, 2001, and
as to 3.9 million shares if they do not become exercisable on or before July 31,
2003. The warrants may be forfeited in certain other circumstances, generally if
the number of homes passed in a committed system is reduced. As of April 29,
1999, Charter had earned warrants to purchase 22,971 shares. The exercise price
and the number of shares of common stock that may be issued under the warrants
are subject to adjustment upon the occurrence of certain events, including
certain issuances of capital stock, rights, options, warrants or other
securities; stock splits; stock dividends; reorganizations; reclassifications;
consolidations or mergers. All shares of common stock issuable upon exercise of
all warrants have certain registration rights. See "Description of Capital
Stock--Registration Rights".
We have also issued a warrant to Microsoft to purchase 250,000 shares of
common stock at 125% of the initial public offering price, exercisable until May
2004. The warrant provides Microsoft the right to purchase one additional share
of our common stock for each additional 10 homes passed above 2.5 million homes
Comcast commits to us by May 1, 2002.
In March 1999, we issued warrants to purchase 20,150 shares of our common
stock at a purchase price of $6.45 per share in connection with our acquisition
of the assets of Atlanta Online InterNet, Inc.
OTHER EQUITY-BASED AGREEMENTS
From time to time in connection with the negotiation of material
agreements, we may use equity-based arrangements, including warrants to purchase
shares of common stock, as an incentive for a strategic partner to enter into an
agreement with us.
REGISTRATION RIGHTS
We have entered into registration rights agreements with certain of our
stockholders. After the completion of this offering, the holders of 31 million
shares of common stock issuable upon the conversion of all of the outstanding
preferred stock, and warrants to purchase an additional 7.75 million shares of
common stock, will be entitled to certain demand registration rights with
respect to the registration of their registrable securities under the Securities
Act. The holders of 25% or more of the registrable securities are entitled to
demand that we register their registrable securities under the Securities Act.
We are not required to effect more than two registrations pursuant to these
demand registration rights. These holders are also entitled to require us to
include their registrable securities in future registration statements that we
may file. In addition, after the completion of the offering, the holders of 3.1
million shares of common stock may demand that we register up to 20% of their
shares under the Securities Act. We are not required to effect more than one
registration pursuant to this demand registration right. In addition, these
holders may require us to include their shares in future registration statements
that we may file. These registration rights are subject to various conditions
and limitations, including the right of the underwriters of an offering to limit
the number of registrable securities that may be included in the offering. In
addition, holders of all of these shares will be restricted from exercising
their demand rights until 180 days after the date of this prospectus. We are
generally required to bear all of the expenses of these registrations, except
underwriting discounts and selling commissions. Registration of any of the
registrable securities held by security holders with registration rights will
result in shares becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of such registration.
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DELAWARE BUSINESS COMBINATION STATUTE
Section 203 of the Delaware General Corporation Law generally prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
interested stockholder attained such status with the approval of the board of
directors or unless the business combination is approved in a prescribed manner.
A "business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, fifteen percent
(15%) or more of the corporation's outstanding voting stock. This statute could
prohibit or delay a change in control of our company and could discourage
potential acquisition proposals.
BOARD OF DIRECTORS VACANCIES
Our bylaws authorize the board of directors to fill vacant directorships or
increase the size of the board of directors. This may deter a stockholder from
attempting to remove incumbent directors and simultaneously gaining control of
our board of directors by filling the vacancies created with its own nominees.
STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
Our amended and restated certificate of incorporation provides that
stockholders may not take action by written consent, but only at duly called
annual or special meetings of stockholders. The certificate further provides
that special meetings of our stockholders may be called only by the board of
directors, or by our chairman.
CLASSIFIED BOARD OF DIRECTORS
Our amended and restated certificate of incorporation divides our board of
directors into three classes, with regular three-year staggered terms and
initial terms of one year for the class I directors, two years for the class II
directors and three years for the class III directors. This could prevent a
party who acquires control of a majority of our outstanding voting stock from
obtaining control of the board of directors.
Our stockholders do not have the right to cumulative voting in the election
of directors.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Our bylaws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide advance notice to
us in writing. These provisions may preclude stockholders from bringing matters
before or from making nominations for directors at an annual meeting of
stockholders.
AUTHORIZED BUT UNISSUED SHARES
The ability of the board of directors to establish the rights of, and to
issue, substantial amounts of preferred stock without the need for shareholder
approval, may have the effect of discouraging, delaying or preventing a change
in control. Such preferred stock, among other things, may be used to create
voting impediments with respect to any changes in control or to dilute the stock
ownership of holders of common stock seeking to obtain control.
AMENDMENTS TO OUR CERTIFICATE AND BYLAWS
Under Delaware law, the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or bylaws.
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LIMITATION OF LIABILITY
Our amended and restated certificate of incorporation provides that none of
our directors will be personally liable to us or our stockholders for monetary
damages for any breach of fiduciary duty as a director except for liability for
breach of the director's duty of loyalty to us or our stockholders, for acts or
omissions which are not in good faith or which involve intentional misconduct or
knowing violations of law, for actions leading to improper personal benefit to
the director, and for the payment of dividends or approval of stock repurchases
or redemptions that are prohibited by Delaware law. This provision does not
affect the directors' responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
INDEMNIFICATION
Section 145 of the Delaware corporate laws provide for the power to
indemnify any directors and officers and to purchase insurance with respect to
liability arising out of their capacity or status as directors and officers. The
indemnification provisions are not exclusive of any other rights to which the
directors and officers may be entitled under the corporation's bylaws, any
agreement, a vote of stockholders or otherwise.
Our amended and restated certificate of incorporation provides a right to
indemnification to the maximum extent permitted by Delaware law to any person
who was or is a party or is threatened to be made a party to or becomes involved
in any action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was our director or
officer, or is or was serving at our request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses (including attorney's fees),
judgments, fines and amounts paid in settlement reasonably incurred by such
person in connection with such action, suit or proceeding. The certificate of
incorporation provides for the advancement of expenses incurred by any of our
directors, officers or other employees in the defense of any such actions, suits
or proceedings, so long as any director, officer or employee engaged in such a
defense is not later found ineligible for indemnification. The certificate of
incorporation also permits us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions, regardless of whether Delaware law would permit indemnification.
We have entered into agreements to indemnify our executive officers and
directors, in addition to the indemnification provided for in our certificate of
incorporation. We believe that these provisions and agreements are necessary to
attract and retain qualified directors and executive officers. We maintain
liability insurance to provide directors and officers with insurance coverage
for losses arising from claims based on breaches of duty, negligence, error and
other wrongful acts.
At present, there is no pending litigation or proceeding, and we are not
aware of any threatened litigation or proceeding, that may result in a claim for
such indemnification involving any director, officer, employee or agent as to
which indemnification will be required or permitted under the certificate of
incorporation.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American
Securities Transfer & Trust, Inc., Denver, Colorado.
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UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of common stock
applicable to Non-U.S. Holders of common stock who acquire and own it as a
capital asset within the meaning of section 1221 of the Internal Revenue Code. A
"Non-U.S. Holder" is any person other than
- a citizen or resident of the United States,
- a corporation or partnership created or organized in the United States or
under the laws of the United States or of any state, or
- an estate whose income is includable in gross income for United States
federal income tax purposes regardless of its source, or
- a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United
States persons have the authority to control all substantial decisions of
the trust.
For purposes of the withholding tax on dividends discussed below, a
non-resident fiduciary of an estate or trust will be considered a Non-U.S.
Holder. An individual may, subject to certain exceptions, be deemed to be a
resident alien (as opposed to a non-resident alien) by virtue of being present
in the United States on at least 31 days in the calendar and for an aggregate of
at least 183 days during a three-year period in the current calendar year
(counting for these purposes all of the days present in the current year,
one-third of the days present in the immediately preceding year, and one-sixth
of the days present in the second succeeding year). Resident aliens are subject
to U.S. federal tax as if they were U.S. citizens and, thus, are not Non-U.S.
Holders for purposes of this discussion.
This discussion does not consider specific facts and circumstances that may
be relevant to a particular Non-U.S. Holder's tax position, including the fact
that in the case of a Non-U.S. Holder that is a partnership, the U.S. tax
consequences of holding and disposing of shares of common stock may be affected
by certain determinations made at the partner level, and does not consider U.S.
state and local or non-U.S. tax consequences. Further, it does not consider
Non-U.S. Holders subject to special tax treatment under the federal income tax
laws, including banks and insurance companies, dealers in securities, and
holders of securities held as part of a "straddle," "hedge" or "conversion
transaction". In addition, persons that hold the common stock through "hybrid
entities" may be subject to special rules and may not be entitled to the
benefits of a U.S. income tax treaty. The following discussion is based on
provisions of the Internal Revenue Code and administrative and judicial
interpretations as of the date hereof, all of which are subject to change,
possibly on a retroactive basis, any change could affect the continuing validity
of this discussion. THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL
INFORMATION. ACCORDINGLY, IF YOU ARE A NON-U.S. HOLDER, WE URGE YOU TO CONSULT A
TAX ADVISOR WITH RESPECT TO THE UNITED STATES FEDERAL TAX CONSEQUENCES OF
HOLDING AND DISPOSING OF OUR COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES THAT
MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, LOCAL OR OTHER NON-U.S. TAXING
JURISDICTION.
Dividends. In general, assuming we have, and to the extent of, tax earnings
and profits at the time of any dividends, dividends paid to a Non-U.S. Holder
will be subject to withholding of U.S. federal income tax at a 30% rate unless
this rate is reduced by an applicable income tax treaty. Dividends that are
effectively connected with the holder's conduct of a trade or business in the
United States, or, if a tax treaty applies, attributable to a permanent
establishment or in the case of an individual a "fixed base," in the United
States ("U.S. trade or business income") are generally subject to U.S. federal
income tax at regular rates and are not generally subject to withholding if the
Non-U.S. Holder files the appropriate form with the payor. Any U.S. trade or
business income received by a non U.S. corporation may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate,
or any lower rate that may be applicable under an income tax treaty.
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Under current law, dividends paid to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
that country for purposes of the withholding discussed above, and under the
current interpretation of U.S. Treasury regulations, for purposes of determining
the applicability of a tax treaty rate. Under final U.S. Treasury regulations,
effective January 1, 2000, however, a Non-U.S. Holder of common stock who wishes
to claim the benefit of an applicable treaty rate would be required to satisfy
applicable certification and other requirements, which would include the
requirements that the Non-U.S. Holder file a Form W-8 which contains the
holder's name and address.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for a refund
with the U.S. Internal Revenue Service.
Disposition of Common Stock. Except as described below, a Non-U.S. Holder
generally will not be subject to U.S. federal income tax in respect of gain
recognized on a disposition of common stock provided that
- the gain is not U.S. trade or business income,
- the Non-U.S. Holder is not an individual who is present in the United
States for 183 or more days in the taxable year of the disposition and
who meets certain other requirements,
- the Non-U.S. Holder is not subject to tax pursuant to the provisions of
U.S. tax law applicable to certain United States expatriates, and
- the Company has not been and does not become a "United States real
property holding corporation" for U.S. federal income tax purposes.
The Company believes that it has not been, is not currently, and is not
likely to become, a United States real property holding corporation. However, no
assurance can be given that the Company will not be a United States real
property corporation when a Non-U.S. Holder sells its shares of common stock.
Federal Estate Taxes. In general, an individual who is a Non U.S. Holder
for U.S. estate tax purposes will incur liability for U.S. federal estate tax if
the fair market value of property included in the individual's taxable estate
for U.S. federal estate tax purposes exceeds the statutory threshold amount. For
these purposes, common stock owned, or treated as owned, by an individual who is
a Non-U.S. Holder at the time of death will be included in the individual's
gross estate for U.S. federal tax purposes, unless an applicable estate tax
treaty provides otherwise.
U.S. Information Reporting Requirements and Backup Withholding Tax. We are
required to report annually to the Internal Revenue Service and to each Non-U.S.
Holder the amount of dividends paid to, and the tax withheld with respect to,
each Non-U.S. Holder. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
these information returns may also be made available under the provisions of a
specific treaty or agreement to the tax authorities in the country in which the
Non-U.S. Holder resides. Under current regulations, the United States backup
withholding tax, which generally is a withholding tax imposed at the rate of 31%
on certain payments to persons that fail to furnish the information reporting
requirements, will generally not apply to dividends paid on the common stock to
a Non-U.S. Holder at an address outside the United States. Under final Treasury
regulations, effective January 1, 2000, a Non-U.S. Holder generally would not be
subject to backup withholding at a 31% rate if the beneficial owner certifies to
that owner's foreign status on a valid Form W-8.
Non-U.S. Holders will not be subject to information reporting or backup
withholding with respect to the payment of proceeds from the disposition of
common stock effected by a foreign office of a foreign broker provided however
that if the broker is a U.S. person or a "U.S. related person," information
reporting but not backup holding would not apply unless the broker receives a
statement from the owner, signed under penalties of perjury, certifying its
foreign status or otherwise establishing an exemption or the
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broker has documentary evidence in its files as to the Non-U.S. Holder's foreign
status and the broker has no actual knowledge to the contrary. For this purpose,
a "U.S. related person" is
- a "controlled foreign corporation" for U.S. federal income tax purposes,
- a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding
the payment (or for the part of the period that the broker has been in
existence) is derived from activities that are effectively connected with
the conduct of a U.S. trade or business,
- a foreign partnership that is either engaged in a U.S. trade or business
or in which U.S. persons hold more than 50% of the income or capital
interest, or
- certain U.S. branches of foreign banks or insurance companies.
Non-U.S. Holders will be subject to information reporting and backup
withholding at a rate of 31% with respect to the payment of proceeds from the
disposition of common stock effected by to or through the United States office
of a broker, U.S. or foreign, unless the Non-U.S. Holder certifies as to its
foreign status under penalties of perjury or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Holder will be allowed as a credit against the Non-U.S. Holder's U.S.
federal income tax, and any amounts withheld in excess of the Non-U.S. Holder's
federal income tax liability will be refunded, provided that the required
information is furnished to the Internal Revenue Service.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of common stock in the public market following
the offering could adversely affect the market price of the common stock and
could impair our ability to raise capital.
Of the 51.9 million shares of common stock outstanding after the offering
(assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options or warrants), the 13 million shares sold in the offering
and the 1.7 million shares to be sold to Cisco, Com21 and Microsoft will be
freely tradable in the public market, unless such shares are held by
"affiliates" as that term is defined in Rule 144 under the Securities Act, and
subject to the terms of certain lockup agreements entered into between certain
stockholders and the underwriters. For purposes of Rule 144, an "affiliate" of
an issuer is a person that, directly or indirectly, through one or more
intermediaries, controls, or is controlled by or is under common control with,
such issuer. The remaining 37.2 million shares of common stock are "restricted
securities" as defined under Rule 144. Restricted securities may be sold in the
public market only if registered or upon the expiration of certain holding
periods under Rule 144, subject to the volume, manner of sale and other
limitations of Rule 144.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of the completion of the
offering, a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of common stock (approximately 519,000 shares
immediately after the offering) or (ii) the average weekly trading volume in the
common stock during the four calendar weeks preceding the date on which notice
of such sale is filed. In addition, a person who is not an affiliate at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years is entitled to sell all those shares
under Rule 144(k) without regard to the volume limitations, manner of sale
provisions or public information requirements. To the extent that shares are
acquired from one of our affiliates in a privately negotiated transaction, the
holding period under Rule 144 of the person acquiring the shares being sold by
our affiliate commences on the date of transfer from the affiliate.
As of the date of this prospectus, options to purchase a total of 1,096,700
shares of common stock are outstanding under our stock option plans, 1,029,200
of which will be exercisable upon completion of the offering and warrants to
purchase a total of 8.1 million shares of common stock are outstanding. In
addition, we intend to issue options to purchase 465,065 shares of common stock
under the 1999 stock option plan at an exercise price equal to the initial
public offering price per share contemporaneously with the completion of this
offering. See "Management--Compensation of Directors" and "--Stock Option
Plans."
We and our directors, officers, substantially all current stockholders,
holding an aggregate of 37.2 million shares of common stock and warrants to
purchase up to 7.75 million shares of common stock, and Cisco, Com21 and
Microsoft have agreed not to offer to sell, sell or otherwise dispose of,
directly or indirectly, any shares of common stock during the 180-day period
following the date of the prospectus without the prior written consent of Lehman
Brothers, except that the holders of 5.5 million shares may transfer these
shares by gift provided that the donee signs a similar lock up agreement, and we
may issue, and grant options to purchase, shares of common stock under our
option plans. In addition, we may issue shares of common stock in connection
with any acquisition of another company if the terms of such issuance provide
that such common stock will not be resold prior to the expiration of the 180-day
period referenced in the preceding sentence.
Following the offering, holders of 34.1 million shares of our outstanding
common stock and holders of warrants to purchase up to 7.75 million shares of
common stock will have demand registration rights with respect to their shares
of common stock (subject to the 180-day lock-up arrangement described above),
under certain circumstances and conditions, to require us to register their
shares of common stock under the Securities Act, and rights to participate in
any future registration of securities by us. If those holders, by exercising
their registration rights, cause a large number of shares to be registered and
sold in the public market, such sales could have an adverse effect on the market
price for the common stock. Holders of registrable securities have agreed to be
subject to a lock-up period of not more than 180 days following the date of this
prospectus. See "Description of Securities--Registration Rights."
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UNDERWRITING
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, each of the underwriters
named below, for whom Lehman Brothers Inc., J.P. Morgan Securities Inc., Banc of
America Securities LLC and CIBC World Markets are acting as representatives, has
agreed to purchase from us the respective number of shares of common stock shown
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
UNDERWRITERS COMMON STOCK
------------ -------------------
<S> <C>
Lehman Brothers Inc. .......................................
J.P. Morgan Securities Inc. ................................
Banc of America Securities LLC..............................
CIBC World Markets Corp. ...................................
-----------
Total............................................. 13,000,000
===========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock are subject to certain conditions, and that if
any of the foregoing shares of common stock are purchased by the underwriters
pursuant to an underwriting agreement, all of the shares of common stock that
the underwriters have agreed to purchase pursuant to the underwriting agreement
must be so purchased.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to certain selected dealers,
who may include the underwriters, at such public offering price less a selling
concession not in excess of $ per share. The underwriters may allow, and the
selected dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the offering, the underwriters may change the
offering price and other selling terms.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by us..... $ $ $
Expenses payable by us................................ $ $ $
</TABLE>
We have granted to the underwriters an option to purchase up to an
aggregate of 1,950,000 additional shares of common stock, exercisable solely to
cover over-allotments, if any, at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus. Such option may be exercised at any time, and from time to time,
until 30 days after the date of the underwriting agreement. To the extent that
the underwriters exercise this option, each underwriter will be committed,
subject to certain conditions, to purchase a number of additional shares of
common stock proportionate to
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such underwriter's initial commitment, as indicated in the preceding table, and
we will be obligated, under such over-allotment option, to sell such shares of
common stock to the underwriters.
We and our directors, officers, and substantially all current stockholders,
holding an aggregate of 34.1 million shares of common stock and warrants to
purchase 7.75 million shares of common stock, and Cisco, Com21 and Microsoft
have agreed not to offer to sell, sell or otherwise dispose of, directly or
indirectly, any shares of common stock during the 180-day period following the
date of the prospectus without the prior written consent of Lehman Brothers,
except that the holders of 5.5 million shares may transfer these shares by gift
provided that the donee signs a similar lock up agreement and we may issue, and
grant options to purchase, shares of common stock under our option plans. In
addition, we may issue shares of common stock in connection with any acquisition
of another company if the terms of that issuance provide that the common stock
will not be resold prior to the expiration of the 180-day period referenced in
the preceding sentence. See "Risk Factors -- Investors may suffer substantial
dilution from other transactions" and "Shares Eligible for Future Sale."
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our historical performance and capital
structure, estimates of our business potential and earning prospects, an overall
assessment of our management and the consideration of the above factors in
relating to market valuation of companies in related businesses.
Application has been made to have the common stock approved for quotation
on the Nasdaq National Market under the symbol "HSAC."
We have agreed to indemnify the underwriters against liabilities related to
the offering, including liabilities under the Securities Act, and to contribute,
under defined circumstances, to payments that the underwriters may be required
to make in respect thereof.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for and purchase shares of common stock. As
an exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of common stock. These transactions may
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the common stock.
If the underwriters create a short position in the common stock in
connection with the offering (i.e., they sell more shares than are set forth on
the cover page of this prospectus), the representatives may reduce that short
position by purchasing common stock in the open market. The representatives also
may elect to reduce any short position by exercising all or part of the
over-allotment option described herein.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed 5% of the total number of shares of common
stock offered by them.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid could have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will
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engage in these stabilizing transactions or that these transactions, once
commenced, will not be discontinued without notice.
Any offers in Canada will be made only pursuant to an exemption from the
requirements to file a prospectus in the relevant province of Canada in which a
sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
At our request, the underwriters have reserved up to 7.5% of the common
stock offered hereby for sale to certain of our employees, directors and friends
at the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus. The number of shares
available for sale to the general public will be reduced to the extent these
persons purchase such reserved shares.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Brobeck, Phleger & Harrison LLP, Denver, Colorado. Certain legal
matters in connection with the offering will be passed upon for the underwriters
by Weil, Gotshal & Manges LLP, New York, New York.
EXPERTS
The financial statements of High Speed Access Corp. as of December 31, 1998
and for the period from April 3, 1998 through December 31, 1998; CATV.net, Inc.
as of December 31, 1997 and April 2, 1998 and for the periods from March 12,
1997 through December 31, 1998 and January 1, 1998 through April 2, 1998; and
High Speed Access Network, Inc. as of December 31, 1997 and April 3, 1998 and
for the periods from July 21, 1997 through December 31, 1998 and January 1, 1998
through April 3, 1998, included in this prospectus, have been so included in
reliance on the report of PricewaterhouseCoopers, LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1, including the exhibits, schedules and amendments thereto,
under the Securities Act with respect to the shares of common stock to be sold
in the offering. This prospectus does not contain all the information set forth
in the registration statement. For further information with respect to us and
the shares of common stock to be sold in the offering, we refer you to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
You may read and copy all or any portion of the registration statement or
any other information we file at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our Securities and Exchange Commission filings,
including the registration statement, are also available to you on the SEC's Web
site (http://www.sec.gov).
As a result of the offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Upon approval of
71
<PAGE> 78
the common stock for the quotation on the Nasdaq National Market, such reports,
proxy and information statements and other information may also be inspected at
the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
REPORTS TO STOCKHOLDERS
We intend to furnish our stockholders annual reports containing audited
financial statements and will make available copies of quarterly reports for the
first three quarters of each year containing unaudited interim financial
information.
72
<PAGE> 79
GLOSSARY OF TECHNICAL TERMS
56 Kbps Equivalent to a single high-speed telephone service
line, capable of transmitting one voice call or 56
Kbps of data.
Backbone Very high-capacity, long-distance lines that carry
enormous amounts of Internet traffic and data from
one regional network to another.
Bandwidth The number of bits of information which can move
over a communications medium in a given amount of
time; the capacity of a telecommunications
circuit/network to carry voice, data and video
information. Typically measured in Kbps and Mbps.
Bandwidth from public networks is typically
available to business and residential end-users in
increments from 56 Kbps to T-3.
Broadband A transmission that has a bandwidth greater than
128 Kbps
Dial-up Line Communications circuit that is established by a
switched-circuit connection using the telephone
network.
DOCSIS Data Over Cable Service Interface Specification.
Cable modem specification set by the MCNS
partnership of North American cable operators.
DSL Digital Subscriber Line. Point-to-point public
network access technologies that allow multiple
forms of data, voice and video to be carried over
twisted-pair copper wire on the local loop between
a network service provider's central office and the
customer site at limited distances.
Downstream The data path from service provider to customer.
End user The ultimate residential or business consumer of
our services.
Exurban Markets/Areas Cable systems with fewer than 100,000 homes passed.
Headend The central distribution point in a cable
television system that typically serves tens of
thousands to hundreds of thousands of homes via
high-speed fiber-optic connections to the nodes, or
coaxial cable connection to the homes.
Homes Passed The number of homes that potentially can be served
by a cable system.
ISDN Integrated Services Digital Network. An
internationally accepted standard for voice, data
and signaling that makes all transmission circuits
end-to-end digital and defines a standard
out-of-band signaling system.
Kbps Kilobits per second. Thousand bits per second.
Migrating Cable Systems Cable systems that are in the process of upgrading
from one-way to two-way.
Mbps Megabits per second. Million bits per second.
MCNS Multimedia Cable Network System. Industry
specification that defines the technical
requirement for interoperability of high-speed
cable modem and headend equipment.
Modem A device for transmitting information over an
analog communications
A-1
<PAGE> 80
channel, such as a POTS telephone circuit.
Node A single local area distribution point that is
connected via high-speed fiber-optic lines to a
Headend. In a cable system, each town or city
typically is divided into groups of approximately
500 homes which are connected to a single node.
Non-upgraded Cable System A cable system that has not upgraded to two-way
capabilities.
POTS Plain old telephone service. Standard analog
telephone service used by many telephone companies
throughout the United States.
Router A device for interconnecting local area networks
that have dissimilar operating protocols but which
share a common network interconnection protocol. A
router receives and transmits data packs between
segments in a network or different networks.
Turnkey service An outsourced service that enables a cable operator
to provide Internet access and ancillary services.
Upgraded Cable Systems A cable system that has upgraded to two-way
capabilities.
Upstream The data path from the customer to the service
provider.
A-2
<PAGE> 81
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
High Speed Access Corp. and Subsidiaries
Report of Independent Accountants......................... F-2
Consolidated Balance Sheets at December 31, 1998 and March
31, 1999 (unaudited)................................... F-3
Consolidated Statements of Operations for the period from
April 3, 1998 (inception) through December 31, 1998 and
the three months ended March 31, 1999 (unaudited)...... F-4
Consolidated Statements of Changes in Stockholders'
Deficit for the period from April 3, 1998 (inception)
through December 31, 1998 and the three months ended
March 31, 1999 (unaudited)............................. F-5
Consolidated Statements of Cash Flows for the period from
April 3, 1998 (inception) through December 31, 1998 and
the three months ended March 31, 1999 (unaudited)...... F-6
Notes to Consolidated Financial Statements................ F-7
CATV.net, Inc.
Report of Independent Accountants......................... F-24
Balance Sheets at December 31, 1997 and April 2, 1998..... F-25
Statements of Operations for the period from March 12,
1997 (inception) through December 31, 1997 and the
period from January 1, 1998 through April 2, 1998...... F-26
Statement of Changes in Stockholders' Deficit for the
period from March 12, 1997 (inception) through December
31, 1997 and the period from January 1, 1998 through
April 2, 1998.......................................... F-27
Statements of Cash Flows for the period March 12, 1997
through December 31, 1997 and the period from January
1, 1998 through April 2, 1998.......................... F-28
Notes to Financial Statements............................. F-29
High Speed Access Network, Inc.
Report of Independent Accountants......................... F-36
Balance Sheets as of December 31, 1997 and April 3,
1998................................................... F-37
Statements of Operations for the periods from July 21,
1997 (inception) through December 31, 1997 and from
January 1, 1998 through April 3, 1998.................. F-38
Statement of Changes in Stockholders' Deficit for the
periods from July 21, 1997 (inception) through December
31, 1997 and from January 1, 1998 through April 3,
1998................................................... F-39
Statements of Cash Flows for the periods from July 21,
1997 (inception) through December 31, 1997 and from
January 1, 1998 through April 3, 1998.................. F-40
Notes to Financial Statements............................. F-41
Unaudited Pro Forma Combined Statement of Operations
High Speed Access Corp. and Subsidiaries
Unaudited Pro Forma Combined Statement of Operations
for the year ended December 31, 1998.................. F-46
Notes to Unaudited Pro Forma Condensed Combined
Financial Statements.................................. F-47
</TABLE>
F-1
<PAGE> 82
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
High Speed Access Corp.
The recapitalization described in Note 14 to the consolidated financial
statements has not been consummated at May 3, 1999. When it has been
consummated, we will be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheet and the
related consolidated statement of operations, changes in stockholders'
deficit and of cash flows present fairly, in all material respects, the
consolidated financial position of High Speed Access Corp. and Subsidiaries
at December 31, 1998 and the results of their operations and their cash
flows for the period from April 3, 1998 (inception) through December 31,
1998, in conformity with generally accepted accounting principles. 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 audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above."
/s/ PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
March 12, 1999
except as to the third paragraph of Note 8 and Note 14,
for which the date is May 3, 1999
F-2
<PAGE> 83
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS STOCKHOLDERS'
ENDED EQUITY
DECEMBER 31, MARCH 31, MARCH 31,
1998 1999 1999
------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 17,888 $ 7,350
Accounts receivable, net of allowance for doubtful
accounts of $13 and $18, respectively................... 83 250
Prepaid expenses and other assets......................... 123 284
--------- ---------
Total current assets................................ 18,094 7,884
Property, equipment and improvements, net................... 5,807 10,824
Intangible assets, net...................................... 3,603 3,718
Other assets................................................ 871
--------- ---------
Total assets........................................ $ 27,504 $ 23,297
========= =========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 2,741 $ 3,955
Accrued compensation and related expenses................. 744 1,125
Other current liabilities................................. 395 1,283
Notes payable -- related parties, current portion......... 8 3
Capital lease obligations, current portion................ 44 59
--------- ---------
Total current liabilities........................... 3,932 6,425
--------- ---------
Notes payable -- related parties............................ 530 529
Capital lease obligations................................... 219 277
--------- ---------
Total liabilities................................... 4,681 7,231
--------- ---------
Commitments and contingencies
Mandatorily redeemable convertible preferred stock:
Series A, $.01 par value, 5,000,000 shares designated,
issued and outstanding, no shares outstanding pro forma
(unaudited)............................................. 47,050 85,000 $ --
Series B, $.01 par value, 10,000,000 shares designated,
issued and outstanding, no shares outstanding pro forma
(unaudited)............................................. 102,200 170,000 --
Series C, $.01 par value, 5,000,000 shares designated, no
shares issued and outstanding, actual and pro forma
(unaudited)............................................. -- -- --
--------- --------- ---------
Total mandatorily redeemable convertible preferred
stock............................................. 149,250 255,000 --
--------- --------- ---------
Stockholders' (deficit) equity:
Preferred stock, $.01 par value, 20,000,000 shares
authorized, 20,000,000 shares designated actual;
10,000,000 shares authorized, none designated, issued
and outstanding pro forma (unaudited)................... -- -- --
Common stock, $.01 par value, 77,500,000 shares and
400,000,000 (unaudited) shares authorized, actual and
pro forma; 6,200,000 and 29,525,166 (unaudited) shares
issued and outstanding, actual and pro forma............ 62 62 295
Class A common stock, 100,000,000 shares authorized pro
forma (unaudited); none issued and outstanding.......... -- -- --
Additional paid-in capital................................ 4,237 7,856 262,623
Deferred compensation..................................... (84) (1,481) (1,481)
Accumulated deficit....................................... (130,642) (245,371) (245,371)
--------- --------- ---------
Total stockholders' (deficit) equity................ (126,427) (238,934) $ 16,066
--------- --------- =========
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
deficit........................................... $ 27,504 $ 23,297
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 84
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 3, 1998 THREE MONTHS
(INCEPTION) ENDED
THROUGH MARCH 31,
DECEMBER 31, 1998 1999
----------------- ------------
(UNAUDITED)
<S> <C> <C>
Net revenue................................................. $ 337 $ 299
Costs and expenses:
Operating costs........................................... 2,067 2,123
Engineering............................................... 2,266 1,485
Sales and marketing....................................... 3,696 2,038
General and administrative................................ 2,323 1,286
Non-cash compensation expense from the issuance of stock
options................................................ 1,523
---------- ----------
Total costs and expenses.......................... 10,352 8,455
---------- ----------
Loss from operations........................................ (10,015) (8,156)
Interest income, net........................................ 40 119
---------- ----------
Net loss.......................................... (9,975) (8,037)
Mandatorily redeemable convertible preferred stock
dividends................................................. (385) (518)
Accretion of redemption value of mandatorily redeemable
convertible preferred stock............................... (120,282) (105,232)
---------- ----------
Net loss available to common stockholders......... $ (130,642) $ (113,787)
========== ==========
Basic and diluted net loss available to common stockholders
per share................................................. $ (21.07) $ (18.35)
========== ==========
Weighted average shares used in computation of basic and
diluted net loss available to common stockholders per
share..................................................... 6,200,000 6,200,000
Pro forma basic and diluted net loss per share
(unaudited)............................................... $ (.71) $ (.27)
========== ==========
Weighted average shares used in computation of pro forma
basic and diluted (unaudited)............................. 14,091,935 29,450,000
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 85
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIOD APRIL 3, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------ PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT DEFICIT
--------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock in
connection with acquisition
of CATV and HSAN............. 6,200,000 $62 $3,153 $ -- $ 3,215
Grant of option to purchase
Series C mandatorily
redeemable preferred stock... 1,000 1,000
Mandatorily redeemable
convertible preferred stock
dividends.................... -- -- -- (385) (385)
Accretion of redemption value
of mandatorily redeemable
convertible preferred
stock........................ -- -- -- (120,282) (120,282)
Deferred compensation from
grants of stock options to
purchase common stock........ 84 (84)
Net loss....................... -- -- -- (9,975) (9,975)
--------- --- ------ --------- --------- ---------
BALANCES AT DECEMBER 31,
1998......................... 6,200,000 62 4,237 (84) (130,642) (126,427)
Mandatorily redeemable
convertible preferred stock
dividends (unaudited)........ (517) (517)
Accretion of redemption value
of mandatorily redeemable
convertible preferred stock
(unaudited).................. (105,232) (105,232)
Distribution of Darwin
Networks, Inc. stock to
shareholders (unaudited)..... 569 (943) (374)
Issuance of common stock
warrants in connection with
acquisition of customer base
(unaudited).................. 130 130
Issuance of vested compensatory
stock options (unaudited).... 1,470 1,470
Deferred compensation from
grants of stock options to
purchase common stock
(unaudited).................. 1,450 (1,450)
Amortization of deferred
compensation (unaudited)..... 53 53
Net loss (unaudited)........... (8,037) (8,037)
--------- --- ------ --------- --------- ---------
BALANCES AT MARCH 31, 1999
(UNAUDITED).................. 6,200 $62 $7,856 $ (1,481) $(245,371) $(238,934)
========= === ====== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 86
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
APRIL 3, 1998 ENDED
(INCEPTION) THROUGH MARCH 31,
DECEMBER 31, 1998 1999
------------------- ------------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(9,975) $ (8,037)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization............................. 1,344 897
Non-cash compensation expense from the issuance of stock
options................................................. 1,523
Changes in assets and liabilities, excluding effects of
acquisitions:
Accounts receivable..................................... (36) (167)
Prepaid expenses and other current assets............... (106) (197)
Other assets............................................ (871)
Accounts payable........................................ 739 763
Accrued compensation and related expenses............... 629 374
Other current liabilities............................... 211 895
------- --------
Net cash used in operating activities.............. (7,194) (4,820)
------- --------
INVESTING ACTIVITIES
Purchase of property, equipment and improvements, net of
leases.................................................... (4,235) (5,497)
Cash acquired in purchase of CATV and HSAN.................. 907
Purchase of customer base................................... (204)
------- --------
Net cash used in investing activities.............. (3,328) (5,701)
------- --------
FINANCING ACTIVITIES
Net proceeds from issuance of mandatorily redeemable
convertible preferred stock............................... 27,583
Proceeds from notes payable -- related parties.............. 1,000
Payments on capital lease obligations....................... (17) (11)
Payments on long-term debt.................................. (156) (6)
------- --------
Net cash provided by financing activities.......... 28,410 (17)
------- --------
Net increase in cash and cash equivalents................... 17,888 (10,538)
Cash and cash equivalents, beginning of period.............. -- 17,888
------- --------
Cash and cash equivalents, end of period.................... $17,888 $ 7,350
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 14 $ 8
SUPPLEMENTAL SCHEDULE OF NONCASH 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................... $ 241 $ 84
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.................. $ 1,429 $ 1,880
Distribution of Darwin Networks, Inc. to shareholders..... $ 943
Issuance of common stock warrants in connection with
customer base acquisition............................... $ 130
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 87
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. THE COMPANY AND BASIS OF PRESENTATION
The Company
High Speed Access Corp. and Subsidiaries (the Company) provides high speed
Internet access via cable modems to residential and commercial customers in
exurban areas. The Company is among the first providers to offer cable
modem-based high speed Internet access in exurban markets. The Company defines
exurban markets as cable systems with fewer than 100,000 homes passed which it
estimates includes approximately 48 million homes, or approximately one-half of
the homes passed by cable in the United States. The Company enters into
long-term exclusive contracts with cable system operators to provide them with a
comprehensive "turnkey" service. That service enables a cable system's customers
to receive high speed Internet access. In exchange for providing the Company
with access to its customers, the Company pays the cable operator a portion of
the monthly fees received from an end user that subscribes to the services. The
Company operates in one business segment.
Business Combination and Basis of Presentation
High Speed Access Corp. was incorporated on April 2, 1998. No initial
capitalization transactions occurred on that date. The current Chairman of the
Board of Directors was named the sole director on formation. He also holds
significant investments in Broadband Solutions I, LLC and Broadband Solutions
II, LLC (collectively Broadband Solutions), two entities with identical
ownership.
Broadband Solutions acquired voting control of two separate companies, High
Speed Access Network, Inc. on April 3, 1998 and CATV.net, Inc. on February 23,
1998. In each case, Broadband acquired voting control through a purchase of $500
of mandatorily redeemable convertible preferred stock of each company. Each of
these transactions was accounted for by Broadband using purchase accounting.
On April 3, 1998, Broadband contributed its investments in CATV.net, Inc.
(CATV) and High Speed Access Network, Inc. (HSAN) (together, the "Predecessors")
to High Speed Access Corp. High Speed Access Corp. issued $1,000 in Series A
mandatorily redeemable convertible preferred stock to Broadband in exchange.
This transaction was accounted for as a transaction by 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 acquisition of the Predecessors 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 options were
valued at $15 based upon a valuation using an established option pricing model.
The value of options issued has been included in the calculation of the purchase
price of the Predecessors and is reflected in additional paid-in capital in the
accompanying consolidated financial statements. The acquisitions of the common
stock of CATV and HSAN have been accounted for as purchases. The accompanying
statement of operations includes the results of the Predecessors subsequent to
April 3, 1998.
F-7
<PAGE> 88
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Assets acquired, liabilities assumed and equity recorded in the
contribution of CATV and HSAN preferred stock by Broadband and the purchase of
the common stock of CATV and HSAN by the Company were as follows:
<TABLE>
<CAPTION>
CATV HSAN
------ ------
<S> <C> <C>
Fair value of assets acquired............................... $2,334 $3,486
Fair value of liabilities assumed........................... (219) (1,386)
Fair value of mandatorily redeemable convertible preferred
stock issued.............................................. (500) (500)
Fair value of common stock and common stock options
issued.................................................... (1,615) (1,600)
------ ------
Cash paid................................................... $ -- $ --
====== ======
</TABLE>
The excess of cost over net identifiable assets acquired of $1,839 relating
to CATV and $2,332 to HSAN has been allocated to goodwill and is being amortized
on a straight-line basis over 5 years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company, CATV and HSAN as if the
acquisitions had occurred on January 1, 1998. The pro forma adjustment relates
to the amortization of the excess of cost over net identifiable assets acquired
of $4,171 for the period January 1, 1998 through April 2, 1998.
<TABLE>
<S> <C>
Net revenues................................................ $ 450
Net loss.................................................... $ (11,923)
Net loss attributable to common shareholders................ $(132,590)
Basic and diluted net loss per share attributable to common
shareholders.............................................. $ (21.39)
</TABLE>
2. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements for the periods ended December 31,
1998 and March 31, 1999 include the operations of the Company for the period
from April 3 (inception) through December 31, 1998 and the three months ended
March 31, 1999, respectively. All significant intercompany transactions and
balances have been eliminated in consolidation.
Interim Financial Information
The interim financial information as of March 31, 1999 and for the three
months then ended is unaudited but includes all adjustments, consisting only of
normal recurring adjustments, that the Company considers necessary for a fair
presentation of its financial position at such date and its results of
operations and cash flows for the period. The financial and other data disclosed
in these notes to the financial statements for this period are also unaudited.
Operating results for the three months ended March 31, 1999 are not necessarily
indicative of results that may be expected for any future periods.
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. Subscription revenue and revenue from rentals of cable modems to
customers billed in
F-8
<PAGE> 89
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
advance are recorded as deferred revenue initially and recognized as income in
the period in which the services are provided.
Long-Lived Assets
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
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
No such impairment losses have been identified by the Company.
Property, Equipment and Improvements
Property, equipment and improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful life 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. 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 income.
Intangible Assets
The excess of cost over net identifiable assets acquired in the purchases
of the Predecessors has been recorded as goodwill and is being amortized over
five years on a straight-line basis. Amortization expense for the period ended
December 31, 1998 was $626. In connection with the acquisition of HSAN, the
Company recognized an intangible asset of $80 for the acquisition of a customer
base from an internet service provider. The customer base acquisition cost is
being amortized over a three year period on a straight-line basis. Amortization
expense of customer acquisition cost for the period ended December 31, 1998 was
$22.
Capitalized Software Costs
The Company capitalizes costs associated with the design and implementation
of internal use software, including internally and externally developed
software, in accordance with American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP) 98-1. 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.
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 bases 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.
Stock-based Employee Compensation
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25) and has adopted the disclosure-only requirements
of Statement Financial of Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
F-9
<PAGE> 90
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Fair Value of Financial Instruments
The Company's financial instruments principally consist of cash and cash
equivalents, accounts receivable, accounts payable, and capital lease
obligations that are carried at cost, which approximates fair value because of
the short-term nature of these instruments. Notes payable are with related
parties, and as a result, while the Company believes that the fair value of such
instruments approximates carrying value, the fair value is not readily
determinable.
Cash and Cash Equivalents
Cash and cash equivalents include all short-term, highly liquid investments
that mature within three months of their acquisition date. At December 31, 1998
and March 31, 1999 (unaudited), cash equivalents consist principally of
interest-bearing demand deposit accounts with a single financial institution.
Engineering
Engineering costs are expensed as incurred.
Concentration of Credit Risk
The Company's 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 total revenues or accounts receivable balances for the
period ended December 31, 1998. The Company maintains an allowance for doubtful
accounts receivable based upon its historical experience and the expected
collectibility of all accounts receivable. The Company recorded an allowance for
doubtful accounts of $3 related to the accounts receivable acquired from CATV
and has recorded an additional allowance of $10 during the period ended December
31, 1998.
Unaudited Pro Forma Information
The Company is planning to file a registration statement with the
Securities and Exchange Commission that would permit the Company to sell shares
of common stock in an initial public offering (IPO). The unaudited pro forma
balance sheet information and the pro forma net loss per share reflect the
effects of the automatic conversion of all series of the Company's mandatorily
redeemable convertible preferred stock to common stock upon the closing of the
IPO. The unaudited pro forma information gives effect to the conversion of
accrued dividends on mandatorily redeemable convertible preferred stock into
shares of common stock based upon the accrued dividends of $902 as of March 31,
1999 (unaudited) and a conversion price of $12 per share. Actual dividends and
the conversion price will be different upon actual conversion.
Recent Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-5, Reporting on the Costs of Start-Up Activities. SOP
98-5, which is effective for fiscal years beginning after December 15, 1998,
provides guidance on the financial reporting of start-up costs and organization
costs. It requires costs of start-up activities and organization costs to be
expensed as incurred. As the Company has expensed these costs, the adoption of
this standard is not expected to have a significant impact on the Company's
results of operations, financial position or cash flows.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 Accounting for Derivatives
and Hedging Activities (SFAS 133), which establishes accounting and reporting
standards for derivative instruments, including certain derivative
F-10
<PAGE> 91
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. As the Company does not
currently engage or plan to engage in derivatives, or hedging transactions there
will be no impact to the Company's results of operations, financial position or
cash flows upon the adoption of SFAS 133.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
3. PROPERTY, EQUIPMENT AND IMPROVEMENTS
The components of property, equipment and improvements at December 31, 1998
and March 31, 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Equipment............................................ $6,286 $11,835
Furniture and fixtures............................... 181 231
Leasehold improvements............................... 36 112
------ -------
6,503 12,178
Less accumulated depreciation........................ 696 1,354
------ -------
$5,807 $10,824
====== =======
</TABLE>
Equipment includes assets acquired under capital leases, principally
telephone equipment, of $282 at December 31, 1998 and $365 at March 31, 1999
(unaudited). Accumulated depreciation of these assets was $34 at December 31,
1998 and $48 at March 31, 1999 (unaudited). Total depreciation expense was $696
for the period ended December 31, 1998 and $658 for three months ended March 31,
1999 (unaudited).
4. LEASE OBLIGATIONS
The Company leases certain office facilities under non-cancelable operating
leases that expire at various dates through 2003, 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 terms of the leases. Facility
rent expense for the period ended December 31, 1998 was $144.
F-11
<PAGE> 92
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Company also has obligations under capital equipment leases. Future
minimum lease payments under non-cancelable operating and capital leases having
terms in excess of one year as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Year Ending December 31,
1999..................................................... $198 $ 68
2000..................................................... 107 68
2001..................................................... 31 68
2002..................................................... 13 68
2003..................................................... 6 49
Thereafter............................................... 14
---- ----
Total minimum lease payments..................... $355 335
====
Less amounts representing interest......................... 72
----
Present value of minimum capital lease obligations......... 263
Less current portion....................................... 44
----
Noncurrent portion......................................... $219
====
</TABLE>
One of the capital leases is with a company affiliated with an officer of
HSA. The present value of the minimum capital lease payments associated with
this lease is $34 at December 31, 1998.
5. INCOME TAXES
As of December 31, 1998, the Company had deferred tax assets of
approximately $3,780 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 $8,500 at December 31,
1998 expire in 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 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 period ended December
31, 1998 differs from the income tax benefit determined by applying the U.S.
federal statutory rate to the net loss as follows:
<TABLE>
<S> <C>
Tax provision (benefit) of U.S. statutory rate.............. $(3,392)
Net operating losses and temporary differences not
recognized................................................ 3,159
Goodwill and other permanent differences.................... 233
-------
Total............................................. $ --
=======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
F-12
<PAGE> 93
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
purposes. Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 3,401
Accrued expenses, not currently deductible................ 383
-------
Total gross deferred tax assets................... 3,784
Less valuation allowance.................................. (3,784)
-------
Net deferred tax assets........................... $ --
=======
</TABLE>
6. RETIREMENT PLAN
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.
7. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Series A, B, and C mandatorily redeemable convertible preferred stock,
("Preferred Stock") at December 31, 1998 consists of the following:
<TABLE>
<CAPTION>
SHARES PROCEEDS NET ACCRETION TO
ISSUE ISSUED AND OF ISSUANCE ACCRUED REDEMPTION REDEMPTION LIQUIDATION
SERIES PRICE OUTSTANDING COSTS DIVIDENDS VALUE VALUE VALUE
- ------ ----- ----------- ------------ --------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
A $1.00 5,000,000 4,990 190 41,870 47,050 5,673
B $2.50 10,000,000 23,593 195 78,412 102,200 25,698
C $5.00 -- -- -- -- -- --
</TABLE>
The first 1,000,000 shares of Series A Preferred Stock were issued in
exchange for 500,000 shares of redeemable convertible preferred stock of each of
HSAN and CATV in the acquisition on April 3, 1998. The remaining Series A shares
were issued from April through August 1998. Series B shares were issued from
September through November 1998.
Preferred Stock ranks senior to the common stock and equal with each other
with respect to the payment of dividends, distribution of assets, and rights
upon liquidation, dissolution or winding up of the Company.
Dividends
The holders of Preferred Stock are entitled to receive dividends in
preference to holders of common stock. Dividends accrue on the Series A, B and C
Preferred Stock at an annual rate of $.07, $.175 and $.35 per share,
respectively. Dividends accrue on each share from its date of issuance, whether
or not earned or declared by the Company. Such dividends are cumulative, and
must be paid before any dividend or distribution is declared on common stock.
Any accumulation of dividends on the Preferred Stock do not bear interest. In
lieu of cash, a holder of Preferred Stock is entitled to receive common stock
valued at its current fair market value.
F-13
<PAGE> 94
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Liquidation
Upon any liquidation of the Company, before any distribution is made to
holders of common stock, the holders of Preferred Stock are entitled to receive
from the assets of the Company the issue price per share for the Series plus a
25% percent compounded annual return on the investment, less any dividends
already paid on the shares. However, if the amount to be distributable for each
share of common stock, assuming conversion of the Preferred Stock plus accrued
and unpaid dividends to common stock, is higher, the holders of the Preferred
Stock may elect to receive that per share amount.
In the case of the sale or merger of the Company, as defined, the holders
of Preferred Stock are permitted to convert their Preferred Stock in a manner
that will allow the holder to obtain the issue price for the shares plus a 25%
compounded annual return on the investment, less any dividends paid on the
shares. If the Company issues common shares, or warrants, options, convertible
securities or other securities entitling the holders to obtain common stock, for
a consideration per share which is less than the issue price of the Preferred
Stock, then the conversion price is to be adjusted to reflect the lower price.
In such an instance, the holders of the Preferred Stock would be able to receive
additional common shares upon conversion. The terms of the conversion are also
adjusted in the case of stock splits and dividends, capital reorganizations and
other specified events to allow the holders of Preferred Stock to receive the
same rights that would have been received had the conversion taken place before
the event occurred.
Redemption
If the Company has not completed a qualified IPO of common stock, the
holders of Preferred Stock may require the Company to redeem the shares on or
after April 3, 2003 in the case of Series A, and on or after November 25, 2003
in the case of Series B and C. The required redemption price is to be the
greater of the initial purchase price plus accrued but unpaid dividends or the
fair value per share based on a qualified appraisal acceptable to both the
Company and the holders of Preferred Stock. The shares of Preferred Stock are
not redeemable at the Company's option.
As a result of these provisions, the Company accrued dividends of $190 and
$276 as of December 31, 1998 and March 31, 1999 (unaudited), respectively, on
Series A and $195 and $626 on Series B as of December 31, 1998 and March 31,
1999 (unaudited), respectively. In addition, the Company charged $120,282 to its
accumulated deficit during 1998 to increase the carrying value of the Preferred
Stock to its estimated redemption value at December 31, 1998 of $9.41 per share
for Series A and $10.22 per share for Series B Preferred Stock. For the three
months ended March 31, 1999 (unaudited), the Company charged $105,232 to its
accumulated deficit to increase the carrying value of the Preferred Stock to its
estimated redemption value at March 31, 1999 of $17.00 per share for both Series
A and Series B Preferred Stock.
Conversion
Each Series of Preferred Stock is convertible at the option of the holder
into 1.55 shares of common stock. Upon conversion of any share of Preferred
Stock, all accrued but unpaid dividends are to be paid in shares of common stock
based on the fair value of the common stock (or the IPO price, if applicable) at
the date of the conversion. The Company is required to reserve a sufficient
number of authorized but unissued common shares to allow for the Preferred Stock
conversion rights to be satisfied. Each share of Preferred Stock is to be
automatically converted to common stock immediately upon the closing of a
qualified IPO.
Voting Rights
All shares of Preferred Stock have voting rights. Each share has the number
of votes equal to the number of shares of common stock into which the Preferred
Stock are convertible. In addition, the
F-14
<PAGE> 95
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Company must obtain the consent from the holders of a majority of each Series of
Preferred Stock outstanding in order to pursue certain specific actions. For
purposes of this consent, each share of Preferred Stock has one vote in
determining whether a majority of the shares of the class will vote to consent
to the action.
The specified actions which require consent include: a liquidation or
substantial change of the Company's business; amendment of the Company's bylaws
in most instances; redemption of common stock, or paying dividends or
distributions to common shareholders without redeeming or paying equal dividends
on the Preferred Stock; issuance of new equity shares except in certain
instances; certain transactions with shareholders or officers; any merger or
sale of substantially all of the Company's assets; acquisition of any assets for
a purchase price in excess of $2,500, or a series of transactions with an
aggregate purchase price in excess of $7,500; or any action that would
materially and adversely affect the holders of the Preferred Stock. However,
should either of the holders of a majority of a Series of Preferred Stock
transfer more than 30% of their holdings in the Company's stock, as defined,
then the company does not thereafter require the consent of the Series of shares
controlled by that investor.
A Voting Agreement provides for four members of the Company's Board of
Directors to be named by Broadband Solutions and three members of the board of
directors to be named by Vulcan Ventures, Inc. The Voting Agreement specifies
the conditions under which, based on reductions of either investor's investment
in the company, an investor may lose the right to name one or more directors.
The consent provisions discussed above and the Voting Agreement terminate
upon the completion of an IPO, upon consent of each party or after ten years.
Adjustment of Terms
The terms of the Preferred Stock with respect to dividends, liquidation,
redemption, conversion and voting rights are adjusted upon a stock split,
dividend or other recapitalization to maintain the same rights that would have
been received before the recapitalization under the original terms. Upon an IPO,
all Preferred Stock is automatically converted to common stock and all
preferential rights are terminated.
8. TRANSACTIONS WITH VULCAN VENTURES, INC.
On November 25, 1998, the Company entered into a series of agreements with
Vulcan Ventures Incorporated (Vulcan), in which the Company issued shares of
Preferred Stock to Vulcan and entered into agreements under which it will
provide Internet access services to customers in certain cable systems
controlled by Vulcan.
The Company issued 8,000,000 shares of its Series B Preferred Stock to
Vulcan at a purchase price of $2.50 per share. The Company also agreed to sell,
and Vulcan to buy, 2,500,000 shares of Series C Preferred Stock for $12.5
million if certain conditions were met. Vulcan also obtained the option to
acquire 2,500,000 additional shares of Series C Preferred Stock at $5 per share.
The Company valued this option to purchase Series C Preferred Stock at $1,000
using an accepted option pricing model and based on assumptions of a $2.50 stock
price, $5 per share exercise price, 90% stock volatility, an expected term of
approximately 12 months, zero dividend rate and 5% interest rate. The $1,000
option was recognized as an addition to paid-in capital and a reduction to the
net proceeds of the issuance of Series B preferred stock. The commitment to
issue the Series C Preferred shares to Vulcan expires on November 25, 2000.
As further described in Note 14, Vulcan subsequently purchased the
5,000,000 shares of Series C Preferred Stock.
F-15
<PAGE> 96
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In November 1998, the Company entered into a systems access and investment
agreement with Vulcan and its affiliate Charter Communications (Charter), a
programming content agreement with Vulcan, and a related network services
agreement with Charter. Under these agreements, Charter committed to provide the
Company exclusive access to at least 750,000 homes passed, and 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 benchmarks relating to various equipment
maintenance, operations and reporting obligations or otherwise breach our
agreement. Charter can terminate the agreement without cause as long as it
purchases the associated cable head end equipment and modems at book value and
pays the Company a termination fee based on the net present value of the
revenues the Company otherwise would earn for the remaining term of the
agreement from end users subscribing to the Company's services as of the
termination date. During the term of the agreements, the Company has agreed not
to compete with Charter in any market in which it owns or operates a cable
system and will not deploy Worldgate, Web TV(R) or various other digital TV
products in the market areas of any committed system or in areas in which
Charter operates a cable system. The agreements will continue until the Company
ceases to provide services to an end user residing in a home passed in a
committed system.
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. As of March 31, 1999 (unaudited), the Company
had issued no warrants to purchase shares of common stock to Charter.
The Company will recognize an addition to equity for the fair value of any
warrants issued, and recognize the related expense over the term of the service
agreement with the cable system to which the warrants relate, generally four to
five years, in accordance with Emerging Issues Task Force Issue No. 96-18,
Accounting for Equity Instruments that are Issued to other than Employees for
Acquiring or in Conjunction with Selling, Goods or Services.
9. STOCK OPTION PLAN
In April 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan (the 1998 Plan). A total of 1,395,000 shares of common stock were
reserved for issuance under this Plan.
The exercise price for the options is determined by the Board of Directors,
but shall not be less than 100% of the estimated fair market value of the common
stock on the date the option is granted. Generally, the options vest over a
five-year period after the date of grant and expire ten years after the date of
grant. The Plan provides for accelerated vesting should there be a change in
control or an IPO of the Company's common stock. Option holders that terminate
their employment with the Company forfeit all non-vested options. Employees, key
advisors and non-employee directors of the Company are eligible to receive
awards under the Plan.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock-Issued to Employees" and related interpretations in accounting for its
stock option plan. Under APB No. 25, compensation expense is recognized based on
the amount by which the fair value of the Company's common stock exceeds the
exercise price of the stock options at the date of grant. Stock options with an
F-16
<PAGE> 97
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
exercise price of $.65 and $1.61 were granted 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 with an exercise price of
$3.23 December were later determined to be compensatory based on a revised
estimate of the fair value of the Company's common stock and the Company will
recognize expense of approximately $84 over the five year vesting period of the
options. Recognition of this expense will be accelerated to the period in which
a change in control or a IPO occurs. Expense recognized in 1998 was
insignificant.
Options to acquire an additional 140,740 shares under the 1998 Plan were
granted in January 1999. These options were also considered compensatory, and
the Company recorded deferred compensation of approximately $1,090 during the
three months ended March 31, 1999 (unaudited). Recognition of this expense will
also be over a five period, unless accelerated by a change in control or an IPO
occurs.
The Company adopted the 1999 Stock Option Plan and the 1999 Non-Employee
Directors Plan (the Directors Plan) in January 1999. Under the 1999 Stock Option
Plan, 3,100,000 shares are reserved for issuances. Options to purchase 46,500
shares were granted 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 $360. The Company will recognize this amount
over the five year vesting period of these options. Options to purchase 21,000
shares were also granted with an exercise price equal to the greater of $6.45 or
the IPO price per share. None of the options under this plan are currently
exercisable.
Under the 1999 Directors Plan, options to purchase 189,875 shares with an
exercise price of $3.23 per share, all of which were immediately exercisable,
were granted in January 1999. The Company recognized expense of $1,470 during
the three months ended March 31, 1999 (unaudited) related to the issuance of
these options. Under the 1999 Directors Plan, 465,000 shares are reserved for
issuances.
The Company has adopted the disclosure only provisions of SFAS 123. The
weighted average fair value of stock options granted was $.42 and $8.14 for the
periods ended December 31, 1998 and March 31, 1999 (unaudited), respectively.
Had compensation expense been recognized pursuant to SFAS 123, the Company's net
loss would have been increased to the pro forma amounts indicated below for the
periods ended December 31, 1998 and March 31, 1999:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Net loss available to common stockholders -- as reported.... $(130,642) $(113,787)
Basic and diluted net loss available to common stockholders
per share -- as reported.................................. $ (21.07) $ (18.35)
Pro forma basic and diluted net loss available to common
stockholders.............................................. $(130,654) $(113,876)
Pro forma basic and diluted net loss available to common
stockholders per share.................................... $ (21.07) $ (18.37)
</TABLE>
F-17
<PAGE> 98
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The fair value of each option grant is estimated on the date of grant using
the minimum value option pricing method with the following weighted average
assumptions used for grants for the year ended December 31, 1998 and March 31,
1999 (unaudited):
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Expected life of options in years........................... 5 years
Risk-free interest rate..................................... 5%
Expected dividend yield..................................... 0%
Expected volatility......................................... N/A
</TABLE>
The following table summarizes the activity in the Plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at April 3, 1998....................... --
Options granted.................................. 709,435 $1.36
Options cancelled................................ (4,650) $1.48
--------- -----
Outstanding at December 31, 1998................... 704,785 $1.35
Options granted (unaudited)...................... 398,115 $3.55
Options cancelled (unaudited).................... (6,200) $1.09
--------- -----
Outstanding at March 31, 1999 (unaudited).......... 1,096,700 $2.19
========= =====
</TABLE>
At December 31, 1998, there were no options exercisable. At March 31, 1999
(unaudited), 18,600 options were exercisable under the 1998 Plan and none were
exercisable under the 1999 Stock Option Plan. Under the Directors Plan, 189,875
options were exercisable. The following table summarizes information about
options outstanding at March 31, 1999 (unaudited):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
NUMBER OF CONTRACTUAL
EXERCISE PRICE SHARES LIFE (IN YEARS)
- -------------- --------- ---------------
<S> <C> <C>
$.65................................................. 326,120 9.1
$1.61................................................ 286,285 9.5
$3.23................................................ 463,298 9.7
$11.00............................................... 21,000 10.0
</TABLE>
10. EARNINGS (LOSS) PER SHARE
The Company computes net loss per share under the provisions of SFAS No.
128 "Earnings per Share" (SFAS 128) and SEC Staff Accounting Bulletin No. 98
(SAB 98). Under the provisions of SFAS 128 and SAB 98, basic and diluted net
loss per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of shares of common
stock outstanding during the period. The calculation of diluted net loss per
share excludes potential common shares if the effect is antidilutive. Basic
earnings per share is computed by dividing income or loss applicable to common
shareholders by the weighted average number of shares of common stock
outstanding during this period.
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and assuming conversion of the Company's Preferred Stock. In addition, income or
F-18
<PAGE> 99
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
loss is adjusted for dividends and other transactions relating to preferred
shares for which conversion is assumed. The diluted earnings per share amount
equals basic earnings per share because the Company has a net loss and the
impact of the assumed exercise of the stock options and the assumed preferred
stock conversion is not dilutive.
Under the Company's Certificate of Incorporation, each share of outstanding
Preferred Stock will convert into 1.55 shares of Common Stock upon the closing
of the Company's IPO of Common Stock. The unaudited pro forma net loss per share
assumes the conversion of the Preferred Stock to Common Stock as if it had been
converted at the date of issuance, even though the result is antidilutive.
The following table presents the calculation of basic and diluted and pro
forma net loss per share:
<TABLE>
<CAPTION>
APRIL 3, 1998 (INCEPTION) THREE MONTHS ENDED MARCH 31, 1999
THROUGH DECEMBER 31, 1998 (UNAUDITED)
---------------------------------------- ----------------------------------------
DENOMINATOR DENOMINATOR
NUMERATOR (WEIGHTED NUMERATOR (WEIGHTED
(NET LOSS) AVERAGE SHARES) PER SHARE (NET LOSS) AVERAGE SHARES) PER SHARE
---------- --------------- --------- ---------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic and diluted net loss
available to common
stockholders.............. $(130,642) 6,200,000 $(21.07) $(113,787) 6,200,000 $(18.35)
Mandatorily redeemable
convertible preferred
stock dividends........... 385 -- 518 --
Accretion of redemption
value of mandatorily
redeemable convertible
preferred stock........... 120,282 -- 105,232 --
Assumed conversion of shares
of mandatorily redeemable
convertible preferred
stock into shares of
common stock at April 3,
1998 or issuance, (if
later).................... -- 7,891,935 -- 23,250,000
--------- ---------- --------- ----------
Pro forma basic and diluted
net loss per common share
(unaudited)............... $ (9,975) 14,091,935 $ (.71) $ (8,037) 29,450,000 $ (.27)
========= ========== ======= ========= ========== =======
</TABLE>
Options and issued warrants to purchase 704,785 and 1,109,700 shares of
common stock at December 31, 1998 and March 31, 1998 (unaudited), respectively,
were excluded from the calculation above because they are antidilutive.
On April 30, 1999 the Company issued 5,000,000 shares of Series C Preferred
Stock. If these shares had been outstanding at December 31, 1998 or March 31,
1999, it would have materially impacted the number of potential common shares
outstanding at the end of the periods.
11. 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
F-19
<PAGE> 100
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 and has the right to name three of the members of the Company's
board of directors. See Note 8 "Transactions with Vulcan Ventures, Inc." for
more information on these agreements.
The Company has an agreement with Gans Multimedia Partnership, an entity
owned by Joseph S. Gans, III, a founder and former director of HSA, under which
Gans Multimedia granted the Company the exclusive right to provide the customers
of two cable systems owned by Gans Multimedia with high speed Internet access.
The agreement has a five year term and provides that Gans Multimedia will
receive 25% of the gross revenues the Company receives under the agreement.
During 1998, the Company paid Gans Multimedia $76 under the agreement.
The Company has an agreement to pay $20 each quarter for financial
consulting services provided by a private investment firm managed by two of the
Company's directors. The Company has a payable of $60 to the private investment
firm at December 31, 1998. These fees are payable upon the earlier of a
determination by the Company's Board of Directors that the Company has
sufficient cash flow to pay the fees or the Company achieves $100 or more in
after-tax quarterly profits for two consecutive quarters.
An officer of the Company is associated with a private company that entered
into a service agreement with the Company to provide certain financial,
accounting, professional staffing and legal services to the Company. The Company
paid fees of $71 relating to these services during the period ended December 31,
1998. This service agreement was terminated on December 31, 1998. The private
company also leased certain equipment to the Company as described in Note 4.
Lease payments paid by the Company on this capital lease were $6 for the period
ended December 31, 1998.
Notes Payable -- Related Party
During October, 1998, Broadband Solutions, LLC, the holder of the Series A
Preferred Stock, made a loan to the Company of $1,000 bearing interest at 12%
which was exchanged for 400,000 shares of Series B preferred stock on November
13, 1998. Interest paid to Broadband Solutions, LLC was $11.
As part of its acquisition of HSAN, the Company assumed a note payable in
the aggregate principal amount of $ 650, evidenced by a promissory note and
assignment and security agreement, owing to Gans Multimedia Partnership. The
note bears interest at a rate of 7% per annum. The Company repaid $150 of the
note in December 1998 and the remaining $500 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 Multimedia Partnership
from July 1997 to April 1998.
As part of its acquisition of CATV, the Company assumed a note payable in
the aggregate principal amount of $44, evidenced by a promissory note and
assignment and security agreement, from a private company associated with an
officer of the Company. The note bears interest at a rate of 7% per annum. The
Company paid $6 of the note prior to December 31, 1998, with the remaining
balance of $38 payable in monthly installments of approximately $1 through
February 5, 2003. The loan represents working capital of CATV funded by the
private company from March 1998 to April 1998.
F-20
<PAGE> 101
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The aggregate amounts of notes payable -- related parties maturities are as
follows:
<TABLE>
<S> <C>
Year Ending December 31,
1999...................................................... $ 8
2000...................................................... 9
2001...................................................... 509
2002...................................................... 9
2003...................................................... 3
----
Total principal payments.......................... $538
====
</TABLE>
12. 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.
13. RISKS AND UNCERTAINTIES
Requirements for Additional Financing
The Company expects to experience substantial negative cash flows from
operating activities and investing activities for at least the next several
years due to the deployment of its services into new markets and the enhancement
of its network and operations. During 1998, the Company has raised cash through
the sale of the Company's mandatorily redeemable convertible preferred stock. At
December 31, 1998, the primary source of liquidity for the Company was $17,888
of cash and cash equivalents. The Company believes that additional financing of
$25 million will be obtained from the planned sale of Series C Preferred Stock
to Vulcan Ventures. The Company also intends to obtain additional equity from an
initial public offering of its common stock during 1999. Other financing may be
obtained from debt and leasing activities, among other alternatives. Management
believes these financing sources will be sufficient to meet the Company's
working capital requirements, including operating losses, and capital
expenditure requirements for at least the next 18 months. There can be no
assurance as to the availability or terms upon which such financing and equity
might be obtained. If financing is not available at terms acceptable to the
company, management has the intent and believes it has the ability to reduce
expenditures so as to delay the need for additional financing.
Dependence on Key Technology Suppliers and Cable Companies
The Company currently depends on a limited number of suppliers for certain
key technologies used to build and manage the Company's services. Although the
Company believes that there are alternative suppliers for each of these
technologies, the Company has established favorable relationships with each of
its current suppliers, and it could take a significant period of time to
establish relationships with alternative suppliers and substitute their
technologies. The loss of any of the Company's relationships with its current
suppliers could have a material, adverse effect on the Company's financial
condition and results of operations. Should the Company not obtain additional
cable systems for distribution, it could have a material, adverse effect on the
Company's financial condition and results of operations.
The Company's business plan is dependent on cable companies to distribute
its service to its subscribers. The Company has an agreement with several of its
shareholders to provide exclusive Internet access on certain cable systems
controlled by them. However, there is no guarantee that the shareholders will
provide additional cable systems for distribution by the Company. In addition,
the Company's
F-21
<PAGE> 102
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
agreements with individual cable systems are for terms of no more than 5 years,
and they may be terminated prior to that date under certain circumstances.
The Company's ability to provide its services is also dependent on the
availability and reliability of the infrastructure of the cable system
operators. Currently, many cable system operators in the Company's markets and
potential markets have not upgraded their systems to allow the Company to
efficiently provide its services. These cable system operators are under no
obligation to undertake an upgrade of their systems, and the Company is
therefore dependent on cable system operators to make the improvements that will
allow the Company to provide its services.
14. SUBSEQUENT EVENTS
Initial Public Offering
In February 1999 the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission that would
permit the Company to sell shares of the Company's common stock in connection
with a proposed IPO. The Company has subsequently authorized the sale of $18,500
of common stock to Cisco Systems, Inc., Com 21, Inc. and Microsoft Corporation
in a concurrent offering.
Distribution to Stockholders of Darwin Networks, Inc.
In March 1999, the Company transferred to Darwin Networks, Inc., a newly
created Delaware corporation, all of the assets used in the Company's digital
subscriber line service, which had a net book value of approximately $330, in
exchange for 100% of the outstanding Darwin common stock. These assets consisted
primarily of computer equipment and furniture and fixtures. On March 31, 1999,
the Company distributed all of the outstanding Darwin common stock to the
Company's common and preferred stockholders. This distribution has been recorded
as a net reduction of stockholders equity in the March 31, 1999 (unaudited)
financial statements. In connection with the asset transfer, the Company entered
into a services agreement with Darwin pursuant to which it will provide various
financial, accounting and other professional staff services to Darwin and will
be compensated for its costs at fair market value. The services agreement is for
an initial six month term. The Company also agreed to loan Darwin up to $500 for
working capital pursuant to a six month uncollateralized revolving credit note
bearing interest at the prime rate. In connection with the note, Darwin issued
to the Company a warrant to purchase 1,000,000 shares of Darwin common stock at
an exercise price of $5.00 per share, which the Company has valued at $7.
Expenses related to the Darwin service line approximated $175 in 1998 and $302
for the three months ended March 31, 1999. No revenue was realized in 1998 or
1999 associated with Darwin.
Debt
In April 1999, the Company entered into a $3,000 master loan and security
facility. Each advance under the agreement is to be repaid over 36 months. As of
April 30, 1999, $1.7 million had been drawn under the facility. The loan is
collateralized by certain assets of the Company.
Series C Preferred Stock
On April 30, 1999, the Company received $25 million in cash proceeds from
the sale of 5,000,000 shares of Series C Preferred Stock to Vulcan under the
terms of the agreements further described in Note 8.
F-22
<PAGE> 103
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Road Runner Letter of Intent
The Company signed a non-binding letter of intent in April 1999 with
ServiceCo LLC, the entity that provides Road Runner's cable internet access and
content aggregation services. Under any definitive agreement that the Company
may sign, based on the letter of intent, the Company would grant ServiceCo LLC a
warrant to purchase one share of common stock at a price of $5 per share for
each home, up to a maximum of 5 million homes, that the Company and ServiceCo
LLC designate to receive their joint services.
Warrants Issued to Microsoft
In April 1999, the Company granted Microsoft a warrant to purchase 250,000
shares of common stock at an exercise price of 125% of the IPO price. Microsoft
has agreed to introduce the benefits of the Company's services to Comcast Corp.,
a multiple system cable operator. The warrant also provides Microsoft the right
to purchase one additional share of common stock for each 10 additional homes
over 2.5 million that are committed by Comcast to the Company by May 1, 2002.
The Company estimates that it will record a charge to earnings upon the
effective date of the IPO related to the issuance of the 250,000 warrants of
approximately $1.7 million, based on a $12 IPO price. Should the Company's IPO
price be different than $12, the amount expensed related to these warrants could
be materially different. Additional expense may also be recognized in future
periods should Microsoft earn the right to purchase additional common shares
based on the number of homes committed to the Company by Comcast.
Recapitalization
In May 1999, the Company expects to complete a 1.55 for 1 split of its
common stock. This stock split will result in a corresponding change in the
conversion rate for all shares of the Company's redeemable convertible preferred
stock such that each share of Preferred Stock will be convertible into 1.55
shares of common stock. All outstanding warrants, if earned, may be exercised to
acquire 1.55 shares of common stock after the contemplated split. The
accompanying financial statements have been restated for all periods presented
to reflect the effects of the stock split.
Also, the Board of Directors expects to authorize 100 million shares of
Class A common stock and increase the number of Common Stock authorized to 400
million shares. The increases in authorized shares have been reflected in the
unaudited pro forma balance sheet information as of March 31, 1999.
F-23
<PAGE> 104
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
CATV.net, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of CATV.net, Inc. at
December 31, 1997 and April 2, 1998 and the results of its operations and its
cash flows for the periods from March 12, 1997 (inception) through December 31,
1997 and January 1, 1998 through April 2, 1998, in conformity with generally
accepted accounting principles. 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 generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, 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 the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
March 12, 1999
F-24
<PAGE> 105
CATV.NET, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 2,
1997 1998
------------ --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1 $ 332
Accounts receivable, net of allowance for doubtful
accounts of $3 in 1998................................. 1 29
Prepaid expenses and other assets......................... 4 4
----- -------
Total current assets.............................. 6 365
Property and equipment, net................................. 36 130
----- -------
Total assets...................................... $ 42 $ 495
===== =======
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 55 $ 143
Other current liabilities................................. 3 8
Notes payable -- related parties, current portion......... 117 7
Capital lease obligations, current portion................ -- 6
----- -------
Total current liabilities......................... 175 164
----- -------
Notes payable -- related parties............................ -- 37
Capital lease obligations................................... -- 33
----- -------
Total liabilities................................. 175 234
----- -------
Mandatorily redeemable convertible preferred stock:
No par value, 2,500,000 shares designated; 500,000 shares
issued and outstanding; 2,000,000 shares subscribed.... -- 2,500
Subscription receivable................................... -- (2,000)
----- -------
Total mandatorily redeemable convertible preferred
stock........................................... 500
----- -------
Stockholders' deficit:
Member units, 500,000 outstanding, 1997...................
Common stock, no par value, 4,950,000 shares authorized;
2,000,000 shares issued and outstanding, 1998.......... -- --
Additional paid-in capital................................ -- 117
Accumulated deficit....................................... (133) (356)
----- -------
Total stockholders' deficit....................... (133) (239)
----- -------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
deficit......................................... $ 42 $ 495
===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 106
CATV.NET, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 12, 1997 JANUARY 1, 1998
(INCEPTION) THROUGH THROUGH
DECEMBER 31, 1997 APRIL 2, 1998
------------------- ---------------
<S> <C> <C>
Net revenue................................................. $ 117 $ 26
Costs and expenses:
Operating costs........................................... 108 87
Engineering............................................... 50 58
Sales and marketing....................................... 35 67
General and administrative................................ 57 38
----- -----
Total costs and expenses.......................... 250 250
----- -----
Loss from operations........................................ (133) (224)
Interest income, net........................................ -- 1
----- -----
Net loss.......................................... $(133) $(223)
===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 107
CATV.NET, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT
FOR THE PERIODS FROM MARCH 12, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997 AND
JANUARY 1, 1998 THROUGH APRIL 2, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MEMBER UNITS COMMON STOCK TOTAL
------------------ ------------------- ADDITIONAL ACCUMULATED STOCKHOLDERS'
UNITS AMOUNT SHARES AMOUNT PAID IN CAPITAL DEFICIT DEFICIT
-------- ------- --------- ------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of member units in
connection with the formation
of the Company................ 500,000 --
Net loss........................ $(133) $(133)
-------- ------- --------- ------- --- ----- -----
BALANCES AT DECEMBER 31, 1997... 500,000 -- -- -- (133) (133)
Conversion of note payable --
related party to member
units......................... 100,000 117 117
Issuance of common stock........ 30 -- --
Exchange of shares related to
the merger of CATV.net LLC and
CATV.net, Inc................. (600,000) 1,999,970 --
Net loss........................ (223) (223)
-------- ------- --------- ------- --- ----- -----
BALANCES AT APRIL 2, 1998....... -- -- 2,000,000 -- 117 (356) (239)
======== ======= ========= ======= === ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE> 108
CATV.NET, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, (EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 12, 1997 JANUARY 1,
(INCEPTION) 1998
THROUGH THROUGH
DECEMBER 31, APRIL 2,
1997 1998
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(133) $(223)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization.......................... 3 5
Accounts receivable.................................. (1) (28)
Prepaid expenses and other current assets............ (4) --
Accounts payable..................................... 55 88
Other current liabilities............................ 3 5
----- -----
Net cash used in operating activities............. (77) (153)
----- -----
INVESTING ACTIVITIES
Purchase of property, equipment and improvements, net of
capital leases......................................... (39) (58)
----- -----
Net cash used in investing activities............. (39) (58)
----- -----
FINANCING ACTIVITIES
Net proceeds from issuance of redeemable convertible
preferred stock........................................... -- 500
Advances from related parties............................... 117 44
Payments on capital lease obligations....................... -- (2)
----- -----
Net cash provided by financing activities......... 117 542
----- -----
Net increase in cash and cash equivalents................... 1 331
Cash and cash equivalents, beginning of period.............. -- 1
----- -----
Cash and cash equivalents, end of period.......... $ 1 $ 332
===== =====
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Equipment acquired under capital leases................... -- $ 41
Issuance of note payable as consideration for advance from
related party.......................................... $ 117 $ 44
Issuance of CATV.net, LLC member units in exchange for
cancellation of notes payable -- related parties....... -- $ 117
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE> 109
CATV.NET, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS FROM MARCH 12, 1997
(INCEPTION) THROUGH DECEMBER 31, 1997
AND JANUARY 1, 1998 TO APRIL 2, 1998
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
CATV.net, Inc. ("the Company") provides high speed Internet access via
cable modems to residential and commercial customers in exurban areas. The
Company enters into long-term exclusive contracts with cable system operators to
provide them with a comprehensive "turnkey" service. That service enables a
cable system's customers to receive high speed Internet. In exchange for
providing the Company access to its customers, the cable operator receives a
portion of the monthly fees received from the customer that subscribes to the
services.
The Company also provides consulting services focused on enabling cable
operators to provide Internet access services and sells related equipment to the
operator. In addition, the Company installs cable modems for residential and
commercial customers generally through the use of independent contractors.
Basis of Presentation
CATV.net LLC was organized on March 12, 1997. No capital contributions were
received in exchange for the member units issued upon inception. On January 1,
1998, CATV.net LLC issued 100,000 additional member units in repayment of $117
due to one of its officers. On February 23, 1998, CATV.net LLC reorganized as a
corporation, CATV.net Inc., without changing its ownership. Also on February 23,
1998, CATV.net Inc. entered into a Convertible Preferred Stock Purchase
Agreement with Broadband Solutions LLC ("Broadband Solutions"), an investor
group. Broadband Solutions agreed to purchase 2,500,000 shares of Preferred
Stock from CATV.net LLC for $1 per share. Broadband paid for the purchase of the
first 500,000 shares on February 23, 1998.
On April 3, 1998, the Company effected a 10-to-1 split of its common and
mandatorily redeemable convertible preferred stock. All balances of the common
and mandatorily redeemable convertible preferred stock have been adjusted to
reflect this stock split.
Revenue Recognition
Revenues from the sale of equipment and consulting services are recognized
when earned. Monthly customer subscription revenue is recognized in the period
in which subscription services are provided. Subscription revenue billed in
advance is deferred until the related services are provided.
Long-Lived Assets
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
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
No such impairment losses have been identified by the Company.
Property and Equipment
Property, equipment, and improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful life of the assets for equipment
F-29
<PAGE> 110
CATV.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3 years) and furniture and fixtures (5 years), or the shorter of useful life or
lease term for capital leases. 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 income.
Stock-based Employee Compensation
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB Opinion No. 25) and has adopted the disclosure-only requirements
of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123).
Fair Value of Financial Instruments
The Company's financial instruments principally consist of cash and cash
equivalents, accounts receivable, accounts payable, and capital lease
obligations that are carried at cost, which approximates fair value because of
the short-term nature of these instruments. Notes payable are with related
parties, and as a result, while the Company believes that the fair value of such
instruments approximates carrying value, the carrying amount may not necessarily
reflect fair value.
Cash and Cash Equivalents
Cash and cash equivalents include all short-term, highly liquid investments
that mature within three months of their acquisition date.
Engineering
Engineering costs are expensed as incurred.
Concentration of Credit Risk
The Company's 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 total revenues or accounts receivable balances for the
periods ended December 31, 1997 and April 2, 1998. The Company maintains an
allowance for doubtful accounts receivable based upon its historical experience
and expected collectibility of all accounts receivable.
Recent Accounting Pronouncements
In April 1998 the American Institute of Certified Public Accountants issued
Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (SOP
98-5). SOP 98-5, which is effective for fiscal years beginning after December
15, 1998, provides guidance on the financial reporting of start-up costs and
organization costs. It requires costs of start up activities and organization
costs to be expensed as incurred. As the Company has expensed these costs, the
adoption of this standard is not expected to have a significant impact on the
Company's results of operations, financial position or cash flows.
In June 1998 the Financial Accounting Standards Board issued Accounting for
Derivatives and Hedging Activities (SFAS 133), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. As the Company does not
currently engage or plan to engage in derivatives, there will be no impact to
the Company's results of operations, financial position or cash flows upon the
adoption of SFAS 133.
F-30
<PAGE> 111
CATV.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
2. PROPERTY, EQUIPMENT AND IMPROVEMENTS
The components of property, equipment and improvements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 2,
1997 1998
------------ --------
<S> <C> <C>
Equipment............................................... $39 $134
Furniture and fixtures.................................. -- 4
--- ----
39 138
Less accumulated depreciation and amortization.......... 3 8
--- ----
$36 $130
=== ====
</TABLE>
Equipment includes amounts for assets acquired under capital leases of $41
at April 2, 1998. Accumulated amortization for these assets was $1 at April 2,
1998. Total depreciation and amortization expense for the periods ended December
31, 1997 and April 2, 1998 was $3 and $5.
3. LEASE OBLIGATIONS
The Company leases certain office facilities on a month-to-month basis,
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. Facility rent expense for the periods ended December 31,
1997 and April 2, 1998 amounted to $2 and $3 respectively.
The Company also has obligations under capital equipment leases. The
capital lease is with a company affiliated with an officer of the Company.
Future minimum lease payments capital leases having terms in excess of one year
as of April 2, 1998 are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES
-------
<S> <C>
Year Ending December 31,
1999...................................................... $10
2000...................................................... 10
2001...................................................... 10
2002...................................................... 10
2003...................................................... 9
Thereafter................................................ --
---
Total minimum lease payments...................... 49
Less amounts representing interest........................ 10
---
Present value of minimum capital lease obligations........ 39
Less current portion...................................... 6
---
Noncurrent portion........................................ $33
===
</TABLE>
F-31
<PAGE> 112
CATV.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS 109) Accounting for Income Taxes which
provides for the establishment of deferred tax assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. As of
April 2, 1998, the Company had deferred tax assets of approximately $53
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 $133 at April 2, 1998 expire in 2018. Utilization
of these net operating losses may be subject to a substantial annual limitation
provided by the Internal Revenue Code of 1986 and similar state provisions. The
annual limitation may result in the expiration of net operating losses before
utilization.
Prior to the February 23, 1998 conversion of the Company from a limited
liability company to a corporation (CATV.net, Inc.), the Company was treated as
a flow-through entity for federal income tax purposes. The losses of the Company
were reported by its members on their individual federal and state income tax
returns, and CATV.net LLC did not pay income taxes or receive income tax
benefits.
5. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Outstanding mandatorily redeemable convertible preferred stock, ("Preferred
Stock") at April 2, 1998 consists of the following:
<TABLE>
<CAPTION>
SHARES ISSUED PROCEEDS OF
AND NET OF LIQUIDATION
ISSUE PRICE OUTSTANDING ISSUANCE COSTS VALUE
- ----------- ------------- -------------- -----------
<S> <C> <C> <C>
$1.00................................... 500,000 500 510
</TABLE>
The Company issued 500,000 shares of its Preferred Stock on February 23,
1998. The holder of the Preferred Stock has subscribed to an additional
2,000,000 shares, payable at the option of the Company. The Preferred Stock
ranks senior to the common stock with respect to the payment of dividends,
distribution of assets, and rights upon liquidation, dissolution or winding up
of the company.
Dividends
The holders of Preferred Stock are entitled to receive dividends in
preference to holders of common shares. Dividends accrue on the shares at an
annual rate of $.07 per share. Dividends accrue on each share whether or not
earned or declared by the company. Such dividends are cumulative, and must be
paid before any dividend or distribution is declared on common stock. Any
accumulation of dividends on the preferred shares do not bear interest. In lieu
of cash, a holder of preferred shares is entitled to receive common stock valued
at its current fair market value.
Liquidation
Upon any liquidation of the Company, before any distribution is made to
common stock holders, the holders of Preferred Stock are entitled to receive
from the assets of the Company the issue price per share plus a 25% compounded
annual return on the investment, less any dividends already paid on the shares.
However, if the amount to be distributable for each share of common stock,
assuming conversion of the Preferred Shares plus accrued and unpaid dividends to
common shares, is higher, the holders of the Preferred Shares may elect to
receive that per share amount.
F-32
<PAGE> 113
CATV.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Redemption
If the Company has not completed a qualified initial public offering of
common stock, the holders of Preferred Stock may require the Company to redeem
the shares on or after April 3, 2003. The required redemption price is to be the
greater of the initial purchase price plus accrued but unpaid dividends or the
fair value per share based on a qualified appraisal acceptable to both the
Company and the shareholder. The shares of preferred stock are not redeemable at
the Company's option.
Conversion
The Preferred Stock is convertible at the option of the holder into an
equal number of common shares. Upon conversion of any share of Preferred Stock,
all accrued but unpaid dividends are to be paid in shares of common stock based
on the fair value of the common stock at the date of the conversion. The Company
is required to reserve a sufficient number of authorized but unissued common
shares to allow for the Preferred Stock conversion rights to be satisfied. Each
share of Preferred Stock is to be automatically converted to common shares
immediately upon the closing of a qualified initial public offering.
In the case of the sale or merger of the Company, as defined, the holders
of Preferred Stock are permitted to convert their Preferred Shares in a manner
that will allow the holder to obtain the issue price for the shares plus a 25%
compounded annual return on the investment, less any dividends paid on the
shares. If the company issues common shares, or warrants, options, convertible
securities or other securities entitling the holders to obtain common stock, for
a consideration per share which is less than the par value of the Preferred
Stock, then the conversion price is to be adjusted to reflect the lower price.
As a result, the holders of the Preferred Stock would be able to receive
additional common shares upon conversion. The terms of the conversion are also
adjusted in the case of stock splits and dividends, capital reorganizations and
other specified events to allow the holders of Preferred Stock to receive the
same rights that would have been received had the conversion taken place before
the event occurred. The holders of the Preferred Stock waived their right to
exercise this provision in the exchange of preferred shares on April 3, 1998.
Voting
All shares of preferred stock have voting rights. The number of votes per
preferred shares are adjusted so that at any time the total votes attributable
to Preferred Stock is equal to 2,500,000 common shares. As a result, the holders
of Preferred Stock have a majority voting interest in the Company at April 2,
1998.
6. STOCK OPTION PLAN
In February 1998, the Company's Board of Directors adopted the 1998 Stock
Option Plan (the Plan). A total of 45,000 shares of common stock were reserved
for issuance under this Plan.
The exercise price for the options is determined by the Board of Directors,
but shall not be less than 100% of the fair market value of the common stock on
the date the option is granted. Generally, the options vest over a five-year
period after the date of grant and expire ten years after the date of grant. The
Plan provides for accelerated vesting should there be a change in control, or an
initial public offering of the Company's common stock. Option holders that
terminate their employment with the Company forfeit all non-vested options.
Employees, key advisors and non-employee directors of the Company are eligible
to receive awards under the Plan.
F-33
<PAGE> 114
CATV.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the activity of the Company's stock option
plan:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Outstanding at January 1, 1998........................... --
Options granted to employees........................... 6,000 $1.00
Options cancelled......................................
----- -----
Outstanding at April 2, 1998............................. 6,000 $1.00
===== =====
</TABLE>
At April 2, 1998 there were no options exercisable under the Plan. The
following table summarizes information about options outstanding at April 2,
1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
NUMBER OF CONTRACTUAL
EXERCISE PRICE SHARES LIFE (IN YEARS)
- -------------- --------- ---------------
<S> <C> <C>
$1.00................................................ 6,000 9.8
</TABLE>
The Company applies APB No. 25, and related interpretations in accounting
for its stock option plan. Under APB No. 25, compensation expense is recognized
based on the amount by which the fair value of the Company's common stock
exceeds the exercise price of the stock options at the date of grant. No expense
was recognized during the period ended April 2, 1998.
The Company has adopted the disclosure only provisions of SFAS 123. The
weighted average fair value of the options granted as of April 2, 1998 was $.24
per option. Had compensation expense been recognized pursuant to SFAS No. 123,
the Company's net loss would have been increased to the pro forma amounts
indicated below for the period ended April 21, 1998:
<TABLE>
<S> <C>
Net loss -- as reported..................................... $223
Net loss -- pro forma....................................... $224
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value option pricing method with the following weighted average
assumptions used for grants for the period ended April 2, 1998:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Expected life of options in years........................... 5 years
Risk-free interest rate..................................... 5%
Expected dividend yield..................................... 0%
Expected volatility......................................... N/A
</TABLE>
7. RELATED PARTY TRANSACTIONS
The Company incurred fees for financial advisory services provided by a
private investment firm managed by two of the Company's directors. Total fees
for these services were $7 for the period ended April 2, 1998.
An officer of the Company is associated with a private company that entered
into a service agreement with the Company to provide certain financial,
accounting, professional staffing and legal services to the Company. The Company
paid fees of $1 and $28 relating to these services during the periods ended
December 31, 1997 and April 2, 1998, respectively.
F-34
<PAGE> 115
CATV.NET, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In February, 1998, the Company borrowed $44 from a private company
associated with an officer of the Company. The note bears interest at a rate of
7% per annum with monthly installments of approximately $1 through February 5,
2003. The loan represents working capital funded by the private company from
March 1998 to April 1998.
8. RISKS AND UNCERTAINTIES
Dependence on Key Technology Suppliers
The Company currently depends on a limited number of suppliers for certain
key technologies used to build and manage the Company's services. Although the
Company believes that there are alternative suppliers for each of these
technologies, the Company has established favorable relationships with each of
its current suppliers, and it could take a significant period of time to
establish relationships with alternative suppliers and substitute their
technologies. The loss of any of the Company's relationships with its current
suppliers could have a material, adverse effect on the Company's financial
condition and results of operations. Should the company not obtain additional
cable systems for distribution, it could have a material, adverse effect on the
Company's financial condition and results of operations.
Dependence on Cable Companies
The Company's business plan is dependent on cable companies to distribute
its service to its subscribers. The Company has an agreement with several of its
shareholders to provide exclusive Internet access on certain cable systems
controlled by them. However, there is no guarantee that the shareholders will
provide additional cable systems for distribution by the Company. In addition,
the Company's agreements with individual cable systems are for terms of no more
than 5 years, and they may be terminated prior to that date under certain
circumstances.
The Company's ability to provide its services is also dependent on the
availability and reliability of the infrastructure of the cable system
operators. Currently, many cable system operators in the Company's markets and
potential markets have not upgraded their systems to allow the Company to
efficiently provide its services. These cable system operators are under no
obligation to undertake an upgrade of their systems, and the Company is
therefore dependent on cable system operators to make the improvements that will
allow the Company to provide its services.
9. SUBSEQUENT EVENTS
The Company was acquired by High Speed Access Corp. in an exchange of stock
on April 3, 1998.
F-35
<PAGE> 116
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
High Speed Access Network, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' deficit and of cash flows present
fairly, in all material respects, the financial position of High Speed Access
Network, Inc. at December 31, 1997 and April 3, 1998 and the results of its
operations and its cash flows for the periods from July 21, 1997 (inception)
through December 31, 1997 and January 1, 1998 through April 3, 1998, in
conformity with generally accepted accounting principles. 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
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
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 the opinion expressed
above.
/s/PRICEWATERHOUSECOOPERS, LLP
Louisville, Kentucky
March 12, 1999
F-36
<PAGE> 117
HIGH SPEED ACCESS NETWORK, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 3,
1997 1998
------------ --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 9 $ 575
Accounts receivable....................................... -- 18
Receivable from vendor.................................... 113 --
Prepaid expenses and other assets......................... 7 13
----- -------
Total current assets.............................. 129 606
Property, equipment and improvements, net................... 211 468
Intangible assets, net...................................... 87 80
----- -------
Total assets...................................... $ 427 $ 1,154
===== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 45 $ 430
Advances from related parties............................. 741 922
Accrued compensation and related expenses................. 7 115
Other current liabilities................................. 7 129
----- -------
Total current liabilities......................... 800 1,596
----- -------
Mandatorily redeemable convertible preferred stock:
No par value, 2,500,000 shares designated; 500,000 shares
issued and outstanding; 2,000,000 shares subscribed.... -- 2,500
Subscription receivable................................... -- (2,000)
----- -------
-- 500
----- -------
Stockholders' deficit:
Common stock, $.01 par value, 4,900,000 shares authorized;
1 share issued and outstanding, 1997; 2,000,000 shares
issued and outstanding, 1998.............................. -- --
Additional paid-in capital................................ -- 947
Accumulated deficit....................................... (373) (1,889)
----- -------
Total stockholders' deficit....................... (373) (942)
----- -------
Total liabilities and stockholders' deficit....... $ 427 $ 1,154
===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE> 118
HIGH SPEED ACCESS NETWORK, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 21, 1997 (INCEPTION) JANUARY 1, 1998 THROUGH
THROUGH DECEMBER 31, 1997 APRIL 3, 1998
------------------------- -----------------------
<S> <C> <C>
Net revenue..................................... $ 9 $ 87
Costs and expenses:
Operating costs............................... 218 247
Engineering................................... 23 48
Sales and marketing........................... 109 315
General and administrative.................... 32 46
Non-cash stock compensation................... -- 947
----- -------
Total costs and expenses.............. 382 1,603
----- -------
Net loss.............................. $(373) $(1,516)
===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<PAGE> 119
HIGH SPEED ACCESS NETWORK, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE PERIODS FROM JULY 21, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997
AND JANUARY 1, 1998 THROUGH APRIL 3, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT PAID IN CAPITAL DEFICIT DEFICIT
--------- ------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock in
connection with the formation of
the Company..................... 1 $ -- $ -- $ -- $ --
Net loss.......................... -- -- (373) (373)
--------- ------- ---- ------- ------
BALANCES AT DECEMBER 31, 1997..... 1 -- -- (373) (373)
Issuance of 1,999,999, shares
including 1,184,000 fully vested
shares to employees and
consultants in exchange for
services........................ 1,999,999 -- 947 -- 947
Net loss.......................... -- -- -- (1,516) (1,516)
--------- ------- ---- ------- ------
BALANCES AT APRIL 3, 1998......... 2,000,000 -- 947 (1,889) (942)
========= ======= ==== ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE> 120
HIGH SPEED ACCESS NETWORK, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 21, 1997
(INCEPTION) JANUARY 1, 1998
THROUGH THROUGH APRIL 3,
DECEMBER 31, 1997 1998
----------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(373) $(1,516)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization.......................... 33 30
Amortization of intangible asset....................... -- 7
Stock compensation..................................... -- 947
Changes in assets and liabilities:
Accounts receivable.................................. -- (18)
Receivable from vendor............................... (113) --
Prepaid expenses and other current assets............ (7) 107
Accounts payable..................................... 45 385
Accrued compensation and related expenses............ 7 108
Other current liabilities............................ 7 122
----- -------
Net cash provided by (used) in operating
activities...................................... (401) 172
----- -------
INVESTING ACTIVITIES
Purchase of property, equipment and improvements, net of
capital leases............................................ (244) (287)
Acquisition of customer base................................ (87) --
----- -------
Net cash used in investing activities....................... (331) (287)
----- -------
FINANCING ACTIVITIES
Net proceeds from issuance of mandatorily redeemable
convertible preferred stock............................... -- 500
Advances from related parties............................... 741 181
----- -------
Net cash provided by financing activities......... 741 681
----- -------
Net increase in cash and cash equivalents................... 9 566
Cash and cash equivalents, beginning of period.............. -- 9
----- -------
Cash and cash equivalents, end of period.......... $ 9 $ 575
===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE> 121
HIGH SPEED ACCESS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIODS FROM JULY 21, 1997 (INCEPTION) THROUGH DECEMBER 31, 1997
AND JANUARY 1, 1998 THROUGH APRIL 3, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
High Speed Access Network, Inc. (the "Company" and "HSAN") provides high
speed Internet access via cable modems to residential and commercial customers
in exurban areas. The Company enters into long-term exclusive contracts with
cable system operators to provide them with a comprehensive "turnkey" service.
That service enables a cable system's customers to receive high speed Internet
access. In exchange for providing access to its customers, the Company pays the
cable operator a portion of the monthly fees received from the customer that
subscribes to the services.
The Company provides the necessary equipment to provide Internet access to
a cable operator's customer base. The Company installs its Internet equipment at
the head-end facilities of the cable operator and performs tests on the system.
Once the equipment is ready for use, the Company markets the services and
installs cable modems for residential and commercial customers, generally using
outside vendors to perform the cable modem installation process.
BASIS OF PRESENTATION
HSAN was incorporated on July 1, 1997, with the issuance of 1 share of its
$.01 par value common shares. On April 2, 1998, HSAN's Board of Directors
approved the issuance of an additional 1,999,999 shares to the founder and four
employees and advisors. No proceeds were received from the issuance of the
additional shares. The issuance of the additional shares has been accounted for
as a 2,000,000 to 1 stock split in the accompanying financial statements.
Accordingly all prior period amounts reflect the stock split as if it had
occurred on July 21, 1997. The Company recognized compensation expense of $947
related to the issuance of 1,184,000 shares to employees and consultants for
services other than the founder. Compensation expense was recognized based on
the Company's estimate of the fair value of $.80 per common share per the common
stock issued.
The Company issued 500,000 shares of mandatorily redeemable convertible
preferred stock occurred on April 3, 1998 just prior to the Company being
acquired by High Speed Access Corp. in a stock-for-stock transaction. Because
the Company's operations for April 3, 1998 are included in the financial
statements of the acquiring company, the financial statements of the Company
include the results of operations only through April 2, 1998.
Revenue Recognition
Monthly customer subscription revenue is recognized in the period in which
subscription services are provided. Subscription revenue billed in advance is
deferred until the related services are provided.
Long-Lived Assets
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
would be recognized when estimated future cash flows expected to result from the
use of the asset and its eventual disposition is less than its carrying amount.
No such impairment losses have been identified by the Company.
F-41
<PAGE> 122
HIGH SPEED ACCESS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property, Equipment and Improvements
Property, equipment, and improvements are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
useful life of the assets for equipment (3 years) and furniture and fixtures (5
years), or the shorter of useful life or lease term for leasehold improvements.
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 income.
Intangible Assets
The Company recognized an intangible asset of $87 for the acquisition of a
customer base from an internet service provider in December 1997. The cost of
the customer base is being amortized over a three year period on a straight-line
basis. Amortization expense for the period ended April 2, 1998 was $7.
Income Taxes
The Company has elected to be taxed under Subchapter S of the Internal
Revenue Code. As a result, the Company's losses have been reported by the
shareholders on their individual federal and state income tax returns, and no
income tax expense or benefit has been recognized by the Company.
Fair Value of Financial Instruments
The Company's financial instruments principally consist of cash and cash
equivalents, accounts receivable, and accounts payable, that are carried at
cost, which approximates fair value because of the short-term nature of these
instruments, while the Company believes that the fair value of such instruments
approximates carrying value, advances from related parties may not necessarily
reflect fair value because of their nature.
Cash and Cash Equivalents
Cash and cash equivalents include all short-term, highly liquid investments
that mature within three months of their acquisition date.
Concentration of Credit Risk
The Company's 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 total revenues or accounts receivable balances for the
periods ended December 31, 1997 and April 2, 1998.
Engineering
Engineering costs are expensed as incurred.
Recent Accounting Pronouncements
In April 1998 the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, Reporting on the Costs of
Start-Up Activities (SOP 98-5). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, provides guidance on the financial reporting
of start-up costs and organization costs. It requires costs of start up
activities and organization costs to be expensed as incurred. As the Company has
expensed these costs, the adoption of this standard is not expected to have a
significant impact on the Company's results of operations, financial position or
cash flows.
F-42
<PAGE> 123
HIGH SPEED ACCESS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998 the Financial Accounting Standards Board issued Accounting for
Derivatives and Hedging Activities (SFAS 133), which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. As the Company does not
currently engage or plan to engage in derivatives, there will be no impact to
the Company's results of operations, financial position or cash flows upon the
adoption of SFAS 133.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
2. PROPERTY, EQUIPMENT AND IMPROVEMENTS
The components of property, equipment and improvements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, APRIL 2,
1997 1998
------------ --------
<S> <C> <C>
Equipment............................................... $237 $507
Furniture and fixtures.................................. 7 22
Leasehold improvements.................................. -- 2
---- ----
244 531
Less accumulated depreciation and amortization.......... 33 63
---- ----
$211 $468
==== ====
</TABLE>
Total depreciation and amortization expense for the periods ended December
31, 1997 and April 2, 1998 were $33 and $30, respectively.
3. LEASE OBLIGATIONS
The Company leases certain office facilities under operating leases on a
month to month basis 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. Facility rent expense for the periods
ended December 31, 1997 and April 2, 1998 amounted to $5 and $12 respectively.
4. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
Mandatorily redeemable convertible preferred stock ("Preferred Stock") at
April 3, 1998 consists of the following:
<TABLE>
<CAPTION>
SHARES PROCEEDS NET
ISSUE ISSUED AND OF ISSUANCE LIQUIDATION
PRICE OUTSTANDING COSTS VALUE
- ----- ----------- ------------ -----------
<S> <C> <C> <C>
$1.00 500,000 500 500
</TABLE>
F-43
<PAGE> 124
HIGH SPEED ACCESS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The 500,000 shares of Preferred Stock were issued on April 3, 1998.
Preferred Stock ranks senior to the common stock with respect to the payment of
dividends, distribution of assets, and rights upon liquidation, dissolution or
winding up of the Company.
Dividends
The holders of Preferred Stock are entitled to receive dividends in
preference to holders of common stock. Dividends accrue on the Preferred Stock
at an annual rate of $.07 per share, respectively. Dividends accrue on each
share from its date of issuance, whether or not earned or declared by the
Company. Such dividends are cumulative, and must be paid before any dividend or
distribution is declared on common stock. Any accumulation of dividends on the
Preferred Stock does not bear interest. In lieu of cash, a holder of Preferred
Stock is entitled to receive common stock valued at its current fair market
value.
Liquidation
Upon any liquidation of the Company, before any distribution is made to
common stock holders, the holders of Preferred Stock are entitled to receive
from the assets of the Company the issue price per share for the Series plus a
25% percent compounded annual return on the investment, less any dividends
already paid on the shares. However, if the amount to be distributable for each
share of common stock, assuming conversion of the Preferred Stock plus accrued
and unpaid dividends to common stock, is higher, the holders of the Preferred
Stock may elect to receive that per share amount.
Redemption
If the Company has not completed a qualified IPO of common stock, the
holders of Preferred Stock may require the Company to redeem the shares on or
after April 3, 2003. The required redemption price is to be the greater of the
initial purchase price plus accrued but unpaid dividends or the fair value per
share based on a qualified appraisal acceptable to both the Company and the
shareholders. The shares of preferred stock are not redeemable at the Company's
option.
Conversion
Each Series of Preferred Stock is convertible at the option of the holder
into an equal number of shares of common stock. Upon conversion of any share of
Preferred Stock, all accrued but unpaid dividends are to be paid in shares of
common stock based on the fair value of the common stock at the date of the
conversion. The Company is required to reserve a sufficient number of authorized
but unissued common shares to allow for the Preferred Stock conversion rights to
be satisfied. Each share of Preferred Stock is to be automatically converted to
common stock immediately upon the closing of a qualified IPO.
In the case of the sale or merger of the Company, as defined, the holders
of Preferred Stock are permitted to convert their Preferred Stock in a manner
that will allow the holder to obtain the issue price for the shares plus a 25%
compounded annual return on the investment, less any dividends paid on the
shares. If the Company issues common shares, or warrants, options, convertible
securities or other securities entitling the holders to obtain common stock, for
a consideration per share which is less than the par value of the Preferred
Stock, then the conversion price is to be adjusted to reflect the lower price.
In such an instance, the holders of the Preferred Stock would be able to receive
additional common shares upon conversion. The terms of the conversion are also
adjusted in the case of stock splits and dividends, capital reorganizations and
other specified events to allow the holders of Preferred Stock to receive the
same rights that would have been received had the conversion taken place before
the event occurred.
F-44
<PAGE> 125
HIGH SPEED ACCESS NETWORK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Voting Rights
All shares of Preferred Stock have voting rights. Each share has the number
of votes equal to the number of shares of common stock into which the Preferred
Stock are convertible.
All shares of preferred stock have voting rights. The number of votes per
preferred shares are adjusted so that at any time the total votes attributable
to Preferred Stock is equal to 2,500,000 common shares. As a result, the holders
of Preferred Stock have a majority voting interest in the Company at April 2,
1998.
Adjustment of Terms
The terms of the Preferred Stock with respect to dividends, liquidation,
redemption, conversion and voting rights are adjusted upon a stock split,
dividend or other recapitalization to maintain the effects of the original
terms. Upon an IPO, all Preferred Stock is automatically converted to common
stock and all preferential rights are terminated.
5. RELATED PARTY TRANSACTIONS
The founder of the Company made advances to the Company totalling $741 as
of December 31, 1997 and $922 as of April 2, 1998. No interest was charged on
their advances, which were due on demand.
6. RISKS AND UNCERTAINTIES
Dependence on Key Technology Suppliers
The Company currently depends on a limited number of suppliers for certain
key technologies used to build and manage the Company's services. Although the
Company believes that there are alternative suppliers for each of these
technologies, the Company has established favorable relationships with each of
its current suppliers, and it could take a significant period of time to
establish relationships with alternative suppliers and substitute their
technologies. The loss of any of the Company's relationships with its current
suppliers could have a material, adverse effect on the Company's financial
condition and results of operations. Should the company not obtain additional
cable systems for distribution, it could have a material, adverse effect on the
Company's financial condition and results of operations.
Dependence on Cable Companies
The Company's business plan is dependent on cable companies to distribute
its service to its subscribers. The Company has an agreement with several of its
shareholders to provide exclusive Internet access on certain cable systems
controlled by them. However, there is no guarantee that the shareholders will
provide additional cable systems for distribution by the Company. In addition,
the Company's agreements with individual cable systems are for terms of no more
than 5 years, and they may be terminated prior to that date under certain
circumstances.
The Company's ability to provide its services is also dependent on the
availability and reliability of the infrastructure of the cable system
operators. Currently, many cable system operators in the Company's markets and
potential markets have not upgraded their systems to allow the Company to
efficiently provide its services. These cable system operators are under no
obligation to undertake an upgrade of their systems, and the Company is
therefore dependent on cable system operators to make the improvements that will
allow the Company to provide its services.
7. SUBSEQUENT EVENTS
The Company was acquired by High Speed Access Corp. in an exchange of stock
on April 3, 1998.
F-45
<PAGE> 126
HIGH SPEED ACCESS CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
The unaudited combined pro forma statement of operations for the year ended
December 31, 1998 reflects the acquisitions of CATV.net, Inc. (CATV) and HSA
Network, Inc. (HSAN), as if the transactions occurred on January 1, 1998. Since
the pro forma financial statement which follows is based upon the financial
condition and operating results of CATV and HSAN during periods when they were
not under the control or management of High Speed Access Corp. (HSA), the
information presented may not be indicative of the results which would have
actually been obtained had the acquisitions been completed as of January 1, 1998
nor are they indicative of future financial or operating results. The unaudited
pro forma financial information does not give effect to any synergies that may
occur due to the integration of the companies. The combined pro forma statement
of operations should be read in conjunction with the historical audited
financial statement of HSA and the notes thereto, as well as the audited
historical financial statements of CATV and HSAN and the notes thereto included
elsewhere in this prospectus. The acquisitions have been accounted for by the
purchase method of accounting. A pro forma balance sheet as of December 31, 1998
has not been presented herein since both acquisitions were completed on April 3,
1998 and have been reflected in HSA's consolidated balance sheet as of December
31, 1998 appearing elsewhere herein.
HSA CORPORATION, CATV AND HSAN
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HSA CORP. CATV HSAN ADJUSTMENTS COMBINED
--------- ----- ------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenue.............................. $ 337 $ 26 $ 87 $ -- $ 450
Cost and Expenses:
Operating Costs........................ 2,067 87 247 2,401
Engineering............................ 2,266 58 48 2,372
Sales and marketing.................... 3,696 67 315 4,078
General and administrative............. 2,323 38 47 209 2,616
Non-cash stock compensation............ -- -- 947 -- 947
--------- ----- ------- ----- ---------
Total expenses................. 10,352 250 1,603 209 12,414
Loss from operations..................... (10,015) (224) (1,516) (209) (11,964)
Interest income, net..................... 40 (1) 41
--------- ----- ------- ----- ---------
Net loss................................. (9,975) (223) (1,516) (209) (11,923)
Mandatorily redeemable convertible
preferred stock dividends.............. (385) (385)
Accretion of redemption value of
mandatorily redeemable convertible
preferred stock........................ (120,282) (120,282)
--------- ----- ------- ----- ---------
Net loss attributable to common
stockholders per common share.......... $(130,642) $(223) $(1,516) $(209) $(132,590)
========= ===== ======= ===== =========
Pro forma net loss per share:
Basic and diluted...................... $ (21.07) $ (21.39)
Weighted average shares outstanding
(basic and diluted)................. 6,200,000 6,200,000
</TABLE>
See accompanying notes to Pro Forma Combined Financial Statements
F-46
<PAGE> 127
HIGH SPEED ACCESS CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. BASIC OF PRESENTATION
The unaudited pro forma combined statement of operations for the year ended
December 31, 1998 give effect to the acquisitions of CATV and HSAN as if they
had occurred on January 1, 1998. The effects of the acquisitions have been
presented using the purchase method of accounting and accordingly, the purchase
price was allocated to the assets acquired and liabilities assumed.
2. PRO FORMA ADJUSTMENT
The pro forma statement of operations for the year ended December 31, 1998
has been adjusted to reflect the amortization of the excess of cost over net
identifiable assets acquired associated with the acquisitions of CATV and HSAN.
The excess of cost over net identifiable assets acquired is being amortized over
a period of 60 months.
F-47
<PAGE> 128
[INSIDE BACK COVER]
[Schematic diagram depicting connection of the Internet
through the cable headend to the end user]
<PAGE> 129
LOGO
13,000,000 SHARES
[HIGH SPEED ACCESS LOGO]
COMMON STOCK
------------------------------------------------------
PROSPECTUS
, 1999
------------------------------------------------------
LEHMAN BROTHERS J.P. MORGAN & CO.
Joint Lead Managers
BANC OF AMERICA SECURITIES LLC
CIBC
WORLD MARKETS
<PAGE> 130
THIS INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
[ALTERNATE PAGE FOR CONCURRENT OFFERING PROSPECTUS]
SUBJECT TO COMPLETION, DATED MAY 17, 1999
PROSPECTUS
SHARES
[HIGH SPEED ACCESS LOGO]
COMMON STOCK
- --------------------------------------------------------------------------------
This prospectus relates to the estimated 672,043 shares of our common stock to
be sold in an
offering to Cisco Systems, Inc., the estimated 89,606 shares to be sold in an
offering to Com21, Inc. and 896,057 shares to be sold in a offering to Microsoft
Corporation. We also are offering shares to the public in our concurrent initial
public offering of common stock.
No public market currently exists for our shares.
We propose to list the shares on the Nasdaq National Market under the symbol
"HSAC."
Anticipated Price Range $10.23 to $12.09 per share.
INVESTING IN THE SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Offering Price.............................................. $ $
Proceeds to High Speed Access Corp.......................... $ $
</TABLE>
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
, 1999
<PAGE> 131
[ALTERNATE PAGE FOR CONCURRENT OFFERING PROSPECTUS]
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Sale of Shares to Cisco, Com21 and
Microsoft........................... 18
Use of Proceeds....................... 18
Dividend Policy....................... 18
Dilution.............................. 19
Capitalization........................ 20
Selected Financial Data............... 22
Management's Discussion and Analysis
of Financial Condition and Results
of
Operations.......................... 24
Business.............................. 30
Management............................ 45
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Transactions.................. 55
Principal Stockholders................ 58
Description of Securities............. 61
United States Federal Income Tax
Consequences to Non-U.S. Holders.... 65
Shares Eligible for Future Sale....... 68
Underwriting.......................... 69
Plan of Distribution.................. 71
Legal Matters......................... 71
Experts............................... 71
Available Information................. 71
Reports to Stockholders............... 71
Glossary of Technical Terms........... A-1
Index to Financial Statements......... F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
This preliminary prospectus is subject to completion prior to this
offering. Among other things, this preliminary prospectus describes our company
as we currently expect it to exist at the time of the offering.
See the section of this prospectus entitled "Risk Factors" for a discussion
of certain factors that you should consider before investing in our common stock
offered in this prospectus. All trademarks and trade names appearing in this
prospectus are the property of their respective holders. Many of the technical
terms we use in this prospectus, which are commonly used in our industry, are
explained in the "Glossary of Technical Terms."
Unless otherwise indicated, all information in this prospectus:
- Reflects the conversion of all of our preferred stock into common stock
upon the closing of this offering;
- Reflects a 1.55-for-1 split of our common stock;
- Assumes a price to public of $12.00 per share, and a price to Cisco,
Com21 and Microsoft of $11.16 per share;
- Assumes the filing of our amended and restated certificate of
incorporation which, among other things, will authorize 10 million shares
of undesignated preferred stock, 400 million shares of common stock and
100 million shares of limited voting Class A common stock; and
- Assumes no exercise of the underwriters' over-allotment option.
References in this prospectus to "HSA," "we," "our," and "us" refer to High
Speed Access Corp., a Delaware corporation. High Speed Access Corp. was
incorporated in Delaware on April 2, 1998. Our principal executive offices are
located at 4100 East Mississippi Avenue, Denver, Colorado 80246. Our telephone
number at that address is (303) 256-2000. Our principal operating offices are
located 1000 W. Ormsby Avenue, Louisville, Kentucky 40210. Our telephone number
at that location is (502) 515-3333. INFORMATION CONTAINED ON OUR WEB SITE DOES
NOT CONSTITUTE PART OF THIS PROSPECTUS.
Until , 1999, all dealers selling shares of the common
stock, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions. Information contained on our Web site does not
constitute part of this Prospectus.
<PAGE> 132
[ALTERNATE PAGE FOR CONCURRENT OFFERING PROSPECTUS]
PLAN OF DISTRIBUTION
The shares being registered hereunder are being issued and sold to Cisco,
Com 21 and Microsoft pursuant to stock purchase agreements. This offering is not
being underwritten. See "Sale of Shares to Cisco, Com 21 and Microsoft".
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Brobeck, Phleger & Harrison LLP, Denver, Colorado.
EXPERTS
The financial statements of High Speed Access Corp. as of December 31, 1998
and for the period from April 3, 1998 through December 31, 1998; CATV net, Inc.
as of December 31, 1997 and April 2, 1998 and for the periods from March 12,
1997 through December 31, 1998 and January 1, 1998 through April 2, 1998; and
High Speed Access Network as of December 31, 1997 and April 3, 1998 and for the
periods from July 21, 1997 through December 31, 1998 and January 1, 1998 through
April 3, 1998, included in this Prospectus, have been so included in reliance on
the report of PricewaterhouseCoopers, LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (including the exhibits, schedules and amendments thereto)
under the Securities Act with respect to the shares of common stock to be sold
in the offering. This prospectus does not contain all the information set forth
in the registration statement. For further information with respect to us and
the shares of common stock to be sold in the offering, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
You may read and copy all or any portion of the Registration Statement or
any other information HSA files at the Securities and Exchange Commission's
public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. HSA's Securities and Exchange Commission filings,
including the registration statement, are also available to you on the SEC's Web
site (http://www.sec.gov).
As a result of the offering, HSA will become subject to the information and
reporting requirements of the Securities Exchange Act of 1934, as amended, and,
in accordance therewith, will file periodic reports, proxy statements and other
information with the Securities and Exchange Commission. Upon approval of the
common stock for the quotation on the Nasdaq National Market, such reports,
proxy and information statements and other information may also be inspected at
the offices of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
REPORTS TO STOCKHOLDERS
We intend to furnish our stockholders annual reports containing audited
financial statements and will make available copies of quarterly reports for the
first three quarters of each year containing unaudited interim financial
information.
<PAGE> 133
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
the underwriting discounts and commissions, payable by the Registrant in
connection with the sale of the common stock being registered, all of which will
be paid by the Registrant.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 60,565
NASD filing fee............................................. 12,500
Nasdaq National Market listing fee.......................... 95,000
Legal fees and expenses..................................... 600,000
Blue sky fees and expenses.................................. 5,000
Accounting fees and expenses................................ 250,000
Directors and officers liability insurance.................. 600,000
Printing and engraving...................................... 350,000
Transfer agent fees......................................... 10,000
Miscellaneous............................................... 16,935
----------
Total............................................. $2,000,000
==========
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Certificate of Incorporation to be in
effect upon the closing of this offering (the "Certificate") provides that,
except to the extent prohibited by the Delaware General Corporation Law, as
amended (the "DGCL"), the Registrant's directors shall not be personally liable
to the Registrant or its stockholders for monetary damages for any breach of
fiduciary duty as directors of the Registrant. Under the DGCL, the directors
have a fiduciary duty to the Registrant which is not eliminated by this
provision of the Certificate and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available. In addition, each director will continue to be subject to liability
under the DGCL for breach of the director's duty of loyalty to the Registrant
and its stockholders, for acts or omissions which are found by a court of
competent jurisdiction to be not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are prohibited by DGCL. This provision
also does not affect the directors' responsibilities under any other laws, such
as the Federal securities laws or state or Federal environmental laws. The
Registrant has obtained liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers. The Certificate provides
that the Registrant shall indemnify any person who was or is a party or is
threatened to be made a party to or becomes involved in any action, suit or
proceeding (whether civil, criminal, administrative or investigative) by reason
of the fact that such person is or was a director or officer of the Registrant,
or is or was serving at the request of the Registrant as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement reasonably
incurred by such person in connection with such action, suit or proceeding. The
DGCL provides further that the indemnification permitted thereunder shall not be
deemed exclusive of any other rights to which the directors and officers may be
entitled under the corporation's bylaws, any agreement, a vote of stockholders
or otherwise. The Registrant has entered into indemnification agreements with
each member of the Board of Directors providing for the indemnification of the
directors to the fullest extent authorized, permitted or allowed by Delaware
law.
II-1
<PAGE> 134
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Registrant's inception, the Registrant has made the following
sales of securities that were not registered under the Securities Act:
1. On April 3, 1998, the Registrant issued and sold 6,200,000 shares of
common stock (subsequently valued by the Registrant at $.52 per share or
$3,200,000 in the aggregate) of the Registrant in exchange for 200,000 shares of
common stock of CATV.net, Inc. and 2,000,000 shares of common stock of High
Speed Access Network, Inc. in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act.
2. During the period from April 3, 1998 to August 14, 1998, the Registrant
issued and sold 5,000,000 shares of Series A Convertible Preferred Stock to
Broadband Solutions, LLC in a private placement for an aggregate consideration
of $5,000,000 in cash. Sales of Series A Convertible Preferred Stock were made
in reliance on the exemption from registration provided by Section 4(2) of the
Securities Act.
3. During the period from September 1, 1998 to November 22, 1998, the
Registrant issued and sold 2,000,000 shares of Series B Convertible Preferred
Stock to Broadband Solutions II, LLC in a private placement for an aggregate
consideration of $5,000,000 in cash and cancellation of indebtedness. Sales of
Series B Convertible Preferred Stock were made in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
4. On November 25, 1998, the Registrant issued and sold 8,000,000 shares of
Series B Convertible Preferred Stock to Vulcan Ventures, Incorporated in a
private placement for an aggregate consideration of $20,000,000 in cash. The
sale of Series B Convertible Preferred Stock was made in reliance on an
exemption from registration provided by Section 4(2) of the Securities Act.
5. On November 25, 1998 the Registrant issued to Vulcan Ventures,
Incorporated warrants to purchase up to an aggregate of 7,750,000 shares of
common stock of the Registrant at a purchase price of $3.23 per share. 3,875,000
of the warrants expire on July 31, 2003 and 3,875,000 of the warrants expire on
July 31, 2004. The warrants were issued in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act.
6. On March 24, 1999, the Registrant issued to Atlanta On-Line Internet
Inc. warrants to purchase 20,150 shares of common stock of the Registrant at a
purchase price of $6.45 per share. The warrants were issued in reliance on an
exemption from registration provided by Section 4(2) of the Securities Act.
7. On April 29, 1999, the Registrant issued and sold 5,000,000 shares of
Series C Convertible Preferred Stock to Vulcan Ventures, Incorporated in a
private placement for an aggregate consideration of $25,000,000 in cash. The
sale of Series C Convertible Preferred Stock was made in reliance on an
exemption from registration provided by Section 4(2) of the Securities Act.
8. On April 30, 1999, the Registrant issued to Microsoft Corporation
warrants to purchase 250,000 shares of common stock of the Registrant for a
purchase price equal to 125% of the public offering price per share. The
warrants were issued in reliance on an exemption from registration provided by
Section 4(2) of the Securities Act.
II-2
<PAGE> 135
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* -- Form of Underwriting Agreement.
1.2** -- Stock Purchase Agreement between High Speed Access Corp.
and Cisco Systems, Inc., as amended May 3, 1999.
1.3** -- Stock Purchase Agreement between High Speed Access Corp.
and Com21, Inc.
1.4** -- Stock Purchase Agreement between High Speed Access Corp.
and Microsoft Corporation
3.1 -- Form of Amended and Restated Certificate of Incorporation
to be effective upon the closing of the offering.
3.2** -- Form of Amended and Restated Bylaws to be effective upon
the closing of the offering.
4.1 -- Specimen Common Stock certificate.
4.2 -- See Exhibits 3.1 and 3.2 for provisions defining the
rights of holders of common stock of the Registrant.
5.1* -- Opinion of Brobeck, Phleger & Harrison LLP.
9.1** -- Voting Trust Agreement dated as of March 30, 1999 among
Terrence J. Herron, as Voting Trustee, and Joseph S.,
Gans, III, Joseph W. Aman, Lawrence Shewack, John Howell
and Terrence J. Herron.
10.1** -- Contribution Agreement among High Speed Access Corp.,
Broadband Solutions, LLC, and certain shareholders of
High Speed Access Corp., dated as of April 3, 1998, as
amended November 25, 1998.
10.2** -- Series B Convertible Preferred Stock Purchase Agreement
between High Speed Access Corp. and Broadband Solutions
II, LLC, dated as of September 1, 1998, as amended
November 25, 1998.
10.3** -- Series B Convertible Preferred Stock Purchase Agreement
between High Speed Access Corp. and Vulcan Ventures,
Incorporated, dated as of November 25, 1998.
10.4** -- Series C Convertible Preferred Stock Purchase Agreement
between High Speed Access Corp. and Vulcan Ventures,
Incorporated, dated November 25, 1998.
10.5** -- Class A Securities Purchase Warrant between High Speed
Access Corp. and Vulcan Ventures, Incorporated, dated as
of November 25, 1998, as Assigned April 23, 1999 and as
amended April 29, 1999.
10.6** -- Class B Securities Purchase Warrant between High Speed
Access Corp. Vulcan Ventures, Incorporated, dated as of
November 25, 1998, as Assigned April 23, 1999, and as
amended April 29, 1999.
10.7+** -- Systems Access and Investment Agreement among High Speed
Access Corp., Vulcan Ventures, Incorporated, Charter
Communications, Inc. and Marcus, Inc., dated as of
November 25, 1998.
10.8+** -- Programming Content Agreement between High Speed Access
Corp. and Vulcan Ventures, Incorporated, dated as of
November 25, 1998.
10.9+** -- Network Service Agreement between High Speed Access
Corp., Charter Communications, Inc., and Marcus Cable,
Inc., dated as of November 25, 1998.
10.10** -- Amended and Restated Registration Rights Agreement, dated
as of November 25, 1998.
10.11** -- Voting Agreement by and among High Speed Access Corp. and
certain shareholders dated as of November 25, 1998.
</TABLE>
II-3
<PAGE> 136
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.12** -- Employment, Non-Competition and Non-Disclosure Agreement
with W. Kent Oyler, III, dated April 3, 1998.
10.13** -- Employment, Non-Competition and Non-Disclosure Agreement
with Ronnie W. Pitcock, dated April 3, 1998.
10.14** -- $650,000 Promissory Note by High Speed Access Corp. in
favor of Gans Multimedia Partnership, dated April 3,
1998.
10.15** -- Assignment and Security Agreement dated April 3, 1998
between High Speed Access Corp. and Gans Multimedia
Partnership.
10.16** -- Noncompetition and Nondisclosure Agreement dated April 3,
1998 between High Speed Access Corp. and Joseph S. Gans,
III.
10.17** -- Convertible Preferred Stock Purchase Agreement dated as
of April 3, 1998 among High Speed Access Network, Inc.,
Ronnie W. Pitcock, Joseph S. Gans, III and Broadband
Solutions, LLC.
10.18** -- Convertible Preferred Stock Purchase Agreement dated as
of February 23, 1998 among CATV.net, Inc., Kent Oyler,
David Gibbs, Gibbs Family Limited Partnership, Colorado
Limited Partnership, OPM Services, Inc. and Broadband
Solutions, LLC.
10.19** -- Convertible Preferred Stock Registration Rights Agreement
dated as of February 23, 1998 among CATV.net, Inc., Kent
Oyler, David Gibbs, Gibbs Family Limited Partnership,
Colorado Limited Partnership, OPM Services, Inc. and
Broadband Solutions, LLC.
10.20** -- Services Agreement dated February 20, 1998 between
CATV.net, Inc. and OPM Services, Inc.
10.21** -- Asset Purchase Agreement dated March 17, 1999 among High
Speed Access Corp., Atlanta On-Line InterNet, Inc.,
Marvin Anglin and Ellen Anglin.
10.22** -- Warrant to Purchase Common Stock dated March 24, 1999
between High Speed Access Corp. and Atlanta On-Line
InterNet, Inc.
10.23** -- Warrant to Purchase Common Stock of Darwin Networks, Inc.
dated as of March 15, 1999 between Darwin Networks, Inc.
and High Speed Access Corp.
10.24** -- Revolving Credit Note dated as of March 15, 1999 issued
by Darwin Networks, Inc. in favor of High Speed Access
Corp.
10.25** -- Services Agreement dated as of March 15, 1999 between
High Speed Access Corp. and Darwin Networks, Inc.
10.26** -- Amended and Restated Shareholders Agreement dated as of
November 25, 1998 among High Speed Access Corp. and
shareholders of High Speed Access Corp.
10.27** -- Master Loan and Security Agreement dated as of February
4, 1999 between Finova Capital Corporation and High Speed
Access Corp.
10.28** -- Lease dated April 1, 1998 between High Speed Access Corp.
and Henry Vogt Machine Co., as amended by a First
Amendment to Lease dated May 1, 1998, a Second Amendment
to Lease dated June 1, 1998, a Third Amendment to Lease
dated July 20, 1998, a Fourth Amendment to Lease dated
September 1, 1998, a Fifth Amendment to lease dated
November 1, 1998, a Sixth Amendment to Lease dated
January 1, 1999, and a Seventh Amendment to Lease dated
March 15, 1999.
10.29** -- HSAnet Cable Affiliate Agreement between High Speed
Access Network, Inc. and Gans Multimedia partnership
dated October 15, 1997.
10.30** -- 1998 High Speed Access Corp. Stock Option Plan
10.31** -- 1999 High Speed Access Corp. Stock Option Plan.
</TABLE>
II-4
<PAGE> 137
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.32** -- High Speed Access Corp. Non-Employee Director Stock
Option Plan.
10.33** -- Form of Indemnity Agreement.
10.34** -- Securities Purchase Warrant dated as of April 30, 1999
between High Speed Access Corp. and Microsoft
Corporation.
10.35** -- Letter Agreement dated as of April 30, 1999 between High
Speed Access Corp. and Microsoft Corporation.
10.36+** -- Letter of Intent between High Speed Access Corp. and
ServiceCo LLC dated as of March 31, 1999.
10.37 -- Master Services Agreement dated as of January 1, 1999
between High Speed Access Corp. and National Cable
Television Cooperative, Inc.
21.1** -- Subsidiaries.
23.1 -- Consent of PricewaterhouseCoopers LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
23.3 -- Consent of PricewaterhouseCoopers LLP.
23.4* -- Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1** -- Powers of Attorney (See Signature Page).
27.1** -- Financial Data Schedule.
</TABLE>
- ---------------
* To be supplied by amendment.
** Previously filed.
+ Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4), or 497(h)
under the Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE> 138
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Denver,
State of Colorado, on this 24th day of May, 1999.
HIGH SPEED ACCESS CORP.
By: /s/ GEORGE E. WILLETT
----------------------------------
Name: George E. Willett
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<C> <S> <C>
* President (Principal Executive May 24, 1999
- ----------------------------------------------------- Officer)
Ron Pitcock, Sr.
* Chief Financial Officer May 24, 1999
- ----------------------------------------------------- (Principal Financial and
George E. Willett Accounting Officer)
* Director, Chairman May 24, 1999
- -----------------------------------------------------
David A. Jones, Jr.
/s/ ROBERT S. SAUNDERS Director, Vice Chairman May 24, 1999
- -----------------------------------------------------
Robert S. Saunders
* Director May 24, 1999
- -----------------------------------------------------
Irving W. Bailey, II
* Director May 24, 1999
- -----------------------------------------------------
Michael E. Gellert
* Director May 24, 1999
- -----------------------------------------------------
Jerald L. Kent
* Director May 24, 1999
- -----------------------------------------------------
William D. Savoy
* Director May 24, 1999
- -----------------------------------------------------
Stephen E. Silva
*By: /s/ ROBERT S. SAUNDERS
------------------------------------------------
Robert S. Saunders
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 139
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1* -- Form of Underwriting Agreement.
1.2** -- Stock Purchase Agreement between High Speed Access Corp.
and Cisco Systems, Inc., as amended May 3, 1999.
1.3** -- Stock Purchase Agreement between High Speed Access Corp.
and Com21, Inc.
1.4** -- Stock Purchase Agreement between High Speed Access Corp.
and Microsoft Corporation
3.1 -- Form of Amended and Restated Certificate of Incorporation
to be effective upon the closing of the offering.
3.2** -- Form of Amended and Restated Bylaws to be effective upon
the closing of the offering.
4.1 -- Specimen Common Stock certificate.
4.2 -- See Exhibits 3.1 and 3.2 for provisions defining the
rights of holders of common stock of the Registrant.
5.1* -- Opinion of Brobeck, Phleger & Harrison LLP.
9.1** -- Voting Trust Agreement dated as of March 30, 1999 among
Terrence J. Herron, as Voting Trustee, and Joseph S.,
Gans, III, Joseph W. Aman, Lawrence Shewack, John Howell
and Terrence J. Herron.
10.1** -- Contribution Agreement among High Speed Access Corp.,
Broadband Solutions, LLC, and certain shareholders of
High Speed Access Corp., dated as of April 3, 1998, as
amended November 25, 1998.
10.2** -- Series B Convertible Preferred Stock Purchase Agreement
between High Speed Access Corp. and Broadband Solutions
II, LLC, dated as of September 1, 1998, as amended
November 25, 1998.
10.3** -- Series B Convertible Preferred Stock Purchase Agreement
between High Speed Access Corp. and Vulcan Ventures,
Incorporated, dated as of November 25, 1998.
10.4** -- Series C Convertible Preferred Stock Purchase Agreement
between High Speed Access Corp. and Vulcan Ventures,
Incorporated, dated November 25, 1998.
10.5** -- Class A Securities Purchase Warrant between High Speed
Access Corp. and Vulcan Ventures, Incorporated, dated as
of November 25, 1998 as Assigned April 23, 1999 and as
amended April 29, 1999.
10.6** -- Class B Securities Purchase Warrant between High Speed
Access Corp. Vulcan Ventures, Incorporated, dated as of
November 25, 1998 as Assigned April 23, 1999, and as
amended April 29, 1999.
10.7+** -- Systems Access and Investment Agreement among High Speed
Access Corp., Vulcan Ventures, Incorporated, Charter
Communications, Inc. and Marcus, Inc., dated as of
November 25, 1998.
10.8+** -- Programming Content Agreement between High Speed Access
Corp. and Vulcan Ventures, Incorporated, dated as of
November 25, 1998.
10.9+** -- Network Service Agreement between High Speed Access
Corp., Charter Communications, Inc., and Marcus Cable,
Inc., dated as of November 25, 1998.
10.10** -- Amended and Restated Registration Rights Agreement, dated
as of November 25, 1998.
10.11** -- Voting Agreement by and among High Speed Access Corp. and
certain shareholders dated as of November 25, 1998.
10.12** -- Employment, Non-Competition and Non-Disclosure Agreement
with W. Kent Oyler, III, dated April 3, 1998.
</TABLE>
<PAGE> 140
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.13** -- Employment, Non-Competition and Non-Disclosure Agreement
with Ronnie W. Pitcock, dated April 3, 1998.
10.14** -- $650,000 Promissory Note by High Speed Access Corp. in
favor of Gans Multimedia Partnership, dated April 3,
1998.
10.15** -- Assignment and Security Agreement dated April 3, 1998
between High Speed Access Corp. and Gans Multimedia
Partnership.
10.16** -- Noncompetition and Nondisclosure Agreement dated April 3,
1998 between High Speed Access Corp. and Joseph S. Gans,
III.
10.17** -- Convertible Preferred Stock Purchase Agreement dated as
of April 3, 1998 among High Speed Access Network, Inc.,
Ronnie W. Pitcock, Joseph S. Gans, III and Broadband
Solutions, LLC.
10.18** -- Convertible Preferred Stock Purchase Agreement dated as
of February 23, 1998 among CATV.net, Inc., Kent Oyler,
David Gibbs, Gibbs Family Limited Partnership, Colorado
Limited Partnership, OPM Services, Inc. and Broadband
Solutions, LLC.
10.19** -- Convertible Preferred Stock Registration Rights Agreement
dated as of February 23, 1998 among CATV.net, Inc., Kent
Oyler, David Gibbs, Gibbs Family Limited Partnership,
Colorado Limited Partnership, OPM Services, Inc. and
Broadband Solutions, LLC.
10.20** -- Services Agreement dated February 20, 1998 between
CATV.net, Inc. and OPM Services, Inc.
10.21** -- Asset Purchase Agreement dated March 17, 1999 among High
Speed Access Corp., Atlanta On-Line InterNet, Inc.,
Marvin Anglin and Ellen Anglin.
10.22** -- Warrant to Purchase Common Stock dated March 24, 1999
between High Speed Access Corp. and Atlanta On-Line
InterNet, Inc.
10.23** -- Warrant to Purchase Common Stock of Darwin Networks, Inc.
dated as of March 15, 1999 between Darwin Networks, Inc.
and High Speed Access Corp.
10.24** -- Revolving Credit Note dated as of March 15, 1999 issued
by Darwin Networks, Inc. in favor of High Speed Access
Corp.
10.25** -- Services Agreement dated as of March 15, 1999 between
High Speed Access Corp. and Darwin Networks, Inc.
10.26** -- Amended and Restated Shareholders Agreement dated as of
November 25, 1998 among High Speed Access Corp. and
shareholders of High Speed Access Corp.
10.27** -- Master Loan and Security Agreement dated as of February
4, 1999 between Finova Capital Corporation and High Speed
Access Corp.
10.28** -- Lease dated April 1, 1998 between High Speed Access Corp.
and Henry Vogt Machine Co., as amended by a First
Amendment to Lease dated May 1, 1998, a Second Amendment
to Lease dated June 1, 1998, a Third Amendment to Lease
dated July 20, 1998, a Fourth Amendment to Lease dated
September 1, 1998, a Fifth Amendment to lease dated
November 1, 1998, a Sixth Amendment to Lease dated
January 1, 1999, and a Seventh Amendment to Lease dated
March 15, 1999.
10.29** -- HSAnet Cable Affiliate Agreement between High Speed
Access Network, Inc. and Gans Multimedia partnership
dated October 15, 1997.
10.30** -- 1998 High Speed Access Corp. Stock Option Plan
10.31** -- 1999 High Speed Access Corp. Stock Option Plan.
10.32** -- High Speed Access Corp. Non-Employee Director Stock
Option Plan.
10.33** -- Form of Indemnity Agreement.
</TABLE>
<PAGE> 141
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.34** -- Securities Purchase Warrant dated as of April 30, 1999
between High Speed Access Corp. and Microsoft
Corporation.
10.35** -- Letter Agreement dated as of April 30, 1999 between High
Speed Access Corp. and Microsoft Corporation.
10.36+** -- Letter of Intent between High Speed Access Corp. and
ServiceCo LLC dated as of March 31, 1999.
10.37 -- Master Services Agreement dated as of January 1, 1999
between High Speed Access Corp. and National Cable
Television Cooperative, Inc.
21.1** -- Subsidiaries.
23.1 -- Consent of PricewaterhouseCoopers LLP.
23.2 -- Consent of PricewaterhouseCoopers LLP.
23.3 -- Consent of PricewaterhouseCoopers LLP.
23.4* -- Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
24.1** -- Powers of Attorney (See Signature Page).
27.1** -- Financial Data Schedule.
</TABLE>
- ---------------
* To be supplied by amendment.
** Previously filed.
+ Confidential treatment requested for certain portions of this Exhibit pursuant
to Rule 406 promulgated under the Securities Act.
<PAGE> 1
EXHIBIT 3.1
SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
HIGH SPEED ACCESS CORP.
High Speed Access Corp., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is High Speed Access Corp. The
corporation was originally incorporated under the name High
Speed Access Corp. and the original Certificate of
Incorporation of the corporation was filed with the Secretary
of State of the State of Delaware on April 2, 1998. The
Amended and Restated Certificate of Incorporation of the
corporation was filed with the Secretary of State of the State
of Delaware on May 21, 1999.
B. Pursuant to Sections 228, 242 and 245 of the Delaware General
Corporation Law and duly adopted in accordance therewith, this
Second Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of
the Amended and Restated Certificate of Incorporation of this
corporation.
C. The text of the Certificate of Incorporation as heretofore
amended or supplemented is hereby amended and restated in its
entirety to read as follows:
ARTICLE I
The Corporation's name shall be High Speed Access Corp.
ARTICLE II
The street address of the registered office of the Corporation is 1209
Orange Street, City of Wilmington, County of New Castle, Delaware 19801, and the
name of the registered agent at such office is The Corporation Trust Company.
ARTICLE III
The Corporation's purpose shall be to transact any and all lawful
business for which corporations may be incorporated under the Delaware General
Corporation Law ("DGCL").
<PAGE> 2
ARTICLE IV
The Corporation is authorized to issue a total of 510,000,000 shares of
capital stock, $.01 par value per share, which shall be divided into three
classes as follows:
400,000,000 shares of Common Stock;
100,000,000 shares of Class A Common Stock; and
10,000,000 shares of Preferred Stock.
A. Common Stock. Each holder of shares of Common Stock shall be
entitled to one vote for each share of Common Stock. The holders of Common Stock
shall be entitled to receive such dividends, if any, as may be declared from
time to time by the Board of Directors ratably in proportion to the number of
shares of Common Stock held by each.
B. Class A Common Stock. The Board of Directors is authorized, subject
to any limitation prescribed herein or by the law of the State of Delaware, to
provide, by resolution or resolutions of not less than 66 b % of the directors
of the Corporation then in office, for the issuance of the shares of Class A
Common Stock in one or more series, and, by filing a Certificate of Designation
pursuant to the applicable law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, to fix the
designation, powers, preferences and rights of the shares of each such series
and any qualifications, limitations or restrictions thereof, and to increase or
decrease the number of shares of any such series (but not below the number of
shares of such series then outstanding). The number of authorized shares of
Class A Common Stock may also be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the stock of the Corporation entitled to vote, unless a
vote of any other holders is required pursuant to a Certificate or Certificates
establishing a series of Class A Common Stock, without the necessity for a
separate class vote of the holders of the Class A Common Stock.
Except as otherwise expressly provided herein or in any Certificate of
Designation designating any series of Class A Common Stock pursuant to the
foregoing provisions of this Article IV, any new series of Class A Common Stock
may be designated, fixed and determined as provided herein by the Board of
Directors without approval of the holders of Common Stock, the holders of Class
A Common Stock, or any series thereof, or the holders of Preferred Stock, or any
series thereof, and any such new series may have such powers, preferences and
rights as the Board of Directors shall determine, including, without limitation,
dividend rights, liquidation rights, redemption rights and conversion rights,
senior to, junior to or pari passu with the rights of the Common Stock, the
Class A Common Stock, or any series thereof, or the Preferred Stock, or any
series thereof, provided, however, [i] the voting rights, if any, of the Class A
Common Stock shall always be junior to, and shall not be equal or senior to, the
voting rights of the Common Stock, and [ii] the liquidation rights or
preferences, if any, of the Class A Common Stock shall not be senior to the
liquidation rights or preferences of the Common Stock.
2
<PAGE> 3
C. Preferred Stock. The Board of Directors is authorized, subject to
any limitation prescribed herein or by the law of the State of Delaware, to
provide, by resolution or resolutions of not less than 66 b % of the directors
of the Corporation then in office, the issuance of the shares of Preferred Stock
in one or more series, and, by filing a Certificate of Designation pursuant to
the applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, to fix the designation,
powers, preferences and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof, and to increase or decrease
the number of shares of any such series (but not below the number of shares of
such series then outstanding). The number of authorized shares of Preferred
Stock may also be increased or decreased (but not below the number of shares
thereof then outstanding) by the affirmative vote of the holders of a majority
of the stock of the Corporation entitled to vote, unless a vote of any other
holders is required pursuant to a Certificate or Certificates establishing a
series of Preferred Stock, without the necessity for a separate class vote of
the holders of the Preferred Stock.
Except as otherwise expressly provided herein or in any Certificate of
Designation designating any series of Preferred Stock pursuant to the foregoing
provisions of this Article IV, any new series of Preferred Stock may be
designated, fixed and determined as provided herein by the Board of Directors
without approval of the holders of Common Stock, the holders of Class A Common
Stock, or any series thereof, or the holders of Preferred Stock, or any series
thereof, and any such new series may have powers, preferences and rights as the
Board of Directors shall determine, including, without limitation, voting
rights, dividend rights, liquidation rights, redemption rights and conversion
rights, senior to, junior to or pari passu with the rights of the Common Stock,
the Class A Common Stock, the Preferred Stock or any future class or series of
Class A Common Stock or Preferred Stock.
ARTICLE V
The number of directors which constitute the whole board of directors
of the Corporation shall be as specified in the Bylaws of the Corporation. The
directors, other than those who may be elected by the holders of Preferred Stock
under specified circumstances, shall be divided into three classes with the term
of office of the first class (Class I) to expire at the annual meeting of
stockholders held in 2000; the term of office of the second class (Class II) to
expire at the annual meeting of stockholders held in 2001; the term of office of
the third class (Class III) to expire at the annual meeting of stockholders held
in 2002; and thereafter for each such term to expire at each third succeeding
annual meeting of stockholders after such election. All directors shall hold
office until the expiration of the term for which elected, and until their
respective successors are elected, except in the case of the death, resignation
or removal of any director.
3
<PAGE> 4
ARTICLE VI
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may not be effected by any consent in
writing by such stockholders.
ARTICLE VII
A. Each person who was or is made a party or is threatened to be made a
party to or becomes involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether formal or informal,
(hereinafter a proceeding), by reason of the fact that he or she, or a person of
whom he or she is the legal representative, is or was a director or officer of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the DGCL, as the same exists or may hereafter be amended (but, in
the case of any such amendment, only to the extent that such amendment permits
the Corporation to provide broader indemnification rights than said law
permitted the Corporation to provide prior to such amendment), against all
expense, liability and loss (including attorney's fees, judgements, fines, ERISA
excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith, and such
indemnification shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that, except as provided in
paragraph B hereof of this Article VII, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this paragraph A of this Article VII shall be a
contract right and shall include the right to be paid by the Corporation the
expenses incurred in defending any such proceeding in advance of its final
disposition; provided, however, that, if the DGCL requires, the payment of such
expenses incurred by a director or officer in his or her capacity as a director
or officer (and not in any other capacity in which service was or is rendered by
such person while a director or officer, including, without limitation, service
to an employee benefit plan) in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation of an
undertaking, by or on behalf of such director or officer, to repay all amounts
so advanced if it shall ultimately be determined that such director or officer
is not entitled to be indemnified under this section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
4
<PAGE> 5
B. If a claim under paragraph A of this Article VII is not paid in full
by the Corporation within 30 days after a written claim has been received by the
Corporation, the claimant may, at any time thereafter, bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
not met the standard of conduct which makes it permissible under the DGCL for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel or its
shareholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
DGCL, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel or its shareholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
C. The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Article VII shall not be exclusive of any other right which any person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaw, agreement, vote of shareholders or disinterested directors
or otherwise.
D. The Corporation may maintain insurance, at its expense, to protect
itself and any director, officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnity such person against such expense, liability or
loss under the DGCL.
ARTICLE VIII
To the fullest extent permitted by law, a director of the Corporation
shall not be personally liable to the Corporation or its shareholders for
monetary damages for any act or omission constituting a breach of his or her
duty as a director. Any repeal or modification of this Article VIII by the
shareholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation hereunder in respect of any act or
omission occurring prior to the time of such repeal or modification.
5
<PAGE> 6
ARTICLE IX
The Board of Directors of the Corporation is authorized and empowered
from time to time in its discretion to make, alter, amend or repeal Bylaws of
the Corporation, except as such power may be restricted or limited by DGCL.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by W. Kent Oyler, III, its Chief Operating Officer, and attested by John
G. Hundley, its Assistant Secretary, this _____ day of _______________, 1999.
HIGH SPEED ACCESS CORP.
/s/ W. KENT OYLER, III
-------------------------------------------
W. Kent Oyler, III, Chief Operating Officer
ATTEST:
/s/ JOHN G. HUNDLEY
- ------------------------------------
John G. Hundley, Assistant Secretary
6
<PAGE> 1
EXHIBIT 4.1
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
[LOGO]
HIGH SPEED ACCESS CORP.
Common Stock Common Stock
[NUMBER] [NUMBER]
CUSIP 42979U 10 2
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
Is the owner of
FULLY-PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF
HIGH SPEED ACCESS CORP.
hereinafter called the "Company," transferable on the books of the Company by
the holder hereof in person or by duly authorized attorney, upon surrender of
this Certificate properly endorsed. This Certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated:
HIGH SPEED ACCESS CORP.
CORPORATE SEAL
OF DELAWARE
/s/ President /s/ Secretary
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. BOX 1590
DENVER, COLORADO 80201
BY:
TRANSFER AGENT AND REGISTRAR AUTHORIZED SIGNATURE
HIGH SPEED ACCESS CORP.
THE COMPANY IS AUTHORIZED TO ISSUE SHARES OF MORE THAN ONE CLASS AND TO ISSUE
SHARES OF CLASS A COMMON STOCK AND PREFERRED STOCK IN SERIES. THE
<PAGE> 2
COMPANY WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS A
STATEMENT OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.
The following abbreviations, when use din the inscription on the face of this
certificate, shall be construed as though they were written out of full
according to applicable laws or regulations.
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ___________ Custodian_________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of
Survivorship and not as tenants under Uniform Gift to Minors Act
in common __________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received. ________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
------------------------------
[ ]
------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
shares of the capital stock represented by the within Certificate, and do hereby
irrevocable constitute and appoint ________________________________________
Attorney to transfer the same stock on the books of the within named Company
with full power of substitution in the premises.
Dated________________
----------------------------------------
NOTICE: THE SIGNATURE(S) TO THE ASSIGNMENT MUST
CORRESPOND WITH THE NAME WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS, CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM).
PURSUANT TO S.E.C. RULE 17Ad-15.
Signature(s) Guaranteed By:
- ----------------------------------------------
<PAGE> 3
ADOPTION CERTIFICATE
This is an Adoption Supplement from:
Name of Operator: [ ]
-----------------------------
Address:
------------------------------
Address: , (the "Operator")
----------------- ---------
Operator is a participating member of the National Cable Television
Cooperative, Inc. ("NCTC"), and by execution and delivery of the attached
Network Services Agreement/System Profile questionnaire, hereby notifies HSAC
and NCTC of its intent to implement HSAC Services for the following Systems:
IDENTIFICATION/CHARACTERIZATION OF OPERATOR'S RF SYSTEM(S) (THE "SYSTEM"):
System Location(s):
--------------- -------------- -------------
Number of Homes Passed:
--------------- -------------- -------------
No. of Cable TV Subscribers:
--------------- -------------- -------------
Address/Locations
of Head-ends:
--------------- -------------- -------------
--------------- -------------- -------------
One/Two Way System:
--------------- -------------- -------------
MHz Capacity:
--------------- -------------- -------------
Operator acknowledges that any System encompassing less than 5,000 homes passed
(a "Sub-5000 System") is subject to the Clustering requirements set forth in the
Master Services Agreement between HSAC and NCTC and thus may not be eligible to
receive HSAC Services unless and until HSAC, in its sole discretion, determines
that it is technically and economically feasible to combine such Sub-5000 System
with other Systems in accordance with the Master Agreement.
Operator hereby requests that HSAC schedule a Site Survey for the purposes of
identifying any pertinent Attainment Measures.
Operator: [ ]
--------------------------------
By: Phone No.:
-------------------------------- ---------------------
Name: Fax No.:
------------------------------ -----------------------
Title: Email:
----------------------------- ------------------------
Date:
-----------------------------
<PAGE> 1
EXHIBIT 10.37
MASTER SERVICES AGREEMENT
This is a Master Services Agreement ("Master Agreement") dated and
effective as of January 1, 1999, between:
HIGH SPEED ACCESS CORP.
D/B/A HSA CORP.
1000 West Ormsby Ave., Suite 210
Louisville, Kentucky 40210 ("HSAC")
and
NATIONAL CABLE TELEVISION COOPERATIVE, INC.
14809 W. 95th St.
Lenexa, Kansas 66215 ("NCTC")
RECITALS
A. NCTC is a cooperative which represents the owners/operators of RF
cable television franchise(s) and related hybrid fiber-coaxial landline
distribution system(s) across the [United States] [North America] (the
"Systems") who join as members of NCTC (individually a "Member" and collectively
the "Participating Members"). NCTC wishes to facilitate the Participating
Members' opportunity to utilize the Systems for high-speed data/Internet access
by their respective cable TV subscribers.
B. HSAC provides high-speed data/Internet access services (the "HSAC
Services," as further defined below) to its customers through various sources,
including without limitation, cable television plants and systems.
C. HSAC and NCTC wish to enter into this Master Agreement to provide
for HSAC's provisioning of HSAC Services to Participating Member's and their
cable subscribers, and govern various aspects of the relationship between HSAC
and NCTC as provided herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements set forth herein and other good and valuable consideration, the
mutuality, receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, the parties agree:
1. DEFINITIONS. Unless otherwise defined herein, all capitalized terms
shall have the meaning ascribed to them in the form of Network Services
Agreement attached hereto as Exhibit A, which is incorporated herein by
reference.
2. NETWORK SERVICES AGREEMENT; TERM.
(a) NCTC and HSAC agree that Participating Members may, from March 1,
1999 through December 31, 2000, subject to the Clustering requirements described
below, take and offer HSAC Services by entering into an Adoption Supplement and
Network Services Agreement with HSAC (a "Network Services Agreement"), the form
of which is attached hereto as Exhibit A. NCTC and HSAC further agree to
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enter into good faith negotiations not later than October 1, 2000 (and every two
(2) years thereafter) to renew and/or enter into a successor Master Agreement
and form of Network Services Agreement (to be effective on January 1, 2001 (and
every two (2) years thereafter) (together the "Successor Agreements").
(b) Notwithstanding the agreement of NCTC and HSAC to renew the Master
Agreement every two (2) years, the term of each Network Services Agreement
between HSAC and a Member shall commence effective as of the date of execution
by a Member, and shall continue for a term of not less than sixty (60) months
from the agreed "Launch Date" for each Member's System (the "Initial Term"),and
expire of December 31st of the calendar year in which the 60th month falls. The
Network Services Agreement shall then renew itself effective as of January 1st
of the next calendar year for a 12-month or 24-month term that runs concurrently
with the term of any successor Master Agreement between NCTC and HSAC then in
effect (i.e., the Network Servicesrenewal may be for one or two years depending
on the cycle) unless notice of intent not to renew is sent by either Member or
HSAC to the other not less than less than 60 days or more than 120 days prior to
such December 31st expiration date. Upon any such renewal, Member shall have the
option of continuing to be governed by its original Network Services Agreement,
or the successor Network Services Agreement then in effect (except for the
length of the term as provided in the previous sentence.
Example #1: Operator enters into a Network Services Agreement with HSAC
with an effective date of August 1, 1999, and HSAC launches HSAC
Services on or before November 1, 1999. The Network Services Agreement
will expire December 31, 2004. NCTC and HSAC enter into a Successor
Agreements and Network Services Agreement effective January 1, 2003.
Operator shall have a 60-day option commencing September 1, 2004 to
either (i) allow the Network Services Agreement to expire, or (ii) (a)
renew the Network Services Agreement then in effect with HSAC or adopt
the terms and conditions of the successor Network Services Agreement
for a period commencing January 1, 2005, and expiring on December 31,
2005.
Example #2: Operator enters into a Network Services Agreement with HSAC
with an effective date of August 1, 2000, and HSAC launches HSAC
Services on or before November 1, 2000. The Network Services Agreement
will expire December 31, 2005. NCTC and HSAC enter into a Successor
Agreements and Network Services Agreement effective January 1, 2005.
Operator shall have a 60-day option commencing September 1, 2005 to
either (i) allow the Network Services Agreement to expire, or (ii)
renew the Network Services Agreement then in effect with HSAC or adopt
the terms and conditions of the successor Network Services Agreement
for a period commencing January 1, 2005, and expiring on December 31,
2007.
3. CLUSTERING. HSAC shall not be required to individually provision
HSAC Services to, and instead shall enjoy complete discretion to "cluster," the
Systems of Participating Members that encompass fewer than 5000 homes passed (a
"Sub-5000 System"). Us used herein or in any Network Services Agreement, a
"cluster" or "clustering" means that one or more Sub-5000 Systems may, for
purposes of aggregating the flow of data to, from and among such Sub-5000
Systems to HSAC's ISP portal or POP, be combined by HSAC with other Systems or
Sub-5000 Systems so that the clustered Sub-5000 Systems mimic the size, economic
and technical specifications of a System exceeding 10,000 homes passed. The head
ends of clustered Sub-5000 Systems must situate within a 50-mile radius of each
other either concentrically or
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sequentially, and shall employ such data transmission technology (telco circuit,
VSAT, xDSL, etc.) as HSAC shall determine in its sole discretion.
4. MOST FAVORABLE REVENUE SHARING. If, during the term of this
Agreement, HSAC enters into a Network Services Agreement for the provision of
HSAC Services to a Participating Member with an equal or fewer number of Data
Subscribers than the then-aggregate number of Participating Members' Data
Subscribers under which HSAC pays a higher percentage of Gross Revenues or Net
Gross Revenues, as the case may be, or offers cash or other equivalent
consideration (not including equity incentives) not offered to other
Participating Members under their Network Services Agreement, then HSAC shall
promptly notify NCTC of such agreement, whereupon HSAC, at the election of NCTC
and the Operator, shall pay such higher percentage or offer equivalent
consideration (not including equity incentives) to other Participating Members
as are provided in such Participating Member's agreement; provided that such
Participating Member shall be subject to and in compliance with all applicable
terms and conditions of the agreement.
5. MOST FAVORED CONTRACT; EXTENDED TERM. HSAC agrees that during the
term of this Agreement that a Participating Member shall have the option of
simultaneously terminating any pre-existing network services agreement with HSAC
and adopting HSAC Services as a "Participating Member" under the Network
Services Agreement provided for herein except that Operator in so doing shall be
deemed to adopted a new term of agreement as set forth in Section 2(b) hereof.
6. NCTC ADMINISTRATION SERVICES; FEE.
(a) During the term hereof, NCTC shall perform the following
services for HSAC and the Participating Members (the "Administration Services"):
i. Communication of and endorsement of HSAC Services to Participating
Members;
ii. Tracking and notification of Participating Members with respect to
expiration of Network Services Agreements and options with respect to
election of Successor Agreements;
iii. Collection, review, handling and processing of Adoption Certificates
and Network Services Agreements; and
iv. Annual audit of HSAC reports/monthly payments to Participating Members
(Section E.4 of the Network Services Agreement).
(b) NCTC may at its option elect to collect HSA's Share (as
defined in Exhibit E to the Network Services Agreement) from Participating
Members serving a billing party under Exhibit E/Section E.3.1 of the Network
Services Agreement and remit same to HSAC within 45 days in accordance with the
procedure/schedule set forth therein.
(c) HSAC shall pay to NCTC annually during the term hereof, on
or before January 31, a fee (calculated as of December 31 of the prior year)
equal to 1% of the Participating Members' share of the aggregate Gross Revenues
and Net Gross Revenues collected from Data Subscribers for the prior calendar
year.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
HIGH SPEED ACCESS CORP.
By: /s/ Tom Soulsby
-------------------------------------
Name: Tom Soulsby
-----------------------------------
Title: Director of Operations
----------------------------------
NATIONAL CABLE TELEVISION
COOPERATIVE, INC.
By: /s/ Michael L. Pandzik
-------------------------------------
Name: Michael L. Pandzik
-----------------------------------
Title: President & CEO
----------------------------------
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[HSA LOGO]
HSA NETWORK SERVICES AGREEMENT
This is a NETWORK SERVICES AGREEMENT ("Agreement") dated and effective
this 1st day of January, 1999, between:
HIGH SPEED ACCESS CORP.
D/B/A HSA CORP.
1000 West Ormsby Ave., Suite 210
Louisville, Kentucky 40210 ("HSAC")
and
A PARTICIPATING MEMBER OF THE
NATIONAL CABLE TELEVISION COOPERATIVE, INC.
IDENTIFIED BY EXECUTION OF ADOPTION SUPPLEMENT HERETO
(an "Operator")
RECITALS
A. Operator is a member of the National Cable Television Cooperative,
Inc. ("NCTC"), which owns and operates the RF cable television franchise(s) and
related hybrid fiber-coaxial landline distribution system(s) identified on the
covering Adoption Supplement and EXHIBIT A attached hereto (the "System"), and
wishes to offer its cable subscribers the opportunity to utilize the System for
high-speed data/Internet access.
B. HSAC provides high-speed data/Internet access services (the "HSAC
Services," as further defined below) to its customers through various sources,
including without limitation, cable television plants and systems.
C. Operator wishes to retain HSAC to provide turnkey implementation of
the HSAC Services to its cable subscribers, and HSAC wishes to access and use
Operator's System to deliver the HSAC Services to such cable subscribers upon
the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements set forth herein and for other good and valuable consideration,
the mutuality, receipt and sufficiency of which are hereby acknowledged, and
intending to be legally bound hereby, the parties agree:
1. DEFINITIONS. Unless otherwise defined in a certain Master Agreement
dated as of January 1, 1999, between NCTC and HSAC (the "Master Agreement," to
which the form of this
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Network Services Agreement is attached as ANNEX A-2), the following terms, as
used herein or in the Master Agreement, shall have the meaning ascribed to them
as follows:
1.1 "Cable Subscriber" means a cable TV subscriber or
potential subscriber residing in a "home passed" (i.e., residence or commercial
establishment) in the System regardless of whether such cable TV subscriber or
potential subscriber subscribes to HSAC Services or cable television services.
1.2 "Cluster" or "Clustering" shall the meaning given them in
Section 3 of the Master Agreement.
1.3 "Confidential Information" means any and all information
emanating from either HSAC's business or Operator's business in any form,
including the terms and conditions of this Agreement, as well as all dates,
summaries, reports or information of all kinds, whether oral or written,
acquired, devised or developed in any manner by or from HSAC personnel or files
or the Operator's personnel or files. The term "Confidential Information" shall
not include information which is in the public domain; information known to the
recipient party as of the date of this Agreement as indicated by the recipient's
written records, unless the recipient party agreed to keep such information in
confidence, and information properly obtained hereafter from a source who is not
under an obligation of confidentiality with respect to such information; is
independently developed by receiving party through persons who have not had,
either directly or indirectly, access or knowledge of such Confidential
Information which can be verified by independent evidence; or is obligated to be
produced under a court order of competent jurisdiction or a valid administrative
or congressional subpoena.
1.4 "Customer Lists" means the Operator's list of Cable
Subscribers in the System and related subscriber information (i.e., name,
address, phone number, other demographics, cable TV service level selection,
etc.)
1.5 "Data Subscriber" means a Cable Subscriber residing in a
"home passed" in the System who or which subscribes to HSAC Services regardless
of whether such subscriber subscribes to Operator's cable TV service.
1.6 "Designated Personnel" means the individuals described in
Sections 7 and 8 of this Agreement.
1.7 "Gross Revenues" means the gross revenues collected from
Data Subscribers in the System for HSAC Services, and which, as used herein,
does not include (i) applicable sales or use taxes, (ii) federal, state or local
franchise fees, (iii) Home Equipment Package installation fees/set-up charges
assessed by HSAC, Operator or other authorized resellers/installers, (iv)
rentals paid by Data Subscribers on rented/leased Home Equipment Packages, (v)
add-on ISP-type service fees or charges for additional e-mail addresses, static
IP
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addresses, commercial ISP web-hosting services, or security/encryption software
sold or sublicensed to Data Subscribers under Section 4.2 of this Agreement, and
(vi) except for Local HSAC Content, other add-on fees, "click" charges or other
revenues, if any, for "content" (whether proprietary to HSAC and its content
providers or Operator), including advertising and promotional revenue or other
transaction value (including barter payments or advertising avails), "bring your
own access" (BYOA), or other online applications.
1.8 "HSAC Network Equipment" means the equipment owned and
employed by HSAC for operation of the HSAC Services by connection to the
head-end of Operator's System, and shall include, without limitation, all
monitoring devices, telecommunications equipment, storage devices, computing and
data processing equipment, and software.
1.9 "HSAC Services" or "Services" means the turnkey design,
installation, activation, testing, operation, marketing, provision, customer
service and "call center" support, billing, and maintenance of HSA's high-speed
"data over cable" connection/transmission services from and between HSA's
Internet ISP/portal and the HSA Network Equipment interfaced with the System
that allows Data Subscribers, for a monthly fee and other applicable charges
paid to HSAC, to browse the Internet/news groups, receive and send electronic
mail (or "E-mail"), and perform related activities and use other data/digital
applications.
1.10 "HSAC Local Content" means HSAC or Operator-branded or
co-branded start-up and other web pages/sites, EPGs (electronic program guides),
or other content designed, created or acquired and controlled exclusively by
HSAC (as ISP) and offered uniquely by HSAC to Data Subscribers in Operator's
System as part of the HSAC Services. "HSAC Local Content" shall not be deemed to
include the initial startup and other web pages/sites, EPGs (electronic program
guides), or other content that is provisioned or acquired from another source
and provisioned generally (e.g., a "start page" provisioned on a nationwide
basis) to any and all data subscribers accessing the Internet through the HSAC
Services. HSAC and Operator agree that the creation and hosting of HSAC Local
Content is an interstate traffic data/transportation business.
1.11 "Home Equipment Package" means the cable modem/other
set-top device and related power converter/supply, network interface card (NIC),
patch cabling, and required software for each Data Subscriber.
1.12 "ISP" means HSAC or its successor Internet/information
service provider designated by HSAC to provide Internet access to Data
Subscribers.
1.13 "Market or Regulatory Conditions" means one or more
events which materially impacts the ability of HSAC or Operator to attract or
retain Data Subscribers, e.g., a repricing, initiation or expansion of
competitive services (such as digital subscriber line) by CLEC or ILEC telephone
carrier, or by fiber, wireless/satellite-connected Internet service or access
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providers, or the imposition by any federal, state or local regulatory authority
of any "open access" requirements on the System or sales, use or privilege
taxes, levies, tariffs or duties, license fees, etc. (i.e., an "Assessment")
with respect to the HSAC Services, regardless of whether such Assessment, or
responsibility for its collection, is imposed on or passed through the ISP, HSAC
or Operator.
1.14 "Optional Services" means the provisioning and marketing
by HSAC of Gross Revenue-generating high-speed digital or data
connection/transmission services which utilizes the Operator's RF Plant/head-end
equipment and/or passes data through the HSA Network Equipment, including, but
not limited to, IP telephony, video/audio streaming, and the deployment of
dial-up or cable modems/other set-top devices which are capable of displaying
text and graphics directly to a Cable Subscriber's TV set (if connected), etc.
1.15 "System" means the "System(s)" as defined in RECITAL A
hereto and listed on EXHIBIT A which (i) each encompass not less than 5,000
"homes passed" or qualify as Sub-5000 System(s) (as defined in Section 3 of the
Master Agreement) that HSAC may elect to Cluster, (ii) is committed to the
deployment of HSAC Services under this Agreement, and (iii) complies with the
System Data Requirements.
1.16 "System Data Requirements" means the minimum technical
requirements set forth on EXHIBIT B hereto to which the System must conform in
order for the HSAC Services to operate, including, without limitation, at least
400 MHz of System bandwidth and, for one-way RF plants/systems, at least one (1)
6 MHz channel reserved for the HSA Service, and for two-way RF plants/systems,
at least two (2) 6 MHz channels reserved for the HSAC Services.
2. EXCLUSIVE RIGHT TO PROVIDE HSAC SERVICES; GENERAL OBLIGATIONS OF
OPERATOR AND HSAC.
2.1 Operator hereby grants to HSAC, and HSAC accepts from the
Operator, the sole and exclusive right and privilege to use the System to
provide to Operator's Data Subscribers the following:
(a) the HSAC Services; and
(b) On a competitive basis, such Optional Services and other
high-speed or "dial-up" transmission services (as more
fully explained in Section 4 below) which are similar to
or competitive with the HSAC Services; provided, that so
long as they do not utilize or interfere with the HSA
Network Equipment or the 6 MHz channel(s) utilized by
the HSAC Services, Operator may provision Optional
Services from another third party if within 120 days of
Operator's notice to HSAC of Operator's intent, HSAC
declines to provision such Optional Services or if HSAC
and
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Operator cannot agree upon engineering specifications, a
deployment schedule, or revenue splits for such Optional
Services.
2.2 Operator covenants and agrees, in accordance with
industry standards, to:
(a) Carry and distribute the HSAC Services in their
entirety, without delay, interruption, alteration,
addition, deletion or editing of any portion thereof,
and in a manner that will permit the highest quality
reception by Data Subscribers as is possible consistent
with the System Data requirements and Attainment
Measures (defined in Section 3.1 below);
(b) maintain its System in accordance with the System Data
Requirements for the transmission of HSAC Services
throughout the System;
(c) take appropriate and commercially reasonable precautions
to ensure that the HSAC Services are received only by
Data Subscribers, and to use commercially reasonable
efforts to prevent unlawful reception, retransmission or
use of the HSAC Services by any means, whether now known
or hereafter devised, without the prior written
authorization of HSAC (if Operator becomes aware that
any unauthorized third party is receiving or
transmitting any part of the HSAC Services, Operator
will notify HSAC in writing of the name and address of
such third party); and
(d) otherwise comply with all applicable local, state and
federal laws, rules, regulation and franchises.
2.3 HSAC agrees to implement, deploy and perform the HSAC
Services in accordance with industry standards and the terms of this Agreement
in a time frame mutually agreed upon by the parties.
3. PARAMETERS OF HSAC SERVICES. In order to provide HSAC Services
during the term of this Agreement, HSAC and Operator agree as follows:
3.1 Commissioning of RF Plant System; System Requirements.
(a) Prior to the provisioning of HSAC Services, Operator
will complete and submit to HSAC and NCTC an Adoption Supplement and System
Profile Questionnaire which summarizes the electronic and physical
specifications of Operator's System(s) and certifies to HSAC the Operator
believes the System(s) conform to the System Data Requirements. Upon review and
acceptance of the Adoption Supplement and Questionnaire (subject to HSAC's
discretion regarding Clustering and absence of conflicts regarding overbuilding)
HSAC will perform a pre-engineering inspection (by spectrum analyzer or
otherwise) of Operator's RF plant/System (i.e., a Site Survey"), and furnish
Operator with its recommendations for any upgrades, repairs, etc., which may be
necessary for the System to meet minimum System Data Requirements (i.e.,
identification of "Attainment Measures").
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(b) Operator agrees that (i) in order to deliver HSAC
Services to Data Subscribers, the System must satisfy the System Data
Requirements, (ii) HSAC is not responsible for whether the System satisfies the
System Data Requirements, and (iii) it shall promptly undertake (or refuse to
take) any reasonable Attainment Measures and maintain the System Data
Requirements during the period of time of this Agreement. In the event Operator
refuses to effect appropriate Attainment Measures, this Agreement shall
terminate without liability of any kind to Operator or HSAC. EXHIBIT B may set
forth the time frame agreed upon by Operator and HSAC for the Operator to bring
the System into conformity with the System Data Requirements.
(c) At such time as Operator and HSAC agree that the
System is sound and meets the System Data Requirements, and subject to HSAC's
right to defer and Cluster Sub-5000 Systems for deployment, HSAC and Operator
will agree within 30 days upon a timetable to "commission" the System, and HSAC
shall launch the HSAC Services to Data Subscribers within 180 days thereafter,
as follows:
i. install and connect the HSAC Network Equipment (Operator will provide
a reasonable amount of collaction/rack space, physical security,
AC/climate control and electrical power supply for the HSAC Network
Equipment);
ii. arrange at HSAC's expense for data transport (via telco, wireless,
etc.) from the Internet to the Operator's head-end(s)/System;
iii. arrange telco return path circuits in one-way Systems;
iv. test the HSA Network Equipment interface;
v. activate the data through-put portion of the HSAC Services, initiate
beta testing with a select group of complimentary "beta" customers;
and
vi. effect a full marketing/revenue "launch" of the HSAC Services.
(d) After initial activation of HSAC Services in a
System, neither party will make any changes or upgrades to the HSA Network
Equipment or Operator's RF Plant/System specifications that might render the
System or the HSAC Services inoperable without consulting with the other party
regarding the allocation of costs of such changes or upgrades.
3.2 Allocation of Maintenance Obligations. Following the
commissioning of the System: (
a) HSAC will at its own cost and expense furnish and
maintain all HSAC Network Equipment attaching to the System/RF plant;
(b) Operator will at its own cost and expense operate,
maintain and repair the integrity of its RF-Plant/System (including, without
limitation, all coaxial cable, head-end equipment, connectors, amplifiers,
passive devices/splitters, etc.) and not interfere with the proper
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connection interface of the HSAC Network Equipment to the System, and provide
technical personnel to eliminate signal leakage or interruptions in the System.
(c) The HSAC Network Equipment will at all times be the
property of HSAC, and will be insured by HSAC against casualty loss. Upon
termination of this Agreement (unless purchased by Operator pursuant to Section
5 hereof), Operator agrees to make available for recovery by HSAC all HSAC
Network Equipment, subject to reasonable wear and tear. HSAC will not damage or
disable the System head-end while recovering the HSAC Equipment, and will leave
the System functional (except for termination of HSAC Services). Operator will
use reasonable care to avoid damaging or disconnecting the HSAC Network
Equipment, and will not move, relocate, alter, sell, lease, license, assign,
encumber or otherwise tamper with the HSAC Network Equipment, and will pay to
repair or replace HSA Network Equipment that Operator or its employees damage.
3.3 Home Equipment Package. HSAC will select the vendor/brand
of cable Home Equipment Packages, and then procure, rent to*, and arrange for
the installation by the Data Subscriber, Operator, or other authorized
resellers/installers of, the Home Equipment Package for each Data Subscriber.
(*Unless purchased directly at retail by the Data Subscriber, HSAC shall retain
ownership of the Home Equipment Package, and Data Subscriber will be required to
sign a statement acknowledging such ownership).
3.4 Allocation of Operational Responsibilities. Upon
activation of the HSAC Services, HSAC will have the exclusive right to
manage/monitor the data that flows through the HSA Network
Equipment/data-switched portion of the System. Neither HSAC nor Operator shall
be responsible for third-party software.
3.5 Notice of Service Failures. Operator and HSAC each agree
to notify the other's Designated Personnel promptly of any outages,
interruptions or degradation of service in either the RF plant portion or the
data portion of the HSAC Services (a "Service Failure") of which they become
aware from any source (i.e., a "Notice"). To the extent a Service Failure is
traceable to an RF plant defect or malfunction (whether or not due to force
majeure), Operator will provide technical personnel within 6 hours or less (or
as soon as commercially practicable) to repair and/or respond to such Service
Failure and restore the HSAC Services. To the extent the Service Failure is
traceable to HSAC Network Equipment or a data stream malfunction (whether or not
due to force majeure), HSAC will likewise correct the Service Failure within 6
hours or provide technical personnel within 24 hours (or as soon as commercially
practicable) to repair or replace any malfunctioning HSAC Network Equipment. In
no event however does HSAC warrant to Operator, or Operator warrant to HSAC,
that their respective systems and services (i.e., the System, the HSAC Services,
the HSA Network Equipment, or the Internet ISP access portal/data stream
afforded by and through the ISP or other utilities will be uninterrupted,
error-free or secure from criminal intrusion (i.e., by "hackers").
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3.6 Troubleshooting. Operator and HSAC agree to cooperate and
work together diligently to respond to all Service Failures, and shall
coordinate the scheduling of maintenance that might interfere with the HSAC
Services. Both parties agree and acknowledge that downtime, incorrect or
inaccurate Data Subscriber invoicing, and infrastructure problems will be given
highest priority attention at all times. Operator and HSAC shall each have
access to the other's Designated Personnel (EXHIBITS F and G) on a 24x7 basis
(including weekends and holidays) via pager, cell phone or similar means for the
purpose of troubleshooting Service Failures pursuant to agreed-upon Escalation
Procedures, which may be annexed hereto as EXHIBIT C.
3.7 Customer Service. HSAC shall provide a toll-free telephone
number and telephone support representatives to take customer service calls from
Data Subscribers regarding Service Failures and the performance of the Home
Equipment Package, and the Internet browser and electronic mail software
provided by third parties. Operator shall also provide its Data Subscribers with
a "customer service response" service for the System/RF portion of the HSA Data
Network. HSAC shall make its engineers and technicians available as needed on a
second-level basis to provide technical support and to serve as liaisons between
or among the Data Subscribers, Operator, and HSAC. Except in the case of a
Service Failure requiring immediate notification under Section 3.5 above, HSAC
will inform Operator of any System/RF Plant problems of which HSAC becomes aware
(i.e., RF level, hum, etc.) as soon as commercially practicable.
3.8 Billing of Data Subscribers; Internet Usage. The
processing of subscriptions for HSAC Services from Data Subscribers and the
invoicing of Data Subscribers shall be handled as set forth on EXHIBIT E hereto
and incorporated herein by reference. Additionally, HSAC shall distribute to and
require Data Subscribers to sign an "Internet End User/Services Agreement" (the
"End User Agreement") which describes the limits placed on Data Subscribers
rights to damages and indemnification. HSAC shall have the right but not the
obligation to enforce the terms and conditions of the End User Agreement and/or
reprice or terminate a Data Subscriber's account for violations of the End User
Agreement.
3.9 Data Subscriber Cancellation/Disconnect. In the event a
Data Subscriber terminates all of his, her or its cable TV/RF services with
Operator, Operator will notify HSAC and use commercially reasonable efforts to
recover and store the Home Equipment Package (except for any NIC/ethernet card
inside the customer's computer) for HSAC at no charge. In the event a Data
Subscriber cancels only his, her or its subscription to HSAC Services, HSAC
shall be responsible for recovering the Home Equipment Package.
3.10 Promotional and Build-Out Activities.
(a) The parties will cooperate reasonably with one another regarding
the marketing and promotion of HSAC Services to Operator's Cable Subscribers
with the aim of maximizing the number of Data Subscribers. Such cooperation will
include (i) a "drop/install" at Operator's expense to any home passed in the
System, and (ii) Operator's distribution of marketing to Cable
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Subscribers regarding the HSAC Services (e.g., a reasonable number of
complimentary "ad avails" on Operator's cable TV system on and with appropriate
channels, times, durations, and demographics, space in bills, statement
messaging, space in installation packs, POP displays, etc.), provided that HSAC
will reimburse Operator for the incremental postage associated with bill
stuffers. Each party will nominate at least one (1) employee each to meet and
jointly review marketing plans and materials assure acceptable quality
standards. Operator will not delete or alter, or authorize the deletion or
alteration of, any copyright or trademark notice, logo, credit or any other
notice included in any promotional materials delivered pursuant to this
paragraph.
(b) Operator will provide HSAC access (both print copy and
electronically) to its Customer List(s) on a confidential basis solely for the
purpose of developing and implementing a marketing plan, developing and
implementing a billing system for Data Subscribers, and otherwise provide
"OnLine Help-Desk" modem configuration support, Data Subscriber sign-up, and
ongoing customer service.
(c) The parties further agree to jointly review and evaluate
periodically the economic feasibility of expanding (i.e., into a central
business district, university campus, etc.) or upgrading Operator's RF Plant in
the System in order to increase the number of homes passed and/or commercial
Data Subscribers.
3.11 Complimentary Accounts. HSAC will at Operator's direction
provide to Homes Passed in the System complimentary HSAC Services accounts
(except that such recipients of complimentary service must pay for their own
Home Equipment Packages as would any other Data Subscriber) as follows:
a) up to five (5) non-transferable accounts as designated by Operator;
b) a reasonable number of other government/"community service" accounts;
c) a reasonable number of accounts for Operator's office(s) (via multiple
modems or single-modem with hub/proxy server distribution as the
parties may agree) within the System, and Operator's employees at
their residences; and
d) such other complimentary accounts as HSAC in its sole discretion shall
determine.
These accounts may only be used by the parties to be listed on EXHIBIT D and may
not be transferred by Operator or the parties listed without the written consent
of HSAC.
3.12 Advertising Expenditures; In-System Marketing Personnel.
HSAC agrees to commit advertising funds in an amount not less than $1.50 per
Home Passed in connection in the initial Launch Date, and at least $.25/Home
Passed annually in such System thereafter. In addition, with respect to Systems
encompassing 10,000 or more homes passed, HSAC will hire or retain one (1)
"local" marketing manager/firm to coordinate the initial launch of HSAC Services
and follow-on Data Subscriber-end user sales and installation activities in the
System. In Systems encompassing fewer than 10,000 homes passed and
Clustered/Sub-5000 Systems, HSAC will engage or retain a "regional" manager/firm
for the System and other Systems in the
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area (which may or may not be Systems owned by Participating Members) for the
purpose of coordinating and supervising the marketing of HSA Services to Data
Subscribers.
4. Miscellaneous Matters Regarding Branding, Optional Services;
Content, Other Matters.
4.1 Branding. HSAC will brand, market, deploy and support the
HSAC Services in the System under the Operator's tradenames (with Operator's
reasonable consent) or such other brands/service marks or co-brands as HSAC and
Operator may jointly designate. HSAC is accordingly granted a license to use
Operator's name and logo to brand the HSAC Services and create HSAC Local
Content, which shall include, advertising, opening web pages, billing, etc. HSAC
will produce and distribute all marketing materials and execute all marketing
plans applicable to the HSAC Services.
4.2 Exclusivity; Limits on Overbuilding/Competition. HSAC will
enjoy exclusive rights under this Agreement to provide HSAC Services (and
non-Gross Revenue generating enhancements to those HSAC Services) in the System.
This includes the rights to market, invoice, and retain its share of Gross
Revenues on accounts enrolled by HSAC on homes passed and business/commercial
subscribers (whether connected by coax or fiber) regardless of whether the
Operator is competing in the System area as a CLEC (i.e., a tariffed Competitive
Local Exchange Carrier), CAP (i.e., a Competitive Access Provider), or other
form of carrier or telco contractor. Except as provided in Section 4.5 below in
connection with "dial-up" services, HSAC will not deploy HSAC Services under an
agreement with or in conjuction with another MSO-cable operator/overbuilder
within the System. Moreover, HSAC may in its discretion refuse to accept any
Adoption Supplement or deploy HSAC Services in connection with any Operator's
overbuild activities.
4.3 Content. HSAC shall designate and prescribe the Data
Subscriber's initial start page and the content thereof. HSAC will also create
and distribute HSAC Local Content linked to such initial start page. Prior
distributing such HSAC Local Content, HSAC will furnish same to Operator,
whereupon Operator shall have ten (10) days to review and offer comments and
suggestions to HSAC regarding such content. HSAC shall not be obligated to
accept any such suggestions from Operator, and Operator shall no right to
disapprove or block the distribution of such HSAC Local Content unless such HSAC
Local Content is manifestly deragatory or dilutive to Operator's brand or
tradenames/trademarks. The "Gross Profits" (i.e., gross sales less direct
operating costs) of captured advertising, E-commerce and any other ancillary
revenues generated by HSAC's or Operator's efforts specifically for and included
within the HSAC Local Content will be deemed Gross Revenues for purposes of
calculating the Operator's Share as set forth in Exhibit E.
4.4 Optional Services. HSAC may upon notice to and consent of
the Operator (such consent not to be unreasonably withheld provided HSAC offers
such Optional Services on a competitively-priced basis) develop and deploy Gross
Revenue-generating Optional Services through
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the HSA Network Equipment for Data Subscribers and invoice for same. If HSAC
deploys IP telephony or other Optional Service, HSAC shall pay Operator a
percentage of the "Gross Profits" (defined in the previous subparagraph)
generated from the sales/distribution of such services as set forth on Exhibit
E. Optional Services may or may not be branded under the Operator's logos and
service marks as the parties agree.
4.5 Additional Connectivity Services. HSAC will have the right
to market and deploy broadband connectivity services (via analog or xDSL modem,
wireless/transciever, etc. broadband technology) to "dial-up" residential and
commercial customers both within and outside the System area that do not qualify
as homes passed/Cable Subscribers and do not utilize the Operator's RF
plant/head-end equipment or the HSA Network Equipment. HSAC will pay 15% of the
"Net Revenues" (i.e., gross revenues less any splits, leased line or other
access fees, or other payments paid to the owner of the copper or other
non-hybrid-fiber/coaxial network owner (be it an RBOC, other telco, or
proprietary LAN owner such as a university, etc.) for access to its bandwidth)
generated from such "dial-up" services to Operator. Such "dial up" customers
will be deemed "owned" by HSAC for purposes of this Agreement. HSAC will retain
such "dial up" customers and 100% of the Gross Revenues generated from "dial-up"
services in the event of any termination or expiration of this Agreement;
provided, that if the Operator expands/upgrades its System/RF plant such that
HSAC's "dial-up" customers eventually qualify as homes passed or Cable
Subscribers, HSAC will make commercially reasonable efforts to enroll such
customers as Data Subscribers.
4.6 Security. HSAC may at its option make available security
and encryption equipment and software to Data Subscribers at no additional
charge to Operator; provided, that HSAC is not obligated to do so, nor shall it
be liable or responsible in any way for the installation and performance of such
equipment or software.
5. Term of Agreement; Expiration; Termination Fee.
5.1 Term; Renewal. This term of this Agreement shall commence
effective as of the date set HSAC accepts and countersigns the Operator's
Adoption Supplement, and shall continue for a term of not less than sixty (60)
months from the agreed "Launch Date" for each Member's System ,and expire on
December 31st of the calendar year in which the 60th month falls (the "Initial
Term"). The Network Services Agreement shall then renew itself effective as of
January 1st of the next calendar year for a 12-month or 24-month term that runs
concurrently with the term of any successor Master Agreement between NCTC and
HSAC then in effect (i.e., the renewal of this Network Services Agreement may be
for one or two years depending on the cycle) unless notice of intent not to
renew is sent by either Member or HSAC to the other not less than less than 60
days or more than 120 days prior to such December 31st expiration date. Upon any
such renewal, Member shall have the option of continuing to be governed by this
Network Services Agreement, or any successor Network Services Agreement then in
effect (except for the length of the term as provided in the previous sentence).
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Example #1: Operator enters into a Network Services Agreement with HSAC
with an effective date of August 1, 1999, and HSAC launches HSAC
Services on or before November 1, 1999. The Network Services Agreement
will expire December 31, 2004. NCTC and HSAC agree upon a successor
form of Network Services Agreement effective January 1, 2003. Operator
shall have a 60-day option commencing September 1, 2004 to either (i)
allow the Network Services Agreement to expire, or (ii) renew the
Network Services Agreement then in effect with HSAC or adopt the terms
and conditions of the successor Network Services Agreement for a period
commencing January 1, 2005, and expiring on December 31, 2005.
Example #2: Operator enters into a Network Services Agreement with HSAC
with an effective date of August 1, 2000, and HSAC launches HSAC
Services on or before November 1, 2000. The Network Services Agreement
will expire December 31, 2005. NCTC and HSAC enter into a Successor
Agreements and Network Services Agreement effective January 1, 2005.
Operator shall have a 60-day option commencing September 1, 2005 to
either (i) allow the Network Services Agreement to expire, or (ii)
renew the Network Services Agreement then in effect with HSAC or adopt
the terms and conditions of the successor Network Services Agreement
for a period commencing January 1, 2005, and expiring on December 31,
2007.
5.2 Termination. This Agreement may be terminated as follows:
(a) At Operator's option exercised on sixty (60) days written notice to
HSAC, in which event Operator shall:
(i) purchase (or assume the leases) from HSAC at book value
the HSAC Equipment and Home Equipment Packages committed to Operator's
System, or, make available to HSAC all HSAC Network Equipment in good
condition, normal wear and tear excepted, and exercise its commercially
reasonable best efforts to assist HSAC with recovery of all Home
Equipment Packages owned/leased by HSAC from Data Subscribers; AND
(ii) pay to HSAC a Termination Fee, i.e., an amount equal to
the net present value of the Gross Revenues for HSAC Services which
would otherwise have been generated from HSAC's then-existing base of
Data Subscribers in the System, which in any event shall not be less
than the amount required to fully reimburse HSAC for any unrecovered
direct "up-front" capital, marketing, and operating costs incurred in
deploying the HSAC Services in the System. If Operator and HSAC cannot
agree upon the amount of any Termination Fee, they shall jointly engage
and split the cost of a neutral appraiser/valuation specialist to place
a value on such Termination Fee.
(b) At HSAC's option exercised on sixty (60) days written notice to
Operator, in which event HSAC shall be liable for damages as if Operator had
terminated this Agreement because of breach by HSAC (subject to the limitations
in Section 12).
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(c) By either party upon breach by the other as provided in Section 13,
in which event the defaulting party shall be liable for damages for breach
(subject to the limitations in Section 12).
(d) By Operator, without further liability of either Operator or HSAC,
if: (i) Operator and HSAC have not agreed upon a timetable for launch within the
30 day period provided under Section 3.1 (c); (ii) the HSAC Services have not
been launched by the later of the agreed upon launch date or 180 days from the
date the parties agreed upon the timetable; or (iii) HSAC has refused to deploy
HSAC Services under the last sentence of Section 4.2.
6. Fees for Services. HSAC will invoice Data Subscribers and pay to
Operator the Operator's Share of Gross Revenues, Gross Profits and Net Gross
Revenues as set forth on EXHIBIT E attached hereto.
7. Designated Operator Personnel. Operator shall identify by name and
location all Operator Designated Personnel required in Section 3. The personnel
identified shall have authority to authorize an investigation of Service
Failures in the RF portion of the Network and have knowledge of pertinent
maintenance, repair and support procedures. The list of authorized Operator
contact personnel is set forth in EXHIBIT F of this Agreement, provided that
such list may be revised by Operator at any time as long as HSAC is informed in
writing and such list includes at least three (3) Operator contact personnel.
8. Designated HSAC Personnel. HSAC shall identify by name and location
all HSAC Designated Personnel required in Section 3. The personnel identified
shall have authority to authorize an investigation of Service Failures in the
data portion of the HSA Data Network and have knowledge of pertinent
maintenance, repair and support procedures. The list of authorized HSAC contact
personnel is set forth in EXHIBIT G of this Agreement, provided that such list
may be revised by HSAC at any time as long as Operator is informed in writing
and such list includes at least three (3) HSAC contact personnel.
9. Confidential Information.
9.1. Each party agrees that it shall not, during or after the
term of this Agreement, permit the duplication, use, or disclosure of any
Confidential Information to any person (other than an employee, agent, or
representative of the other party who must have such information for the
performance of its obligation hereunder), unless such duplication, use or
disclosure is specifically authorized by the other party in writing. Each party
shall (a) not disclose any Confidential Information to any third person without
the express written consent of the disclosing party; (b) not use, directly,
indirectly, or in concert with any other person, any Confidential Information
for any purpose other than the performance of their obligations under this
Agreement; (c) use reasonable diligence, and in no event less than that degree
of care which such party uses in respect to its own confidential information of
like nature, to prevent the unauthorized disclosure or reproduction of such
information. Without limiting the generality of the foregoing, to the extent
that this Agreement permits the copying of
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Confidential Information, all such copies shall bear the same confidentiality
notices, legends, and intellectual property rights designations that appear in
the original versions.
9.2. Apart from HSAC's obligations to Operator under this
section concerning confidentiality, HSAC shall have no obligation to delete or
destroy Operator's information, including Operator's Cable or Data Subscriber
listings, from its computer systems or backup and archival libraries until such
time as HSAC's regular procedures for elimination of such data would normally
delete or destroy such information. Following a Data Subscriber disconnect,
Operator may require the elimination of its data maintained within HSAC's backup
and archival libraries prior to the time the data would normally be deleted or
destroyed by HSAC, and Operator shall pay for all expenses associated with the
early deletion or destruction of all such data.
9.3. Operator acknowledges that the names and marks "HSA",
"HSAC", "HSA Network", "High Speed Access Network", the "HSA Data Network" and
other HSAC logos, program names, trademarks, service marks, programs, manuals,
documentation, and other support materials covered by this Agreement or
otherwise used in connection with the HSA Service, are the exclusive property of
HSAC. Operator has not and will not acquire any proprietary rights thereto by
reason of the Agreement, and Operator shall have no rights to use such names,
marks, logos, variations or titles except at the times and in a manner expressly
approved by HSAC. Operator shall not publish or disseminate any material that
violates any restriction imposed by HSAC. Conversely, HSAC acknowledges that the
Operator's logos, trademarks, service marks, programs, manuals, documentation,
and other support materials covered by this Agreement or otherwise used in
connection with the HSAC Services, are the exclusive property of Operator. HSAC
has not and will not acquire any proprietary rights thereto by reason of the
Agreement, and HSAC shall have no rights to use such names, marks, logos,
variations or titles except at the times and in a manner expressly approved by
Operator.
10. Reproduction of Manuals and Documentation. Subject to the
provisions of Section 9, Operator shall have the right, at no additional charge,
to reproduce solely for its internal use, all manuals and documentation
furnished by HSAC relating to the HSAC Services, regardless of whether such
manual or documentation is copyrighted by HSAC. All copies of manuals or
documentation made by Operator shall include any proprietary notice or stamp
that has been affixed or is requested to be affixed by HSAC.
11. Indemnity.
11.1 HSAC agrees to indemnify and save harmless Operator, and
Operator agrees to indemnify and save harmless HSAC, from any liabilities,
lawsuits, penalties, claims, or demands finally awarded or settled (including
the costs, expenses, and reasonable attorneys' fees on account thereof) that may
be made by any third party for injuries, including death to persons, resulting
from the indemnifying party's negligent or willful acts or omissions or those of
persons employed by the indemnifying party, its agents, or subcontractors. HSAC
agrees to defend Operator, at Operator's
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request, and Operator agrees to defend HSAC, at HSAC's request, against any such
liability, claim, or demand. Operator and HSAC respectively agree to notify the
other party promptly of any written claims or demands against the indemnified
party for which the indemnifying party is deemed responsible hereunder.
11.2 HSAC agrees to indemnify and save harmless Operator from
all Third Party Threats (defined in Section 12 below) and claims arising as a
direct result of HSAC's management, operation and control of the HSAC Services.
12. Limitation of Liability and Disclaimer of Warranty.
12.1. In no event shall HSAC or Operator be liable to one
another for (a) any special, indirect, incidental, punitive, or consequential
damages, including loss of profits arising from or related to the breach of this
Agreement, even if HSAC or Operator had been advised of the possibility of such
damages; (b) damages (regardless of their nature) arising from any Third Party
Threats (defined below) for any delay or failure by HSAC or Operator to perform
its obligations under this Agreement due to any cause beyond their respective
reasonable control; or (c) claims made a subject of a legal proceeding against
HSAC or Operator more than twenty-four (24) months after any such cause of
action first arose. HSAC and Operator specifically acknowledge and agree to the
limitations on their respective liability to Data Subscribers as they relate to
issues of lack of privacy and security, the possibility of viruses, offensive
content, loss/theft of passwords, unauthorized access by hackers, etc. (i.e.,
"Third Party Threats"), as set forth in the End User Agreement (a copy which may
be attached hereto as EXHIBIT H). HSAC and Operator further agree that all such
liability limitations apply to Operator and its software systems and System as
well. Operator and HSAC hereby waive the assertion of any claims relating to,
and release each other from any liability for, any and all claims associated
with or related to such Third Party Threats. Operator and HSAC agree to exercise
their best efforts to maintain the secrecy of (and occasionally rotate) their
software passwords, and notify the other if they become aware that their system
passwords may be or have become compromised. HSAC will maintain appropriate
policies of general liability, casualty and workers compensation insurance to
cover HSAC's employees against injury to themselves or others and casualty
accidents while working on Operator's premises/System. All such HSAC policies
shall name Operator as an additional insured to the extent HSAC may legally do
so. Operator shall furnish HSAC with a list of its System offices and head-ends
for HSAC's insurance brokers.
12.2 HSAC'S AND OPERATOR'S LIABILITIES TO ONE ANOTHER UNDER
THIS AGREEMENT (WITH THE EXCEPTION OF OPERATOR'S LIABILITY TO HSAC FOR ANY
TERMINATION FEE UNDER SECTION 5.2(ii)), WHETHER UNDER CONTRACT LAW, TORT LAW, OR
OTHERWISE, SHALL BE LIMITED TO THE LESSER OF (a) THE AVERAGE MONTHLY OPERATOR'S
SHARE OF GROSS REVENUES (OR HSAC'S SHARE, AS THE CASE MAY BE) FOR THE MONTH IN
WHICH THE LIABILITY AROSE, OR EQUIVALENT THEREOF, FOR HSAC SERVICES PERFORMED
UNDER THIS AGREEMENT FOR THE ACTUAL NUMBER OF MONTHS DURING WHICH THE PROBLEM
EXISTED; OR (b) THE ACTUAL AMOUNT OF MONEY DAMAGES INCURRED BY OPERATOR OR HSAC.
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12.3 Nothing in this Section 12 shall be interpreted to limit
the indemnity obligations of the parties set forth in Section 11 above.
13. Default and Termination. If either party defaults in any material
respect in the performance of any of its material obligations hereunder and such
default shall not be cured within thirty (30) days after written notice thereof
from the other, or if either party becomes insolvent, or if a petition under any
bankruptcy act shall be filed by or against either party (which petition, if
filed against any affiliate of either party, shall not have been dismissed
within thirty (30) days thereafter), or if either party executes an assignment
for the benefit of creditors, or if a receiver is appointed for the assets of
either party, or if either party takes advantage of any insolvency or any like
statute (any of the above acts are hereinafter called "Event of Default"), then
the other party may at its option, in addition to any and all other rights which
party may have, declare a default and terminate this Agreement by giving written
notice to the other party within ten (10) business days from the date of the
occurrence or maturity of any Event of Default. Notwithstanding any other
provision of this Agreement, neither HSAC or Operator will be deemed in default
of this Agreement to the extent any delays in their respective performance are
reasonably and demonstrably attributable to the actions or inaction of the other
or events and circumstances outside of their reasonable control, including, but
not limited to, the actions or negligence of third party vendors. For example,
HSAC will not be deemed in default of this Agreement if (i) a Regional Bell
Operating Company ("RBOC") or other telephone network provider (a "telco") is
late in installing T-1 or other transport from a System head-end to the ISP
portal following the submission of a timely order by HSAC, or (ii) an equipment
vendor (e.g., COM21) fails to meet its delivery deadlines with respect to HSAC
Network Equipment or Home Equipment Packages.
14. Independent Contractor. All work performed by HSAC in connection
with the HSA Service described in this Agreement shall be performed by HSAC as
an independent contractor and not as the agent, employee, joint venture or
partner of Operator. All persons furnished by HSAC shall be for all purposes
solely HSAC's employees or agents and shall not be deemed to be employees of
Operator for any purpose whatsoever. HSAC shall furnish, employ, and have
exclusive control of all persons to be engaged in performing services under this
Agreement and shall prescribe and control the means and methods of performing
such maintenance services by providing adequate and proper supervision. Nothing
contained herein shall be deemed to create a relationship of joint venture,
associates, principal and agent or partnership between the parties hereto and
neither party shall hold itself out of the contrary. Each party is acting as
principal hereunder.
15. Force Majeure. Neither party shall be responsible for any Service
Failure or delay or failure in performance of any part of this Agreement to the
extent that such delay or failure is caused by fire, flood, explosion, war,
lightning, embargo, government requirement, riots or civil commotion, acts of
civil or military authority, strikes or other labor unrest, power surges, acts
or omissions of carriers/utilities, acts of God, or other similar causes or
contingencies beyond its reasonable control (i.e., a "Force Majeure"); provided,
that neither party shall relieved under this Section 15 from its obligations
under Sections 3.5 and 3.6 hereof with respect to timely repairs (i.e., thirty
(30) days or
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less) of Service Failures caused by such Force Majeure once the condition is
removed. If any such an event of Force Majeure occurs and such event continues
for ninety (90) days or more, the party delayed or unable to perform shall give
immediate notice to the other party, and the party affected by the other's delay
or inability to perform may elect to suspend performance of its allocable
portions or duties with respect to the HSAC Services for the duration of the
condition. The affected party or parties may resume performance of its duties
once the condition ceases, and the term of this Agreement shall by notice be
deemed to be extended for such affected System up to the length of time the
condition endured.
16. Assignment. This Agreement shall be binding on the parties hereto
and their respective successors and assigns; PROVIDED, that each party hereto
shall be permitted, upon 30 days advance written notice to the other, to assign
(by assets purchase or other written agreement, merger, consolidation, sale of
assets, operation of law or otherwise) its rights, title and interest under this
Agreement to a successor entity which specifically assumes the assignor's
rights, title and interest under this Agreement prior to or contemporaneous with
the closing of such assignment. No such assignment shall relieve a party of its
obligations hereunder. All assignments in contravention of this section shall be
null and void. Both HSAC and the Operator will be permitted to collaterally
assign and grant a security interest in its contract rights and
tangible/intangible property interests (including the HSA Network Equipment and
Home Equipment Packages) arising under this Agreement for purposes of securing
financing from its commercial lenders.
17. Amendments, Modifications, or Supplements. Amendments,
modifications, or supplements to this Agreement shall be permitted, provided all
such changes shall be in writing signed by the authorized representatives of
both parties, and all such changes shall reference this Agreement and identify
the specific articles or sections of this Agreement that is amended, modified,
or supplemented.
18. Notices. All notices, demands, or other communications herein
provided to be given or that may be given by any party to the other shall be
deemed to have been duly given when made in writing and delivered in person, or
upon receipt, if (a) deposited in the U.S. mail, postage prepaid, certified
mail, return receipt requested; or (b) sent by nationally recognized overnight
courier in a postpaid wrapper, and addressed as follows:
Notices to HSAC: HIGH SPEED ACCESS CORP.
4100 E. Mississippi Ave., Suite 1150
Denver, CO 80222
Attn: Ron Pitcock, Sr., President
Phone: 303-256-2005, fax: 2050
With a copy to: HIGH SPEED ACCESS CORP.
1000 West Ormsby Ave., Suite 210
Louisville, KY 40210
Attn: John G. Hundley, General Counsel
Phone: 502-515-3342, fax: 3101
Notices to Operator: As set forth in the Adoption Supplement
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or to such address as the parties may provide to each other in writing from time
to time.
19. Obligations to Survive Termination. The parties recognize and agree
that the obligations of the other party under Sections 9, 11 and 12 of this
Agreement shall survive the termination or expiration of this Agreement.
20. Governing Law. The validity, construction, interpretation, and
performance of this Agreement shall be governed by and construed in accordance
with the laws (without reference to the conflicts of laws rules) of the State of
Delaware.
21. Headings. The headings contained in this Agreement are for
convenience of reference only and are not intended to have any substantive
significance in interpreting this Agreement.
22. Waivers. Any waiver by either party of any breach of any term or
condition hereof shall be effective only if in writing and such writing shall
not be deemed to be a waiver of any subsequent or other breach, term or
condition of this Agreement.
23. Authority; No Conflicting Agreement. The officers signing on behalf
of the parties to this Agreement acknowledge that they have read and understand
this Agreement and hereby warrant that each has full power and authority to
execute this Agreement and bind the respective parties hereto. Each party
further represents that it is not bound by any other agreement that would
prevent full performance of this Agreement.
24. Y2K. Operator and HSAC represent and warrant to the other that each
has taken or is taking all actions necessary and appropriate to assure that
there shall be no material adverse change to its respective business or
electronic systems or material interruptions in the operation and delivery of
HSAC Services as provided in this Agreement (aside from normal data packet
delays, distortions, and losses (i) on the Internet backbone, (ii) during
transport to the Internet backbone on telecommunication lines leased from a
third party, or (iii) during transport from Data Subscribers to HSAC over a
coaxial cable or fiber optic line) by reason of the advent of the year 2000,
including, without limitation, that all its respective computer-based systems,
embedded microchips and other data processing capabilities have been designed or
modified and fully tested in such a manner that such computer-based systems,
embedded microchips and other data processing capabilities will not generate any
invalid and/or incorrect date-related results or cause any of the problems
commonly referred to as "Year 2000 problems" and will, without interruption or
manual intervention, continue to operate consistently, predictably and
accurately and in accordance with all of the requirements of
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this Agreement, including without limitation, meeting all specifications and/or
functionality and performance requirements, when used during any year prior to,
during or after the calendar year 2000. Neither Operator or HSAC warrant that
interruptions in HSAC Services will not occur due to the network or systems
failures of other parties, including utilities and phone services, caused by
"Year 2000 problems."
25. Franchise Authority. Operator represents and warrants to HSAC that
to the best of its knowledge after due inquiry Operator's cable TV franchise
agreement with the state or local governmental agency with authority over the
System authorizes Operator (and HSAC) to offer the HSAC Services, or does not
prohibit Operator or HSAC from offering the HSAC Services. Operator shall use
its reasonable best efforts to obtain any required supplemental or separate
"data over cable" franchise from such governing authority and preserve the
exclusivity of HSAC's rights to provide HSAC Services under any such separate
franchise. Collection and payment of any franchise fees and/or sales taxes will
be handled as described in EXHIBIT E.
26. Regulatory Compliance. HSAC and Operator agree to comply with all
applicable federal, state and local laws and regulations, including specifically
those pertinent regulations promulgated by the public utilities commission in
Operator's state (or where the System is situated) and the Federal
Communications Commission, which may govern or affect the provision of HSAC
Services to Data Subscribers covered by this Agreement.
27. Arbitration. Any dispute arising out of or relating to this
Agreement or the breach, termination or validity hereof, shall be finally
settled by arbitration conducted expeditiously in accordance with the American
Arbitration Association Commercial Arbitration Rules, without the requirement
that the American Arbitration Association or its arbitrator (the "Arbitrator")
be used. The arbitration shall be governed by the United States Arbitration Act,
9 U.S.C. ss.ss. 1-16, and judgment upon the award rendered by the Arbitrator may
be entered by any court having jurisdiction thereof. The place of arbitration
shall be at a "neutral" location to be mutually agreed upon by the parties to
the arbitration. The Arbitrator is not empowered to award damages in excess of
compensatory damages, and each party hereby irrevocably waives any damages in
excess of compensatory damages as limited by Section 12.2 hereof. The procedures
specified in this section shall be the sole and exclusive procedures for the
resolution of disputes between the parties arising out of or relating to this
Agreement; provided, that a party may seek a preliminary injunction or other
provisional judicial relief if in its judgment such action is necessary to avoid
irreparable damage or to preserve the status quo. Despite such action, the
parties will continue to participate in good faith in the procedures specified
in this Section. All applicable statutes of limitation and defenses based upon
the passage of time shall be tolled while the procedures specified in this
section are pending. The parties will take such action, if any, required to
effect such tolling. Each party is required to continue to perform its
obligations under this Agreement pending final resolution of any dispute arising
out of or relating to this Agreement.
28. Entire Agreement. This Agreement and the Exhibits hereto constitute
the entire agreement between the parties and any parties who have in the past or
who are now representing either
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of the parties hereto, and replaces and supersedes all prior agreements, written
and oral, relating to the subject matter hereof, between the parties to this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
HIGH SPEED ACCESS CORP.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
--------------------------------------
d/b/a
---------------------------------
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
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EXHIBIT A
CABLE TELEVISION/AFFILIATE SYSTEMS COVERED BY THIS AGREEMENT
System Install Beta Launch
To be completed
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EXHIBIT B
SYSTEM DATA REQUIREMENTS
(TECHNICAL REQUIREMENTS FOR RF PLANTS)
A. HSAC will inspect and characterize the two-way cable plant to
determine its feasibility for digital data transmission. This characterization
will focus on the integrity of the cable plant against interference, intermod
distortions, ingress, system noise, and transient/impulse noise.
B. HSAC has established guidelines for Operators wishing to implement
digital data transmission on their cable plant. The guidelines will recommend
CATV plant and equipment configurations to achieve a desired level of signal
reliability and quality in digital data transmission.
C. Operator's RF/cable network must continuously meet the following
minimum performance standards, measured at designated end-of-line test points
throughout the cable plant. Although constituting on a sample of pertinent
issues, the following test points should be selected such that they are
representative of all areas of the cable distribution system.
D. A written report detailing network deficiencies and recommendations
("Attainment Measures") for improvement will be furnished to the Operator.
ANALOG PERFORMANCE PARAMETERS
1) IN-BAND FREQUENCY AMPLITUDE RESPONSE - Frequency response of the cable
network indicates the variation of system gain as a function of frequency
measured in dB. As a general guideline the amplitude characteristic shall be
within a range of +/- 2 dB from 0.75 MHz to 5.0 MHz above the lower boundary
frequency of a cable television channel, referenced to the average of the
highest and lowest amplitudes within these frequency boundaries.
2) VISUAL CARRIER-TO-NOISE RATIO (CNR) - The guideline that HSAC establishes for
CNR values is in accordance with FCC specification 76.6059(a)(7) that defines
the ratio of RF visual signal level to system noise to be not less than 43 dB.
3) DISTORTIONS - Distortions are defined as the ratio of visual signal level to
RMS amplitude of any coherent disturbances such as intermod products, second and
third-order distortions or discrete frequency interfering signals not operating
on proper offset assignments. The guideline which HSAC has established is
defined by FCC specification 76.605 (a)(8) and specifies the following: (i) the
ratio of visual signal level to coherent disturbances shall not be less than 51
dB for non-coherent channel cable television systems, when measured with
modulated carriers; and (ii) the ratio of visual signal level to coherent
disturbances which are frequency-coincident with the visual carrier shall not-be
less than 47 dB for coherent channel cable systems, when measured with modulated
carriers and time-averaged.
4) HUM MODULATION - This is the variation in the amplitude of a CW carrier at
the power line frequency of 60 Hz or its harmonics induced as a result of
passing through the cable network. The HSAC guideline is defined by FCC
regulation 76.605(a)(10), which requires that the peak-to-peak variation in
visual signal level caused by undesired low frequency disturbances (hum or
repetitive transients) generated within the system, or by inadequate low
frequency response, shall not exceed 3 percent.
5) INGRESS AND IMPULSE NOISE LEVELS - Ingress is the level of unwanted ambient
signals leaking into the CATV plant as a result of such things as imperfect
shielding, loose connectors, cracked cabling and other plant defects. Impulse
noise has different spectral characteristics, which invades spectral power
densities as the frequency increases. Causes of impulse noise include AC arcing
of electric motors, power utility transformers, electrostatic discharges,
lightning and
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<PAGE> 27
other transient sources that can produce a loss of synchronization on digital
transmission systems. In characterizing plant performance, HSAC guidelines
dictate that impairments should be maintained, collectively, at a nominal
averaged level not to exceed -50 dBc with respect to video carriers, while
recognizing that noise becomes visible in the video domain at -55 dBc and will
thus cause deterioration to optimum synchronization of the data carrier.
Further, to maintain optimal RF downstream efficiency, HSAC specifies
impairments that cause end-of-line Carrier-to-Noise (CNR) performance to drop
below a minimum constant value of 43 dB is unacceptable and will result in
interrupted high-speed data access service to the customer.
6) GROUP DELAY RESPONSE DISTORTION - No standards are currently defined that
specify minimum performance for this parameter. HSAC guidelines however specify
that as a general rule, delay response over the return path should match that
over the forward path. It is recommended that the return frequencies be located
6 MHz from either the upper of lower limits of the return bandwidth. This will
help minimize any group delay associated with the roll-up or roll-off of the
return spectrum.
7) RETURN PLANT VISUAL CARRIER-TO-NOISE RATIO (CNR) - HSAC guidelines specify a
minimum 36 dB visual CNR over the return plant, defining 40 dB CNR as the more
ideal threshold parameter. The expected higher level of noise sources in the
return path is mitigated by the reduction of video and data carriers on the
upstream.
8) RETURN IN-BAND FREQUENCY AMPLITUDE RESPONSE DISTORTION - HSAC guidelines are
consistent with FCC specification 76.605(a)(6), requiring that the amplitude
characteristic of a video carrier in the return direction to be within a range
of +/- 2dB from 0.75 MHz to 5.0 MHz should also apply to reverse video
transmission.
9) DISTORTION - HSAC expects that the level of CSO and CTB distortions on the
return path* will be generally lower than the forward path, due to the limited
number of RF video carriers interacting with each other in this sub-low
frequency spectrum. To maintain the integrity of the return path data
transmission, HSAC would generally not expect to see more than two video
carriers in this spectrum. Therefore, HSAC guidelines for distortions in the
return path follow the same FCC specification 76.605 (a)(8) which applies to the
forward path, which is not less than 51 dB for standard CATV systems (modulated
carriers and time averaged).
10) SIGNAL AVAILABILITY- HSAC in cooperation with the system partner will
jointly maintain the same goal of providing reliable, uninterrupted signal
transport over both the forward and reverse* plant. Cable maintenance practices
that routinely interrupt service must be discouraged, and HSAC requests that the
Operator provide it with advance notice of any interruptive testing or
maintenance practice that could result in the disruption of signal flow in
either the forward or return path. This advance notice is required in order that
proper customer service levels can be adequately maintained. In extreme cases,
high speed data customers can be notified of possible service disruptions.
11) TESTING - HSAC and Operator jointly agree to periodically test the forward
and return* RF paths of the CATV system. Such testing is required to document
performance parameter thresholds to the extent that high-speed data services are
not adversely affected. In the absence of such routine testing, Operator agrees
to notify HSAC of any adverse irregular signal level condition on the plant,
intermittent or continuous, which persists longer than a 12-hour interval.
* Applies only to 2-way cable plant high speed data solution. Single path, 1-way
hybrid high speed data solutions need not adhere to these specifications.
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EXHIBIT C
ESCALATION PROCEDURES FOR TROUBLESHOOTING
TIER I SUPPORT
Tier I customer service/OnLine Help Desk is the "front line" of the HSA
Corp./MSO product offering. The responsibility of Tier I service is to provide
information to the customer, initiation and changes of service, billing
inquiries and some low-level trouble shooting, and frequently asked questions.
Tier I will include the following:
o Start, stop and changes of service.
o Determination of service eligibility.
o Product information
o Provisioning and initial setup script - IP address generation, logins,
email setup, password capturing, etc.
o Service installation and dispatch scheduling and setup.
o Trouble ticket status reporting.
o Initial problem resolution. Tier I will include reasonably simple scripted
troubleshooting (based on script provided by HSCA) and cable network
related problem diagnosis.
o Billing and pricing questions.
TIER II SUPPORT
Tier II customer service is the diagnostic and problem resolution layer of the
HSAC/MSO customer service offering. In this layer, the symptoms of the problems
are understood and recorded, the problem(s) are determined and action is taken
to resolve problem(s). This group will have advanced technical troubleshooting
skills and tools. Support from this group will include:
o Desktop OS support.
o HSAC network information.
o HSAC delivered software support.
o Problem diagnosis and resolution.
o Build knowledge base and on-line information systems.
o Handle Wed and E-mail support.
TIER III SUPPORT
Tier III will provide customer service and network operations support. This
group will handle any call not able to be resolved by Tier II. In addition to
resolving the more difficult customer problems, this group will be doing ongoing
network monitoring.
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EXHIBIT D
NON-TRANSFERABLE COMPLEMENTARY ACCOUNTS
FOR THE HSA DATA NETWORK
[to be determined]
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<PAGE> 30
EXHIBIT E
OPERATOR'S SHARE OF GROSS REVENUES.
E.1 Base Payments for HSAC Services. During the term of this
Agreement, HSAC will pay to the Operator an amount (i.e., the "Operator's
Share"), equal to the percentages, by service category of Gross Revenues, Gross
Profits or Net Revenues, as shown in TABLE A below.
TABLE A
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
SERVICE OPERATOR'S SHARE
- ----------------------------------------------------------------------------------------------
<S> <C>
One/Two Way Cable Modem 50% of Gross Revenues
- ----------------------------------------------------------------------------------------------
Local Content (Section 4.3) 50% of Gross Profits
- ----------------------------------------------------------------------------------------------
Optional Services (Section 4.4) 50% of Gross Profits unless otherwise agreed
- ----------------------------------------------------------------------------------------------
Dial Up (Section 4.5) 15% of Net Revenues
- ----------------------------------------------------------------------------------------------
</TABLE>
(As used herein, "HSA's Share" shall mean 1.00 minus the Operator's Share.)
E.2 Data Subscriber Refunds. HSAC's local management will have
the discretion to offer reasonable credits/refunds of Gross Revenues to Data
Subscribers resulting from Out-of-Compliance Events, which amounts shall be
deducted from the Operator's Share. The determination of when Out-of-Compliance
Events occur may be monitored and reported by HSAC to the Operator on a monthly
basis. As used herein, an "Out-of-Compliance Event" occurs when the HSAC
Services are repeatedly rendered inoperable or unusable due to the System
failing to meet System Data Requirements or to repeated Service Failures
traceable to the Operator's RF plant/System (and such is not corrected within
the period specified in Section 3.5 of the Agreement) other than failures caused
by a Force Majeure.
E.3 Billing; Sales Taxes; Franchise Fees.
E.3.1 Operator at its option elect to implement and
operate a billing systems and invoice Data Subscribers directly for all HSAC
Services, in which case HSAC shall invoice Operator (with a copy to NCTC)
monthly, in advance, for all HSAC Services to be provided to Data Subscribers,
by delivering to Operator a statement (a "Statement") showing the computation of
Operator's Share (derived from the total number of Data Subscribers and Gross
Revenues, Gross Profits, or Net Revenues) and corresponding HSAC Share, in
accordance with this EXHIBIT E..
E.3.2 Unless Operator elects to operate the billing system
for Data Subscribers, HSAC will implement and operate the billing system and
invoice Data Subscribers for all HSAC Services, in which case HSAC shall invoice
Data Subscribers monthly, in advance,
26
<PAGE> 31
for all HSAC Services to be provided to Data Subscribers, and deliver to
Operator a related Statement.
E.3.3 Except as otherwise provided in Section 25 regarding
franchise taxes, the party electing to invoice Data Subscribers under Section
E.4.1 or E.4.2 above shall bear all risk associated with the collection and
remittance of applicable sales and use taxes and franchise taxes, provided that
HSAC will remit to the Operator for pass-through remittance by the Operator to
the franchise authority (which Operator agrees to do on a timely basis) of any
applicable franchise taxes HSAC collects from Data Subscribers.
E.3.4 Operator shall provide HSAC access (both print copy
and electronically at HSAC's expense) to its Customer Lists and other customer
databases on a confidential basis for the purpose of developing and implementing
a billing system. HSAC and Operator shall work together to develop and implement
an electronic interface between HSAC and Operator for tracking and invoicing
Data Subscribers and vendors. HSAC may at its expense arrange for a data
exchange/software interface to be written and implemented which enables HSAC to
access and interface with Operator's billing system for purposes of updating on
a real-time basis both HSAC's and Operator's records regarding the status of
Data Subscriber accounts so that such accounts may be automatically managed in
the same manner that as Cable Subscriber accounts are managed.
E.4 Settlement; Verification.
E.4.1 Where Operator acts a billing party under Section
E.3.1 above, within forty-five (45) days following the end of each and every
calendar month during the term hereof, Operator shall remit a check to HSAC for
HSAC's Share.
E.4.2 Where HSAC acts a billing party under Section E.3.2
above, within forty-five (45) days following the end of each and every calendar
month during the term thereof, HSAC will deliver to Operator a Statement for
such month and remit a check for same.
E.4.3 HSAC will keep books and records relating to the
Operator's Share in accordance with generally accepted accounting principles,
consistently applied. During the term hereof and for one year thereafter,
Operator, NCTC or their authorized representatives may, at their own expense,
visit HSAC's offices during regular business hours, subject to suitable
protections relating to confidentiality and non-disclosure, to inspect and make
extracts and copies of any such books and records in order to determine the
accuracy of the Statements. If any audit of Statements undertaken by Operator or
NCTC in accordance with this Section E.3 discloses a five percent (5%) or
greater discrepancy from the Statement(s) generated by HSAC, HSAC shall pay such
amounts to the affected Operator and reimburse such Operator or NCTC for all
costs incurred by Operator in connection with such audit.
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<PAGE> 32
E.5 Subscriber Rates. HSAC and Operator agree that Data
Subscriber rates will be reviewed and subject to a rate increase or decrease
based on market factors. Initially, Data Subscriber rates for base HSAC Services
are as follows:
<TABLE>
<S> <C> <C>
RESIDENCE CABLE 500 Kbps* downstream $ 39.95/month
RESIDENCE CABLE 1 Megabit* downstream $ 99.95/month
BUSINESS CABLE 500 kbps* downstream $ 195/month
BUSINESS CABLE 1 Megabit* downstream $ 500/month
</TABLE>
*all bandwidth speeds are approximate, and will vary depending upon a multitude
of factors, including RF Plant condition, whether the System is One-Way or
Two-Way, etc. Upstream rates may or may not be synchronous.
All cable modem rentals: $9.95/month
28
<PAGE> 33
EXHIBIT F
LIST OF AUTHORIZED OPERATOR
CONTACT PERSONNEL
29
<PAGE> 34
EXHIBIT G
LIST OF AUTHORIZED HSAC CONTACT PERSONNEL
Network Operations Center/Call Center
1000 W. Ormsby Ave, Suite 210, Louisville, KY 40210
Main Corporation Phone No.: 800-569-0565 or 502-515-3333
<TABLE>
<CAPTION>
NOC Console/Office (Louisville) 800-567-0579
Phone Pager #s
----- --------
<S> <C> <C>
Tony Lott* 502-515-3013 888-208-7272
Anthony Abounder 502-515-3327 800-759-8888 (PIN 1106620)
Mark Ludeker 502-515-3019 800-759-8352 (PIN 1273377)
OnLine Help Desk 888-550-9400 or 899-569-0565
Howard Williams 502-515-3331
Head-End/RF Troubleshooting
Tim Emig* 502-515-3108 800-759-8888 (PIN 1361615)
Project Management/Activation Scheduling
Hal Cook 303-256-2013
Brad Hayden 303-256-2012
System Engineering
Jorge Salinger 303-256-2045
Chad Thornburg 502-213-3666
800-569-0565
</TABLE>
30
<PAGE> 35
EXHIBIT H
CUSTOMER END USER/INTERNET SERVICES AGREEMENT
See attached form of Internet Services/Customer End User Agreement.
31
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated March 12, 1999, except as to the third paragraph of Note 8 and
Note 14, for which the date is May 3, 1999, relating to the financial statements
of High Speed Access Corp. and Subsidiaries, which appear in such Prospectus.
We also consent to the references to us under the headings "Experts" and
"Selected Financial Data" in such Registration Statement.
PricewaterhouseCoopers LLP
Louisville, Kentucky
May 21, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated March 12, 1999 relating to the financial statements of
CATV.net, Inc., which appear in such Registration Statement. We also consent to
the references to us under the headings "Experts" and "Selected Financial Data"
in such Registration Statement.
PricewaterhouseCoopers LLP
Louisville, Kentucky
May 21, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated March 12, 1999 relating to the financial statements of High
Speed Access Network, Inc., which appear in such Registration Statement. We also
consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Registration Statement.
PricewaterhouseCoopers LLP
Louisville, Kentucky
May 21, 1999
