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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 000-26153
HIGH SPEED ACCESS CORP.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 7370 61-1324009
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
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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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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
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As of March 20, 2000
Aggregate market value of the voting stock held by non-affiliates of the
registrant based on the closing bid price of such stock: $482,092,439
Number of shares of Common Stock outstanding: 54,390,317
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DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF REGISTRANT'S DEFINITIVE PROXY STATEMENT FOR THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD MAY 31, 2000 ARE INCORPORATED BY REFERENCE INTO PART III
(ITEMS 10, 11, 12, AND 13) HEREOF.
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TABLE OF CONTENTS
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PART I
ITEM 1. Business 3
ITEM 2. Properties 11
ITEM 3. Legal Proceedings 12
ITEM 4. Submission of Matters to a Vote of Security Holders 12
PART II
ITEM 5. Market for Registrant's Common Equity and Related Shareholder
Matters 13
ITEM 6. Selected Financial Data 13
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
ITEM 7A. Qualitative and Quantitative Disclosures About Market Risk 19
ITEM 8. Financial Statements and Supplementary Data 30
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 48
PART III
ITEM 10. Directors and Executive Officers of the Registrant 49
ITEM 11. Executive Compensation 49
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 49
ITEM 13. Certain Relationships and Related Transactions 49
PART IV
ITEM 14. Exhibits, Financial Statement, Financial Statement Schedule, and
Reports on Form 8-K 50
SIGNATURES 52
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PART I
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended, and is subject to the safe harbors created
by those sections. These forward-looking statements are subject to significant
risks and uncertainties, including those identified in the section of this Form
10-K entitled "Risk Factors ", which may cause actual results to differ
materially from those discussed in such forward-looking statements. The
forward-looking statements within this Form 10-K are identified by words such as
"believes", "anticipates", "expects", "intends", "may", "will" and other similar
expressions. However, these words are not the exclusive means of identifying
such statements. In addition, any statements which refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. We undertake no obligation to publicly release the
results of any revisions to these forward-looking statements which may be made
to reflect events or circumstances occurring subsequent to the filing of this
Form 10-K with the SEC. Readers are urged to carefully review and consider the
various disclosures made by us in this report and in our other reports filed
with the SEC, that attempt to advise interested parties of the risks and factors
that may affect our business.
ITEM 1. BUSINESS
Overview
High Speed Access Corp. (hereinafter referred to as the Company, we, us, or
our) is a leading provider of high speed Internet access via cable modem. We
primarily focus on residential and commercial end users in exurban areas,
although we have recently begun to provide Internet access in some urban
markets. We provide comprehensive turnkey service to the cable operators in
exurban markets that seek to outsource the services required to provide Internet
access and other services. We also provide our services on an unbundled or
"partial turnkey" basis for cable operators not requiring the full range of our
services. We typically enter into long term exclusive contracts with cable
operators to provide them with our service. In our full turnkey solution we
generally bill the end user directly and pay our cable partners a portion of the
monthly fees we receive. If the cable partner bills the customer, as is often
the case with our partial turnkey customers, we receive a fixed fee or a share
of the revenue from the cable partner.
We have exclusive agreements to provide our services to 37 cable operators,
covering 153 systems and approximately 1,529,000 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 9 operators
representing an additional 22 systems and approximately 444,000 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
deployed our services in 107 systems covering approximately 1,900,000 homes
passed and have approximately 16,100 high speed residential end users.
Vulcan Ventures, Incorporated, ("Vulcan") an affiliate of Microsoft
co-founder Paul Allen, beneficially owns 37.1% of our common stock. Paul Allen
also owns a controlling interest in Charter Communications, Inc. ("Charter"). As
of December 31, 1999 we had deployed our full turnkey services in cable systems
owned by Charter with approximately 765,000 homes passed.
THE HSA SOLUTION
We believe our full turnkey service is uniquely responsive to the needs of
cable operators and end users in the exurban market. We also provide our
services on a partial turnkey basis for those cable operators not requiring the
full range of our services. To be successful, we must provide an attractive
service to both our cable partners and 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.
Solutions Requiring Minimal Effort by the Cable Operator. With our full
turnkey solution we are responsible for all aspects of our Internet access
system. With our full turnkey solution, 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, in the full turnkey
model we provide:
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o Detailed roll-out plan and network design;
o Purchase and installation of the telecommunications and data network
hardware and software necessary to offer our services;
o System testing and project management;
o Arrangements for the installation of a cable modem at the end user's home or
business;
o Connection to, and maintenance of, our Internet backbone system;
o On-going local and corporate-level sales and marketing efforts;
o 24-hours-a-day, seven-days-a-week help desk assistance for end users;
o 24-hours-a-day, seven-days-a-week monitoring of our network and our cable
partner's cable plant; and
o Direct customer billing.
We also offer the foregoing services on a partial turnkey basis for cable
operators not requiring the full range of our services.
Rapid Implementation of High Speed Access In Either Upgraded or
Non-Upgraded Systems. We believe we provide a comprehensive and expedient means
for a cable operator to implement high speed access services. Implementation
generally begins immediately after we sign a letter of intent for network
services. Based on our extensive experience in the cable systems we have
installed to date and our standardized implementation and engineering process,
we target implementation of our full turnkey solution within 120 days after the
cable operator authorizes us to deploy our services.
Source of Additional Revenues With Minimal Associated Operating or Capital
Cost. In addition to sharing 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. For example, in collaboration
with Charter, we recently began to offer local voice over cable service to
Charter's customers in test markets.
Dedicated On Site and National End User Marketing Provided by Us. Our
management team has experience in marketing high speed Internet access and with
our full turnkey solution 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 sales
staff in our 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
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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 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 cost of
an additional phone line. In addition, cable based Internet access is capable of
significantly faster speeds than competing technologies, and is well 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 Access. 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. 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. In collaboration with Charter, we recently began
offering local voice over cable service to Charter's customers in some test
markets.
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 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
in markets where we have an exclusive agreement with our cable partners. We
recently began offering DSL service on a trial basis under a reseller agreement
with NorthPoint Communications. We plan to initially market NorthPoint DSL as an
additional broadband option to small and mid-sized businesses not passed by the
cable plant.
STRATEGY
Our objective is to be the leading provider of high speed Internet access
and related services in exurban markets. Our strategy has the following key
elements:
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Focus on the Exurban Market. Exurban markets include small cities and
towns, as well as suburban communities with fewer than 100,000 homes passed.
Although the exurban market is our primary focus, from time to time we have
deployed our services in larger markets, and we will continue to pursue such
opportunities in markets where we believe it is economically attractive to do
so.
Rapidly Expand Our Base of Cable Partners. We have a dedicated team of
experienced cable industry professionals who are actively marketing to the 100
largest 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 an Outstanding Value Proposition to the Cable Operators and Create
Long Term Partnerships. We have designed our services to offer substantial value
to cable operators. We believe that our full turnkey service is particularly
well suited to exurban markets. Through our full complement of services,
superior marketing and capital investments we seek 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
broadband access through television, like Web TV(R), 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 collaboration with Charter, we
recently began offering local voice over cable service to Charter's customers in
some test markets.
Increase End User Penetration through Dedicated Marketing and Local
Content. 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.
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 intend to do so only if we can
work
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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.
Increase Customer Satisfaction through Outstanding Customer Care and
Technical Support. We believe that providing outstanding customer service is
crucial to our long term success. 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 7-days-a-week customer service center in our
Network Operations 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 for their
installation. 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.
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 full turnkey high speed access end users currently rent a
cable modem from us. Our high speed access services are available to end users
in two-way cable systems, 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 broadband access
through television, like Web TV(R) 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.
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 markets where we offer our
cable-based services, if a business does not have direct access to the cable
infrastructure, we are capable of using alternative technologies, such as
wireless or DSL connections, to link commercial end users to the cable headend.
We recently began offering DSL service on a trial basis under a reseller
agreement with NorthPoint Communications. We plan to initially market NorthPoint
DSL as our additional broadband option for our cable partners to access small
and mid-sized businesses not passed by the cable plant.
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
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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. See "Risk Factors".
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, which we currently offer on a test
basis, 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. See "Risk Factors".
CABLE PARTNERS
Our predecessor companies began offering cable-based Internet services in
late 1997 in Maysville, Kentucky and St. Mary's County, Maryland. We have
deployed our services in cable systems with approximately 1,900,000 homes
passed. We have exclusive agreements to provide our services to 37 cable
operator, covering 153 systems and approximately 1,529,000 homes passed. Most of
our network services agreements provide for a five-year exclusive term from the
date we commence full operation within the cable system. We also have
non-binding letters of intent with 9 operators representing an additional 22
systems and 444,000 homes passed. Many of these letters of intent have expired,
but negotiations for definitive agreements have continued.
We have approximately 16,100 high speed residential cable modem end users
and approximately 6,650 dial-up end users. Approximately 11,240 or 70% of our
high speed cable modem end users and approximately 2,850 or 43% of our dial-up
end users are from cable systems affiliated with Charter.
END USER SALES AND MARKETING
After entering into a full turnkey 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 geographic areas 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.
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.
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Key elements of our network architecture include:
Network Operations Center. Our network operations center staff monitors our
entire data network 24 hours-a-day 7-days-a-week, 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 primary network
operations center is located in Louisville, Kentucky, in a secure building with
redundant Internet access equipment and backup power supplies. 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 a 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.
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. In the future, we may also operate regional
points of presence in order to increase network reliability, broaden our service
offerings and achieve cost efficiencies. As a result, we may incur termination
fees related to cancellation of existing circuits contracts.
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 General Instruments, 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 began deploying DOCSIS compliant modems and modem
controllers in the third quarter of 1999 and we expect future system deployments
to be DOCSIS compliant. In some cases we may replace existing equipment with
DOCSIS compliant equipment. In the future, residential end users also may be
able to connect to the Internet via an integrated television set-top box.
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
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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, 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 DSL or other
competing technologies could significantly reduce the potential customer base
for our services, which could have a material adverse effect on our business and
financial results.
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
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<PAGE> 11
connection with information that the Internet service provider did not itself
create. The law regarding these issues is controversial, and could be changed in
ways that would expose us to greater liability. Also, the Digital Millennium
Copyright Act, passed in 1998, creates a "safe harbor" from copyright
infringement liability for Internet service providers who meet its requirements,
which we intend to do. Finally, if we expand our operations to other countries
with less extensive legal protections for publishers and speakers, our potential
liability for our activities in those countries could be much greater than in
the United States.
The other main aspect of our business -- installing and maintaining the
equipment needed to permit cable systems to transmit information in a
computer-accessible format -- is not currently regulated by state or federal
governments. Even so, the business of our cable partners is subject to
regulation by the federal government and by local governments (which issue
franchises to cable systems) in accordance with federal law. There are four main
ways that these regulations could change that might severally and negatively
affect our business.
First, our service is generally classified by cable operators as a "cable
service." This means that our cable partners may offer our service over their
cable systems under their present franchise rights. If our service is not a
cable service, then some franchising authorities (usually cities or countries)
might claim that our cable partners need separate authorization to offer it.
This separate authorization may not be obtainable on reasonable terms, or at
all. In the alternative, even if the service is treated as cable service, local
franchising authorities may seek to impose "non-discrimination" or "open access"
obligations on our cable partners as a condition of franchise transfer or
renewal.
Second, if our service is not a "cable service," it could be reclassified
as a "telecommunications service." This could subject our cable partners (and
possibly us) to regulation as "telecommunications carriers" at the state and
federal level. For example, if we or our cable partners were either classified
as telecommunications common carriers, or otherwise subject to common
carrier-like access and non-discrimination requirements in the provision of our
Internet over cable service, we or they could potentially be subject to
government-regulated terms, conditions and prices for Internet connection
services, as well as become obligated to make contributions to the universal
service support fund. We may also provide Internet telephony services over cable
plant, and this service may be regulated in the future as a common carrier
telecommunications service. It is not clear what impact compliance with those
regulations would have on our business, but the impact could be severe.
Moreover, we or our cable partners might then have to get a "telecommunications
franchise" from some localities. This franchise might not be available on
reasonable terms, or at all.
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 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 March 20, 2000, we employed 543 people, of whom approximately 41 are
part time employees. None of our employees is subject to any
collective-bargaining arrangements, and we consider our relations with employees
to be good.
ITEM 2. PROPERTIES
Our principal executive office is located in Denver, Colorado where we lease
approximately 30,000 square feet. We also lease two facilities with
approximately 34,000 square feet for customer care and telemarketing operations.
We plan to consolidate substantially all of these operations into a single
72,000 square feet facility during the second half of 2000 in Denver. We also
lease an approximately 38,000 square feet facility in Louisville, KY for network
operations and customer care facilities. During the second half of 2000, we plan
to move our Louisville, KY operation to an 80,000 square feet leased facility in
Louisville which will provide sufficient space for our planned expansion. We
also lease regional offices for technical and sales personnel in Atlanta, GA,
Philadelphia, PA, Washington, D.C. and Hunt Valley, MD in addition to local
marketing offices in the geographic areas where we offer our services.
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ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders in the fourth
quarter of 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
(a) Market for Registrant's Common Equity. Our Common Stock is
traded on the National Market System of the Nasdaq Stock Market, Inc. (the
"NASDAQ National Market") under the symbol "HSAC." The following table sets
forth the range of the high and low sale prices by quarter as reported on the
Nasdaq National Market since June 4, 1999, the date our Common Stock commenced
trading.
<TABLE>
<CAPTION>
Quarter High Low
------- ---- ---
<S> <C> <C>
1999 Second Quarter (commencing June 4, 1999) 27 1/2 15
1999 Third Quarter 49 3/16 21 1/8
1999 Fourth Quarter 28 3/4 16 1/4
</TABLE>
As of March 20, 2000, the number of stockholders of record was 286. We currently
intend to retain any earnings for use in our business and do not anticipate
paying any cash dividends in the foreseeable future.
On April 29, 1999, we issued and sold 7,750,000 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 the
Series C Convertible Preferred Stock was made in reliance on an exemption from
registration provided by Section 4(2) of the Securities Act of 1933. The shares
of Series C Convertible Preferred Stock converted into shares of our common
stock upon the completion of our initial public offering on June 4, 1999.
From October 1, 1999 through December 5, 1999, we issued an aggregate of
407,145 shares to employees upon the exercise of option to purchase our common
stock with exercise prices ranging from $.65 to $13.00, of which substantially
all were paid in cash. The issuances of these securities were deemed exempt from
registration under the Securities Act of 1933 upon Rule 701 promulgated under
the Securities Act.
(b) On June 4, 1999. we completed our initial public offering of
Common Stock. Concurrent with the initial public offering, we sold Common Stock
to Cisco Systems, Com21 and Microsoft under stock purchase agreements. The
initial proceeds to the Company after deducting underwriting discounts and
commissions of $13,081,250 were $199,768,750. Through December 31, 1999 the
gross proceeds of the offering have been applied as follows:
Direct or Indirect payment to others for:
<TABLE>
<S> <C>
Underwriting discounts and commissions $ 13,081,250
Other offering expenses $ 1,828,854
Working Capital $ 19,209,896
</TABLE>
None of such payments were direct or indirect payments to investors or officers
or 10% stockholders of the Company. The remainder of the proceeds is invested in
short term, interest bearing investment grade securities.
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following selected consolidated financial data is qualified by
reference, and should be read in conjunction with, the Company's Consolidated
Financial Statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
herein. The statement of operations data for the year ended December 31, 1999
and the period from April 3, 1998 (Inception) to December 31, 1998 and the
balance sheet data at December 31, 1999 and 1998, have been derived from the
audited consolidated financial statements appearing elsewhere in this Form 10-K.
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. ("HSAN") and CATV.net, Inc.
("CATV"), with our historical results. We have presented this information to
give you a better picture of what our business might have looked like if we had
acquired both of these companies as of January 1, 1998. Since the pro forma
financial information which follows is based upon the operating results of CATV
and HSAN during the period when they were not under the control of management of
the Company, the information presented may not be indicative of the results
which would have actually been obtained had the acquisitions occurred on January
1, 1998 nor are they indicative of future operating results.
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<TABLE>
<CAPTION>
APRIL 3, 1998 PRO FORMA
YEAR ENDED (INCEPTION) TO COMBINED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues ....................................... $ 3,446 $ 337 $ 450
Costs and expenses:
Operating ..................................... 24,021 2,067 2,401
Engineering ................................... 9,255 2,266 2,372
Sales and marketing ........................... 18,134 3,696 4,078
General and administrative (excluding non-
cash compensation expense from stock
options) .................................... 11,888 2,323 2,616
Non-cash compensation expense from stock
options ..................................... 3,039 947
Amortization of deferred distribution costs ... 3,723
----------------- ----------------- -----------------
Total costs and expenses ................. 70,060 10,352 12,414
----------------- ----------------- -----------------
Loss from operations ............................... (66,614) (10,015) (11,964)
Investment income .................................. 6,181 94 95
Interest expense ................................... (519) (54) (54)
----------------- ----------------- -----------------
Net loss ........................................... (60,952) (9,975) (11,923)
Accretion to redemption value of mandatorily
redeemable convertible preferred stock and
mandatorily redeemable convertible
preferred stock dividends ........................ (230,270) (120,667) (120,667)
----------------- ----------------- -----------------
Net loss available to common stockholders .......... $ (291,222) $ (130,642) $ (132,590)
================= ================= =================
Basic and diluted net loss available to common
stockholders per share ........................... $ (8.69) $ (21.07) $ (21.39)
Weighted average shares used in calculation
of basic and diluted net loss available to
common stockholders per share ................... 33,506,735 6,200,000 6,200,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term
investments ................................. $ 178,730 $ 17,888
Working capital ............................... 160,744 14,162
Total assets .................................. 230,426 27,504
Long term debt-- long term debt, notes
payable to related parties and
capital lease obligations, less current
portion ..................................... 11,609 749
Mandatorily redeemable convertible
preferred stock ............................. 149,250
Total stockholders' equity (deficit) .......... 196,130 (126,427)
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
OTHER DATA:
Systems under contract ........................ 153 41
Homes passed under contract ................... 1,529,000 863,000
Homes deployed (1) ............................ 1,900,000 145,000
Residential cable modem end users ............. 16,099 1,619
</TABLE>
- ----------
(1) Homes deployed represents the number of homes passed in systems where we are
able to offer our cable modem Internet access services.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading provider of high speed Internet access via cable modem to
residential and commercial end users in exurban areas. In our full turnkey
solution, 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. In our full turnkey solution we generally bill the end user directly
and pay our cable partners a portion of the monthly fee we receive; in these
instances we report our 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.
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We also offer to our cable partners a partial turnkey solution. In a
partial turnkey solution, we deliver fewer services and incur lower costs than
in a full turnkey solution but will also earn a smaller percentage of the
subscription revenue or a fixed fee on a per subscriber basis. Our cable
partners typically will bill the end user and remit to us our percentage of the
revenue or the fixed fee. During the year ended December 31, 1999, we initiated
partial turnkey services in ten cable systems. We anticipate that partial
turnkey solutions will become a more significant part of our business mix.
We also provide certain services, primarily engineering services related to
design and installation of data network hardware and software necessary to offer
Internet service via cable modems, on a fee for service basis.
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 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 few years, we expect our cable modem rental income to decline as cable
modems become commercially available at lower costs through retail stores and as
they become standard features of personal computers. However, we will save the
cost of purchasing and installing cable modems for end users. In the future we
expect to earn revenues from the local content we provide and, subject to our
agreement with Vulcan, from additional services such as Internet telephony.
Our expenses consist of the following:
o Operating costs, which consist primarily of salaries for help desk and
network operations center employees; telecommunications expenses,
including charges for Internet backbone and telecommunications
circuitry; allocated cost of facilities; costs of installing cable
modems for our end users; and depreciation and maintenance of
equipment. In one-way cable systems, where the end user transmits data
back to the cable headend via a standard telephone line, 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. We may also incur significant fees
if we cancel our telecommunications contracts in advance of the
expiration of the term of the contract. Many of our operating costs
are relatively fixed in the short term. However, as we add new end
users we hope to be able to spread these costs over a larger revenue
base, and, accordingly, decrease our costs per subscriber and improve
our operating margins.
o Engineering expenses, which consist primarily of salaries and related
costs for network design and installation of the telecommunications
and data network hardware and software; system testing and project
management expenses; the development and support of our information
systems; allocated cost of facilities; and depreciation and
maintenance on the equipment used in our engineering processes. We
expect our engineering expenses to grow significantly as we introduce
our services in new markets and expand our network.
o Sales and marketing expenses, which consist primarily of salaries,
commissions and related personnel expenses and costs associated with
the development of sales and marketing materials, database market
analytics, direct mail and telemarketing. We expect that our sales and
marketing expenses will increase significantly as we pursue our growth
strategy.
o General and administrative expenses, which consist primarily of
salaries for our executive, administrative, finance and human resource
personnel; amortization of goodwill; and fees for professional
services. In order to support our planned expansion, we expect to
hire more legal and accounting personnel.
o Non-cash compensation expense from stock options, which equals the
excess of the fair market value of our stock at the time of grant over
the exercise price of the stock options granted to employees and
directors amortized over the vesting period.
o Amortization of distribution agreement costs, which relates to
warrants issued to cable and strategic partners in connection with
network services and other distribution related agreements,
collectively referred to as distribution agreements. We measure the
cost of warrants issued to cable and strategic partners based on the
fair values of the warrants when earned by those partners. Because the
fair value of the warrant is dependent to a large extent on the price
of our common stock, the cost of warrants earned in the future may
vary significantly. Costs of warrants granted in connection with
distribution
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<PAGE> 16
agreements are amortized over the term of the underlying agreement.
Warrants not directly associated with long-term distribution
agreements are expensed as earned.
Our operating results have varied on a quarterly basis during our short
operating history and may fluctuate significantly in the future due to a variety
of factors, many of which are outside our control. In addition, the results of
any quarter do not indicate the results to be expected for a full fiscal year.
These factors are set forth generally under the caption "Risk Factors" and
particularly in that section under the heading "Our quarterly operating results
are likely to fluctuate significantly and may be below the expectations of
analysts and investors". 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.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED WITH THE
PERIOD APRIL 3, 1998 (INCEPTION) TO DECEMBER 31, 1998 (INCEPTION PERIOD)
On April 3, 1998, we acquired CATV.net, Inc. and High Speed Access Network,
Inc. in a transaction recorded under the purchase method of accounting. We had
no operations prior to these acquisitions. Accordingly, the following discussion
for 1998 reflects our results of operations for the period April 3, 1998
(Inception) to December 31, 1998.
Revenues. Net revenue consists primarily of net monthly subscription fees
for cable modem based and traditional dial-up Internet services, cable modem
rental income, fees for engineering services provided to cable partners and
installation fees and other up front fees from end users. Total net revenue for
the year ended December 31, 1999 was $3.4 million, an increase of $3.1 million
over net revenues of $337,000 for the Inception Period. For the year ended
December 31, 1999 and the Inception Period, cable modem based subscription fees
contributed approximately 42% and 45% of the net revenue, traditional dial up
service fees contributed 29% and 35%, cable modem rental fees contributed 19%
and 10%, engineering services provided to cable partners contributed 7% and 0%,
and installation and other up front fees from end users contributed 2% and 10%,
respectively.
Costs and Expenses
Operating. Operating costs for the year ended December 31, 1999 were $24.0
million, an increase of $21.9 million over operating costs of $2.1 million for
the Inception Period. The increase in operating costs resulted primarily from an
increase in personnel and personnel related costs for additional staff in our
network operations centers, help desk and field technical support departments,
an increase in telecommunications expense from the rollout of our service to new
markets and larger subscriber base and depreciation of capital equipment from
the expansion of our network and the installation of cable modems for a growing
subscriber base.
Engineering. Engineering expenses for the year ended December 31, 1999 were
$9.3 million, an increase of $7.0 million over engineering expenses of $2.3
million for the Inception Period. The increase in engineering expenses resulted
from personnel and personnel related costs for additional technical staff to
support the installation of cable headend hardware and software in our cable
partners' systems, continued network design, system testing, development and
support of information systems, and project management, and for the evaluation
of new equipment and possible new product offerings.
Sales and Marketing. Sales and marketing expenses for the year ended
December 31, 1999 were $18.1 million, an increase of $14.4 million over sales
and marketing expenses of $3.7 million for the Inception Period. The increase in
sales and marketing expenses resulted primarily from an increase in personnel
and personnel related costs to expand our residential and commercial end user
sales force, new cable partner sales force and telemarketing sales force, as
well as an increase in direct marketing and advertising expenses, as we expanded
into more geographic markets.
General and Administrative. General and administrative expenses, excluding
non-cash compensation expense from stock options and amortization of
distribution agreement costs, were $11.9 million for the year ended December 31,
1999, an increase of $9.6 million over general and administrative expenses of
$2.3 million for the Inception Period. The increase in general and
administrative expenses resulted from additional personnel and personnel related
costs as we hired personnel to implement procedures and controls to support our
planned expansion and to administer finance, legal and human resource functions.
General and administrative expenses for the year ended December 31, 1999 and the
Inception Period also included amortization of intangible assets of $1.0 million
and $656,000, respectively. Amortization of intangible assets relates primarily
to the acquisitions of CATV.net, Inc. and High Speed Access Network, Inc.
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<PAGE> 17
Non-cash compensation expense from stock options for the year ended
December 31, 1999 was $3.0 million which represents the excess of the fair
market value of our common stock over the exercise price of the stock options
granted to employees and directors amortized over the vesting period. This
expense is principally related to a $1.5 million charge for 189,875 options
issued to our directors which immediately vested, $1.1 million for options
issued to employees which vested upon completion of our initial public offering
and $323,000 related to the accelerated vesting of options for terminated
employees. There was no expense of this nature during the Inception Period.
In 1999, we recorded severance and other benefit related costs of $1.2
million associated with the termination of some of our employees in the fourth
quarter of 1999 including the aforementioned $323,000 of non-cash, compensation
expense from stock options. At December 31, 1999, approximately $776,000 related
to the cash portion of the costs remained unpaid. The balance remaining is
expected to be paid by the end of the first quarter of 2000.
Amortization of Distribution Agreement Costs. Amortization of distribution
agreement costs for the year ended December 31, 1999 was $3.7 million, of which
$3.2 million related to the issuance of 387,500 warrants under the terms of a
non-binding letter of intent and subsequent letter agreement with Microsoft
Corp. ("Microsoft"). The remaining amount reflects the amortization of the value
of 77,738, 76,095, and 44,911 warrants earned by Charter Communications
("Charter"), Classic Cable Inc. ("Classic") and ETAN Industries Inc. d/b/a Cable
Management Associates ("CMA"), respectively, under distribution agreements for
commitments of homes passed to us. There was no expense of this nature during
the Inception Period. We may incur additional material non-cash charges related
to further issuances of common stock purchase warrants to our cable and
strategic partners in the future. We will recognize an addition to equity for
the fair value of any warrants issued, and recognize the related expense over
the term of the service agreement with the cable or strategic partner to which
the warrants relate. The amount of any such charges is not determinable until
the related warrants are earned. The use of warrants in these and similar
transactions may increase the volatility of our earnings in the future.
Investment Income. Investment income was $6.2 million for the year ended
December 31, 1999, compared to investment income of $94,000 for the Inception
Period. Investment income represents interest earned on cash, cash equivalents
and short term investments. The primary reason for the increase in investment
income relates to interest on investments purchased using the net proceeds of
our initial public offering.
Interest Expense. Interest expense was $519,000 for the year ended December
31, 1999, an increase of $465,000 over interest expense of $54,000 for the
Inception Period. Interest expense represents interest payable on long-term debt
and capital lease obligations.
Income Taxes. At December 31, 1999 and 1998, we had accumulated net
operating loss carryforwards for federal and state tax purposes of approximately
$63.6 million and $9.0 million, respectively, which will expire in 2018 and
2019. At December 31, 1999 and 1998, we had net deferred tax assets of $26.5
million and $3.8 million, respectively, relating principally to our accumulated
net operating losses. Our ability to realize the value of our deferred tax
assets depends on our future earnings, if any, the timing and amount of which
are uncertain. We have recorded a valuation allowance for the entire net
deferred tax asset as a result of those uncertainties. Accordingly, we did not
record any income tax benefit for net losses incurred for the year ended
December 31, 1999 or the Inception Period.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had cash and cash equivalents of $53.3 million,
and short term investments of $125.4 million, compared with $17.9 million of
cash and cash equivalents at December 31, 1998. We had significant negative cash
flows from operating activities for the year ended December 31, 1999. Cash used
in operating activities was $40.0 million for the year ended December 31, 1999,
caused primarily by a net loss of $61.0 million and an increase in current and
non-current assets of $4.9 million, offset by non-cash expenses of $13.9 million
and increases in accounts payable, accrued expenses and other current
liabilities of $12.2 million.
Cash used in investing activities was $152.7 million for the year ended
December 31, 1999, the result of purchases of short term investments of $551.8
million, offset by sales and maturities of short term investments of $426.5
million. Also, capital expenditures totaled $26.9 million for the year ended
December 31, 1999. The principal capital expenditures incurred during this
period were for the purchase of headend data network hardware and software,
billing and customer care systems, cable modems and central network hardware and
software, reflecting our expansion into new markets.
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Cash provided by financing activities for the year ended December 31, 1999
was $228.1 million comprised primarily of $179.4 million in net proceeds from
our initial public offering, $18.5 million in proceeds from the concurrent
offering of common stock to Cisco, Com21 and Microsoft, $25.0 million in net
proceeds from the issuance of mandatorily redeemable convertible preferred
stock, and $5.5 million in proceeds from long-term debt.
We expect to experience substantial negative cash flow from operating
activities and negative cash flow from investing activities for at least the
next several years due to continued deployment of our services into new markets
and the enhancement of our network and operations. Our future cash requirements
will depend on a number of factors including:
o The pace of the rollout of our service to our cable partners,
including the impact of substantial capital expenditures and related
operating expenses;
o The rate at which we enter into contracts with cable operators for
additional systems;
o The rate at which end users subscribe to our services;
o Changes in revenue splits with our cable partners;
o Price competition in the Internet and cable industries;
o The mix of services offered by us including whether we provide our
services on a full or partial turnkey basis;
o Capital expenditures and costs related to infrastructure expansion;
o The rate at which our cable partners convert their systems from
one-way to two-way systems;
o End user turnover rates;
o Our ability to protect our systems from telecommunications failures,
power loss and software-related system failures;
o Changes in our operating expenses including, in particular, personnel
expenses;
o The introduction of new products or services by us or our competitors;
o Our ability to enter into strategic alliances with content providers;
and
o Economic conditions specific to the Internet and cable industries, as
well as general economic and market conditions.
Investment Portfolio. Cash equivalents are highly liquid investments with
insignificant interest rate risk and original maturities of 90 days or less and
are stated at amounts that approximate fair value based on quoted market prices.
Cash equivalents consist principally of investments in interest-bearing money
market accounts with financial institutions and highly liquid investment-grade
debt securities of corporations and the U.S. government.
Short term investments are classified as available-for-sale and, as a
result are stated at fair value. Short term investments are principally
comprised of highly liquid debt securities of corporations and the U.S.
government. We record changes in the fair market value of securities held for
short term investment as an equal adjustment to the carrying value and equity.
Loan Facilities. In July 1999, the Company entered into a $5.0 million loan
facility of which $2.9 million has been drawn down at December 31, 1999. The
terms of the loan facility provide for interest at the rate of the 3-year U.S.
Treasury Note yield plus 9.76% on each draw, 36 equal monthly payments and a
balloon payment of 5.0% of the original loan balance in the 37th month and
collateral of the headend, data center and other field equipment of the Company.
In April 1999, the Company entered into a $3.0 million loan facility of
which $2.6 million has been drawn down at December 31, 1999. The terms of the
master loan agreement provide for interest at the rate of the 3-year U.S.
Treasury Note yield plus 9.76% on each draw, 36 equal monthly payments and a
balloon payment of 12.5% of the original loan balance in the 37th month and
collateral of the headend, data center and other field equipment of the Company.
The interest rate on these draws ranged from 14.63% to 15.52%. These terms are
effective on the date of, and applied separately to, each draw on the total loan
facility.
We expect to incur approximately $45 million of capital expenditures in
2000 principally related to the installation of headend data network hardware
and software, cable modems, central network hardware and software for e-mail,
network monitoring, provisioning,
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web hosting, billing and customer care systems and furniture and telephone and
computer equipment for a new leased customer care and corporate headquarters
facilities. 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 where we
provide full turnkey services, as well as the pace of the rollout 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 and public sales of equity securities, capital equipment
leases and debt.
The development of our business may require significant additional capital
in the future to fund our operations, to finance the substantial investments in
equipment and corporate infrastructure needed for our planned expansion, to
enhance and expand the range of services we offer and to respond to competitive
pressures and perceived opportunities, such as investment, acquisition and
international expansion activities. To date, our cash flow from operations has
been insufficient to cover our expenses and capital needs. We believe our
current cash, cash equivalents and short term investments, together with the
proceeds from unused loan facilities totaling $2.5 million entered into during
1999, and $5.6 million of available lease financing through various facilities,
as well as additional loan and lease financing facilities will be sufficient to
meet our working capital requirements, including operating losses, and capital
expenditure requirements into 2001, assuming we achieve our business plan. At
such time, or sooner, if we do not achieve our business plan we will need to
seek additional debt and/or equity financing. There can be no assurance that
additional financing will be available on terms favorable to us, or at all.
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
additional 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. The sale of additional equity or convertible
debt securities may result in additional dilution. If adequate funds are not
available on acceptable terms, we may be forced to curtail 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 we may need to delay the deployment of our services.
YEAR 2000 COMPLIANCE
Many computer systems had been expected to experience problems
distinguishing between dates in different centuries because such systems were
developed using two digits rather than four digits to determine the applicable
year. Consequently, there was concern that these systems would be unable to
distinguish between dates in different centuries and could have experienced
errors resulting in system failures or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities. To
date, we have not experienced any problems complying with the Year 2000 issue
and have not been informed of any failures of our products from customers.
Accordingly, although we do not anticipate any future incidents related to the
passing of the Year 2000, we can make no guarantees that such incidents will not
occur in the future.
We expended $500,000 through December 31, 1999 on our Year 2000 compliance
efforts. None of this amount was capitalized.
RECENTLY ISSUES ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivatives and Hedging
Activities (SFAS 133), which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. SFAS 133, as amended by SFAS 137, is effective for our year ending
December 31, 2001. As we do not currently engage in or plan to engage in
derivatives, or hedging transactions there will be no impact on our results of
operations, financial position or cash flows upon the adoption of SFAS 133.
On December 3, 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. SAB 101 summarizes some of the staff's interpretations of
the application of generally accepted accounting principles to revenue
recognition. All registrants are expected to apply the accounting and disclosure
requirements that are described in SAB 101 no later than the second quarter of
the fiscal year beginning after December 15, 1999. Management of the Company is
currently analyzing the impact of SAB 101 but anticipates that the adoption of
SAB 101 will not have a material effect on the Company's results of operations
or financial position.
ITEM 7A.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to interest rate sensitivity, which
is affected by changes in the general level of U.S. interest rates. Our cash
equivalents are invested with high-quality issuers and limit the amount of
credit exposure to any one issuer. Due to the short-term nature of our cash
equivalents, we believe that we are not subject to any material market risk
exposure.
We do not have any foreign currency hedging or other derivative financial
instruments.
RISK FACTORS
You should carefully consider the following factors and other information
in this Form 10-K and other filings we make with the Securities and Exchange
Commission before trading in our common stock. 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.
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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. Most of our cable modem deployments occurred within the last
twelve months. We do not consider any of the market in which we operate to be
mature. Thus, we have recognized limited revenues since our inception. In
addition, our senior management team and other employees have worked together at
our company for only a short period of time. Consequently, we have a limited
operating history upon which our business can be evaluated.
WE HAVE NOT BEEN PROFITABLE AND EXPECT FUTURE LOSSES.
Since our founding, we have not been profitable. We have incurred
substantial costs to create and introduce our broadband Internet access
services, to operate these services, and to grow our business. We incurred net
losses of approximately $70.9 million from April 3, 1998 (Inception) through
December 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:
o Substantial direct and indirect selling, marketing and promotional
costs;
o System operational expenses, including the lease of our Internet
backbone, which has a traffic capacity in excess of our current needs;
o Costs incurred in connection with higher staffing levels to meet our
growth;
o The acquisition and installation of the equipment, software and
telecommunications circuits necessary to enable our cable partners to
offer our services; and
o Costs in connection with acquisitions, divestitures, business
alliances or changing technologies.
If any of these costs or expenses is not accompanied by an increase in
revenues, then our business and financial results could be materially and
adversely affected.
WE CANNOT PREDICT OUR SUCCESS BECAUSE OUR BUSINESS MODEL IS UNPROVEN, HAS
CHANGED IN THE PAST AND MAY CONTINUE TO CHANGE.
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, ease of
installation and customer acquisition and quality of service--remain unresolved
and are likely to affect the development of the market for our services. We do
not believe any the cable-based services currently offered by cable companies
have been profitable. Moreover, many industry analysts believe that Internet
access providers will become increasingly reliant upon advertising, barter and
subscription-based 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 in our comprehensive turnkey service will
purchase or rent a cable modem from us and pay both monthly service and
installation fees. As of December 31, 1999 we deployed our services in only 107
cable systems and we have approximately 16,100 residential cable modem end
users. We began offering our services on a partial turnkey basis in the third
quarter of 1999. As of the December 31, 1999, we had initiated partial turnkey
services in 10 systems. In our partial turnkey solution, we deliver fewer
services and incur lower costs than in a full turnkey solution but will also
earn a smaller percentage of the subscription revenue or a fixed fee on a per
subscriber basis. We anticipate that partial turnkey services will become a more
significant part of our business mix. If partial turnkey services become a
larger portion of our business mix, this will affect our future revenues and
profitability per subscriber.
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. Nor
can we
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predict whether we can adequately supply services to satisfy that demand if it
develops. We may also not be able to acquire and install customers quickly
enough to meet demand, and the bandwith we provide may prove to be inadequate.
Additionally, we cannot predict whether partial turnkey services will become an
increasingly important part of our business. We have begun to offer DSL on a
limited basis, as a reseller for NorthPoint Communications, and IP Telephony, in
collaboration with Charter as additional services for our cable partners to
offer their customers. We do not know whether these services will become
significant to our business or whether we will continue to offer them at all.
Moreover, we may continue to introduce new services or to make changes to our
product offerings to meet our customer demands or to respond to changes in our
evolving industry. Consequently, our business model is likely to continue to
change.
OUR ABILITY TO ATTRACT AND RETAIN END USERS DEPENDS ON MANY FACTORS WE CANNOT
CONTROL.
Our ability to increase the number of our end users, and our ability to
retain end users, will depend on a number of factors, many of which are beyond
our control. These factors include:
o Our ability to enter into and retain agreements with cable operators;
o The speed at which we are able to deploy our services, particularly if
we cannot obtain on a timely basis the telecommunications circuitry
necessary to connect our cable headend equipment to our Internet
backbone;
o Our success in marketing our service to new and existing end users;
o Competition, including new entrants advertising free or lower priced
Internet access and/or alternative access technologies;
o Whether our cable partners maintain their cable systems or upgrade
their systems from one-way to two-way service;
o The quality of the customer and technical support we provide; and
o The quality of the content we offer.
In addition, our service is currently priced at a premium to many other
online services and many end users may not be willing to pay a premium for our
service. Because of these factors, our actual revenues or the rate at which we
will add new end users may differ from past increases, the forecasts of industry
analysts, or a level that meets the expectations of investors.
OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY BE
BELOW THE EXPECTATIONS OF ANALYSTS AND INVESTORS.
Our revenues and expenses, and in particular our quarterly revenues,
expenses and operating results have varied in the past and may fluctuate
significantly in the future due to a variety of factors, many of which are
outside of our control. These factors include:
o The pace of the rollout of our service to our cable partners,
including the impact of substantial capital expenditures and related
operating expenses;
o Whether and the rate at which we enter into contracts with cable
operators for additional systems;
o The rate at which new end users subscribe to our services, the rate at
which these customers are installed and provisioned for service, and
the rate at which we retain these customers net of customers who
disconnect ;
o Changes in revenue splits with our cable partners;
o Price competition in the Internet and cable industries;
o The extent to which we provide partial, rather than full turnkey
access;
o Capital expenditures and costs related to infrastructure expansion;
o The rate at which our cable partners convert their systems from
one-way to two-way systems;
o Our ability to protect our systems from telecommunications failures,
power loss and software-related system failures;
o Changes in our operating expenses including, in particular, personnel
expenses;
o The introduction of new products or services by us or our competitors;
o Our ability to enter into strategic alliances with content providers;
and
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o Economic conditions specific to the Internet and cable industries, as
well as general economic and market conditions.
In addition, our operating expenses are based on our expectations of the
future demand for our services and are relatively fixed in the short term. We
may be unable to adjust spending quickly enough to offset any unexpected demand
surge or shortfall in demand. A shortfall in revenues in relation to our
expenses could have a material and adverse effect on our business and financial
results.
The quarter-to-quarter comparisons of our results of operations should not
be relied upon as an indication of future performance. It is possible that in
some future periods our results of operations may be below the expectations of
public market analysts and investors. In that event, the price of our common
stock is likely to fall.
WE MAY NOT BE ABLE TO ESTABLISH OR MAINTAIN ACCEPTABLE RELATIONSHIPS WITH CABLE
OPERATORS.
Our success depends, in part, on our ability to gain access to cable
customers. We gain that access through our agreements with cable operators.
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. If we fail to form partnerships rapidly with a large number of cable
operators, we can be effectively excluded from providing our services in the
systems owned by those operators. Not only can other cable-based broadband
service providers compete against us for an exclusive contract, the cable
operator may decide to offer cable-based Internet serviced directly without
assistance from us or our competitors. Delays in forming relationships and
deploying our cable-based services also create windows of time for alternative
broadband access providers to enter the market and acquire customers.
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. Charter is an affiliate of Vulcan,
which owns 37.1% of our outstanding common stock as of December 31, 1999.
Charter has provided us exclusive access to at least 750,000 homes passed.
Charter has equity incentives to provide us additional homes passed, although it
is not obligated to do so. If Charter were to commit more homes passed to our
services, Charter could ask us to deploy many or possibly even all of those
homes passed on a partial turnkey basis. In a partial turnkey solution, we
deliver fewer services and incur lower costs than in full turnkey solutions, but
will also earn a smaller percentage of the subscription revenue.
Under our network service agreement, Charter can also terminate our
exclusivity rights, on a system-by-system basis, if we fail to meet performance
benchmarks or otherwise breach our agreement, including our commitment to
provide content designated by Vulcan. Moreover, Charter can terminate our
agreement, for any reason, as long as it purchases the associated cable headend
equipment and modems at book value and pays us a termination fee based on the
net present value of the revenues we otherwise would earn for the remaining term
of the agreement from those end users subscribing to our services as of the date
of termination. There can be no assurances we will meet the benchmarks related
to our customer penetration rates or that Charter will not decide to terminate
our agreement for any other reason. If Charter were to terminate this agreement,
in whole or for any material system, our business and financial results would be
materially and adversely affected.
OUR AGREEMENTS WITH VULCAN VENTURES COULD CONSTRAIN OUR ABILITY TO GENERATE
REVENUES FROM PROVIDING CONTENT AND FUTURE SERVICES OUR END USERS MAY DEMAND.
Under our programming content agreement with Vulcan, Vulcan has the right
to require us to carry, on an exclusive basis in all cable systems we serve,
content it designates. Vulcan content may include start-up and related web
pages, electronic programming guides, other multimedia information and telephony
services. We will not share in any revenues Vulcan may earn through the content
or telephony services it provides. We must provide all equipment necessary for
the delivery of Vulcan content, although Vulcan will reimburse us for any costs
we incur in excess of $3,000 per cable headend. Vulcan cannot charge us for any
Vulcan content through November 25, 2008; after that date we will be obligated
to pay Vulcan for this content at the lowest fee charged to any Internet service
provider who subscribes to Vulcan content.
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Vulcan has the right to prohibit us from providing content or telephony
services that compete with Vulcan content in Vulcan's discretion and can require
us to remove competing content. Many industry analysts believe that Internet
access will become increasingly reliant upon revenues from content due to
competitive pressures to provide low cost or even free Internet access. If
Vulcan were to require us to remove our content or substitute its telephony
services for any we might provide, we could lose a source of additional revenues
and might not recover all related costs of providing our content or telephony
services. Vulcan's ability to prohibit us from providing content and telephony
services means that Vulcan's interests are not necessarily aligned with those of
our other stockholders.
OUR AGREEMENT WITH ROAD RUNNER MAY NOT BENEFIT US.
Under our agreement with ServiceCo LLC, the entity that provides Road
Runner's cable Internet access and content aggregation services, we may 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 Road Runner will agree to designate any cable operator systems to receive
our services. Two of Road Runner's strategic partners, Time Warner and Media One
Group, are in the process of being acquired and we cannot predict the effect
these acquisitions will have on our contract or on Road Runner. We may not be
able to meet any system deployment schedule proposed by Road Runner. Even if
asked to provide services to a Road Runner-contracted system, we may be asked to
deploy far fewer full turnkey homes than we originally anticipated. In a partial
turnkey solution, we deliver fewer services and incur lower costs than in a full
turnkey solution, but will also earn a smaller percentage of the subscription
revenue. Since the agreement provides that Road Runner will earn one warrant per
home passed in cable systems designated to receive service regardless of whether
we deploy a partial or full turnkey solution, our stockholders could suffer
dilution in exchange for potentially less profitable homes. Consequently, our
agreement with Road Runner may be of no material benefit to us.
INVESTORS MAY SUFFER SUBSTANTIAL DILUTION FROM OTHER TRANSACTIONS.
As an inducement to cause Charter to commit additional systems to us, we
have granted Charter warrants to purchase up to 7,750,000 shares of our common
stock at an exercise price of $3.23 per share. These warrants become exercisable
at the rate of 1.55 shares for each home passed committed to us by Charter in
excess of 750,000. To the extent that Charter becomes eligible to exercise all
or a significant portion of these warrants, our stockholders will experience
substantial dilution. In addition, we have granted Microsoft a warrant to
purchase 387,500 shares of our common stock at an exercise price of $16.25, with
additional warrants issuable for homes passed above 2,500,000 homes passed
committed to us by Comcast. Our agreement with ServiceCo LLC provides for
granting of warrants to purchase one share of our common stock at a price of $5
per share up to a maximum of 5 million shares. We have issued and may in the
future 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 then-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. If Darwin deploys this technology successfully in future
partnerships with wireline telephone providers in markets where we provide our
high speed Internet access, Darwin could become one of our competitors. Neither
Darwin nor our principal stockholders, including Vulcan, will be restricted from
providing competing high speed digital subscriber line Internet access.
ONE-WAY CABLE SYSTEMS INCREASE OUR OPERATING COSTS AND MAY NOT PROVIDE THE
QUALITY NECESSARY TO ATTRACT CUSTOMERS.
Although our service can operate in one-way cable systems, where data can
be transmitted at high speeds from the cable headend to the end user, the end
user in a one-way system can only transmit data back to the cable headend via a
standard phone line. Because we must support the telephone return component of
the system, we incur higher operating costs in one-way systems. Presently only
one-third of the systems where we are or will soon operate our services are
two-way systems. Over time, however, we expect most, if not all, of our cable
partners to upgrade and or rebuild their plants to provide increased bandwidth
and two-way capabilities. We believe faster uploads and the elimination of phone
line return costs make our service more valuable and may lead to higher customer
penetration rates, which in turn benefits the cable operator through higher
revenue. However, upgrading a cable system can be expensive and time-consuming
for the cable operator. Delays in upgrading one-way cable plants also makes our
services vulnerable competition from alternative broadband technologies, and may
make our cable partner vulnerable to overbuilds by competitors.
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Moreover, we do not require our cable partners to make these upgrades and they
have no legal obligation to do so. Consequently, if our cable partners do not
upgrade to two-way capability at the rate we anticipate, our financial results
may be negatively affected.
WE MAY HAVE DIFFICULTY MANAGING OUR GROWTH PLANS.
To manage our anticipated growth, we must continue to implement and improve
our operational, financial and management information systems; hire, train and
retain additional qualified personnel; continue to expand and upgrade core
technologies; and effectively manage our relationships with our end users,
suppliers and other third parties. Our expansion could place a significant
strain on our services and support operations, sales and administrative
personnel, and other resources. In fact, our predecessor companies had
inadequate accounting controls and procedures in place. While we believe that we
generally have adequate controls and procedures in place for our current
operations, our billing software is not adequate to meet our growth plans. We
are in the process of replacing our billing software with an integrated billing
and customer care software system that we believe is capable of meeting our
planned future needs. We could also experience difficulties meeting demand for
our products and services. Additionally, if we are unable to provide training
and support for our products, the implementation process will be longer and
customer satisfaction may be lower. Our growth plan may include acquisitions. If
we acquire a company, we could have difficulty assimilating its operations, or
assimilating and retaining its key personnel. In addition if the demand for our
service exceeds our ability to provide our services on a timely basis, we may
lose customers. There can be no assurance that our systems, procedures or
controls will be adequate to support our operations or that our management will
be capable of exploiting fully the market for our products and services. The
failure to manage our growth effectively could have a material adverse effect on
our business and financial results.
THE MARKET FOR INTERNET SERVICES IS HIGHLY COMPETITIVE.
We face competition from many competitors with significantly greater
financial, sales and marketing resources, larger customer bases, longer
operating histories, greater name recognition and more 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 both cable modem service providers 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. Our agreement with Charter and other operators provides us
exclusive rights to provide high speed Internet access to the customer's
personal computer. However, Charter and other online service providers may
deploy TV-based Internet access services through set-top boxes or other devices.
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, our 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.
OUR ABILITY TO INCREASE THE CAPACITY AND MAINTAIN THE SPEED OF OUR NETWORK IS
UNPROVEN.
We may not be able to increase the transmission capacity of our network to
meet expected end user levels while maintaining superior performance. While peak
downstream data transmission speeds across the cable infrastructure approach 10
Mbps in each 6 megahertz (Mhz) channel, actual downstream data transmission
speeds are almost always significantly slower depending on a variety of factors.
These factors include our intentional throttling of data traffic flowing through
the local network out in order to optimize the use our network capacity and to
sell tiered price-service packages, bandwidth capacity constraints between the
cable headend and the Internet backbone, the type and location of content,
Internet traffic, the number of active end users on a given cable network node,
the number of 6 Mhz channels allocated to us by our cable partner, the
capabilities of the cable modems used and the service quality of
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<PAGE> 25
the cable operators' fiber-coax facilities. The actual data delivery speed that
an end user realizes also will depend on the end user's hardware, operating
system and software configurations. There can be no assurance that we will be
able to achieve or maintain a speed of data transmission sufficiently high to
enable us to attract and retain our planned number of end users, especially as
the number of the end users grows. Because end users will share the available
capacity on a cable network node, we may underestimate the capacity we need to
provide in order to maintain peak transmission speeds. A perceived or actual
failure to achieve or maintain sufficiently high speed data transmission could
significantly reduce end user demand for our services or increase costs
associated with customer complaints and have a material adverse effect on our
business and financial results.
OUR NETWORK MAY BE VULNERABLE TO SECURITY RISKS.
Despite our implementation of industry-standard security measures the
networks we operate 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 WILL NEED ADDITIONAL CAPITAL IN THE FUTURE AND IT MAY NOT BE AVAILABLE ON
ACCEPTABLE TERMS.
The development of our business may require significant additional capital
in the future to fund our operations, to finance the substantial investments in
equipment and corporate infrastructure needed for our planned expansion, to
enhance and expand the range of services we offer and to respond to competitive
pressures and perceived opportunities, such as investment, acquisition and
international expansion activities. To date, our cash flow from operations has
been insufficient to cover our expenses and capital needs. We believe our
current cash, cash equivalents and short term investments, together with the
proceeds from unused loan facilities totaling $2.5 million entered into during
1999, and $5.6 million of available lease financing through various facilities,
as well as additional loan and lease financing facilities will be sufficient to
meet our working capital requirements, including operating losses, and capital
expenditure requirements into 2001, assuming we achieve our business plan. At
such time, or sooner, if we do not achieve our business plan we will need to
seek additional debt and/or equity financing. There can be no assurance that
additional financing will be available on terms favorable to us, or at all.
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
additional 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. The sale of additional equity or convertible
debt securities may result in additional dilution. If adequate funds are not
available on acceptable terms, we may be forced to curtail 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 we may need to delay the deployment of our services.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
WE FACE RISKS FROM LATENT YEAR 2000 PROBLEMS.
We engaged a third-party consultant to complete a Year 2000 assessment
study. The third-party consultant identified only minor issues that have been
remediated by routine upgrades, patches and replacements. We did not experience
any problems associated with Year 2000 compliance, but it is possible that any
such problems with our services might not be discovered until well into the year
2000. 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:
25
<PAGE> 26
o Foreign currency fluctuations, which could result in reduced revenues
or increased operating expenses;
o Inability to locate qualified local partners and suppliers;
o The burdens of complying with a variety of foreign laws and trade
standards;
o Tariffs and trade barriers;
o Difficulty in accounts receivable collection;
o Potentially longer payment cycles;
o Foreign taxes;
o Unexpected changes in regulatory requirements including the regulation
of Internet access; and
o Uncertainty regarding liability for information retrieved and
replicated in foreign countries.
If we expand internationally, we will also be subject to general
geopolitical risks, such as political and economic instability and changes in
diplomatic and trade relationships. There can be no assurance that the risks
associated with our proposed international operations will not materially and
adversely affect our business and financial results.
RISKS RELATED TO THE MARKET FOR HIGH SPEED INTERNET ACCESS
OUR CABLE PARTNERS COULD SELL THEIR SYSTEMS OR BE ACQUIRED.
In recent years, the cable television industry has undergone substantial
consolidation. If one of our cable partners is acquired by a cable operator that
already has a relationship with one of our competitors or that does not enter
into a contract with us, we could lose the ability to offer our cable modem
access services in the systems formerly served by our cable partner, which could
have a material and adverse effect on our business and financial results. Many
of the cable operators with whom we have contracts operate multiple systems,
thus increasing the risk to us if they are acquired. Moreover, it is common in
the cable industry for operators to swap systems, which could cause us to lose
our contract for a swapped system. Even though many of our contracts obligate
our cable partners to pay us a termination fee if they sell their system to
another operator who does not assume our contract, the potential termination fee
may not be adequate to ensure that the successor operator assumes our contract,
or to compensate us fully for the loss of future business in that system.
OUR CABLE PARTNERS COULD LOSE THEIR FRANCHISES.
Cable television companies operate under franchises granted by local or
state authorities that are subject to renewal and renegotiation from time to
time. A franchise is generally granted for a fixed term ranging from five to 15
years, although in many cases the franchise is terminable if the franchisee
fails to comply with the material provisions of its franchise agreement. No
assurance can be given that the cable operators that have contracts with us will
be able to retain or renew their franchises. The non-renewal or termination of
any of these franchises would result in the termination of our contract with the
applicable cable operator. Moreover, cable television operators are sometimes
subject to overbuilding by competing operators who offer competing video and
Internet access services. Moreover, many direct broadcast satellite (DBS)
operators can compete with cable operators and provide Internet access services
to their subscribers. Any such dilution of our cable operator market base can
adversely affect our potential market base.
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 reducing our costs, 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.
26
<PAGE> 27
We currently anticipate that we will use a significant portion of our
working capital to acquire headend, cable modem and other related capital
equipment. The technology underlying that equipment is continuing to evolve. It
is possible that the equipment we acquire could become obsolete prior to the
time we would otherwise intend to replace it, which could have a material
adverse effect on our business and financial results.
WE DEPEND ON A DATA TRANSMISSION INFRASTRUCTURE LARGELY MAINTAINED BY THIRD
PARTIES OR SUBJECT TO DISRUPTION BY EVENTS OUTSIDE OUR CONTROL.
Our success will depend upon the capacity, reliability and security of the
infrastructure used to carry data between our end users and the Internet. A
significant portion of that infrastructure is owned by third parties.
Accordingly, we have no control over its quality and maintenance. For example,
we rely on our cable partners to maintain their cable infrastructures. We also
rely on other third parties to provide a connection from the cable
infrastructure to the Internet. Currently, we have transit agreements with
UUNet, a division of MCI WorldCom, and others to support the exchange of traffic
between our data servers, the cable infrastructure and the Internet. Our
operations also depend on our ability to avoid damages from fires, earthquakes,
floods, power losses, telecommunications failures, network software flaws,
transmission cable cuts, Year 2000 problems and similar events. The occurrence
of any of these events could interrupt our services. The failure of the Internet
backbone, our servers, or any other link in the delivery chain, whether from
operational disruption, natural disaster or otherwise, resulting in an
interruption in our operations could have a material adverse effect on our
business and financial results.
WE MAY BE HELD LIABLE FOR DEFAMATORY OR INDECENT CONTENT, AS WELL AS INFORMATION
RETRIEVED OR REPLICATED.
In part, our business involves supplying information and entertainment to
customers over the cable systems of our cable system partners. Accordingly we
face the same types of risks that apply to all businesses that publish or
distribute information, such as potential liability for defamation, libel,
invasion 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 OR "OPEN ACCESS"
COMPETITION.
We may become subject to burdensome government regulation or "open access"
competition. 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 local cable franchising
authorities, in most cases 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. 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. A consortium of dial-up Internet
service providers and large telephone companies are encouraging local
franchising authorities to ban the type of exclusive ISP-cable operator
arrangements that we have with our cable partners that make us the exclusive
supplier of high speed data on the cable systems where our service is offered.
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. Moreover, both AOL-Time Warner and AT&T-Mindspring have announced plans
to open their networks to competing Internet service providers in the coming
years. We cannot predict the degree to which such voluntary or involuntary
"open access", will affect our business.
27
<PAGE> 28
If our service is not considered a cable service, it might be treated as a
"telecommunications service." This classification could subject our cable
partners, and possibly us, to federal and state regulations as
"telecommunications carriers." This could negatively affect our business in
various ways. For example, if we or our cable partners were 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 burdensome
governmental regulations, including those that regulate the terms, conditions
and prices for Internet connection services and interconnections with the public
switched telephone network, and require that we make contributions to the
universal service support fund. The Internet telephony services over cable
plant (commonly known as "Voice over IP") services that we expect to offer and
deploy may also be regulated as a common carrier telecommunications service. We
or our cable partners might then have to get a "telecommunications franchise" or
a license to operate as a "competitive local exchange carrier" from some states
or localities, which might not be available on reasonable terms, or at all. In
addition, 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. The FCC
issued a line-sharing ruling in December 1999 that allows DSL providers to
simply lease the data spectrum of the customer's local loop from the incumbent
carrier. This may obviate the need for the customers to lease a secondary
DSL-provisioned loop from the incumbent carrier in order to obtain high speed
DSL data service, which in turn could make DSL service a more cost-competitive
alternative to our services. Finally, firms controlling digital broadcast
spectrum have announced plans to utilize a portion of that spectrum to offer
consumers high-bandwidth data delivery via broadcast. We cannot predict when or
whether this service will be offered, but if it is offered it could present
material competition to our services and could materially and adversely affect
our success in the marketplace.
WE DEPEND ON OUR KEY PERSONNEL AND MAY HAVE DIFFICULTY ATTRACTING AND RETAINING
THE SKILLED EMPLOYEES WE NEED TO EXECUTE OUR GROWTH PLAN.
Our future success depends on the continued service of our key personnel,
especially our Chief Executive Officer ("CEO"), Chief Operating Officer ("COO"),
Chief Strategy Officer ("CSO") and Chief Technology Officer ("CTO"). Our COO and
CTO positions are currently open. 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.
RISK RELATED TO TRADING IN OUR STOCK
BECAUSE OF OUR RELATIONSHIP WITH VULCAN VENTURES, NEW INVESTORS WILL HAVE LITTLE
INFLUENCE OVER MANAGEMENT DECISIONS.
Vulcan owns 37.1% of our outstanding stock. Vulcan's affiliate, Charter,
also has warrants to purchase up to an additional 7.75 million shares of our
common stock, which become exercisable at the rate of 1.55 shares per home
passed committed to us by Charter, in excess of 750,000. Accordingly, Vulcan
will be able to significantly influence and possibly exercise control over most
matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This concentration
of ownership may also have the effect of delaying or preventing a change in
control. In addition, conflicts of interest may arise as a consequence of
Vulcan's control relationship with us, including:
o Conflicts between Vulcan, as our controlling stockholder, and our
other stockholders, whose interests may differ with respect to, among
other things, our strategic direction or significant corporate
transactions,
o conflicts related to corporate opportunities that could be pursued by
us, on the one hand, or by Vulcan, on the other hand, or
o conflicts related to existing or new contractual relationships between
us, on the one hand, and Vulcan and its other affiliates, on the other
hand.
In particular, Vulcan is affiliated with Charter, currently our largest
cable partner. Additionally, Vulcan has the exclusive right to provide or
designate the first page our end users see when they log on to our service and,
if it provides that first page, will be entitled to all of the related revenues.
Moreover, Vulcan can prohibit us from providing content that competes with
content it chooses to provide, and can prohibit us from providing telephony
service if it chooses to provide those services.
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<PAGE> 29
THE FUTURE SALE OF SHARES MAY HURT OUR MARKET PRICE.
A substantial number of shares of our common stock are available for
resale. If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. These sales also
might make it more difficult for us to sell equity securities in the future at
times and prices that we deem appropriate.
THERE HAS BEEN NO PRIOR MARKET FOR OUR COMMON STOCK; OUR STOCK PRICE IS LIKELY
TO BE HIGHLY VOLATILE.
Prior to our initial public offering in June 1999, there was no public
market for our common stock. We cannot predict the extent to which investor
interest in us will lead to the development of an active trading market in our
stock or how liquid that market might become. The stock market has experienced
extreme price and volume fluctuations. In particular, the market prices of the
securities of Internet-related companies have been especially volatile. In the
past, companies that have experienced volatility in the market price of their
stock have been the object of securities class action litigation. If we were the
object of securities class action litigation, it could result in substantial
costs and a diversion of our management's attention and resources.
WE HAVE ANTI-TAKEOVER PROVISIONS.
Certain provisions of our certificate of incorporation, our bylaws and
Delaware law, in addition to the concentration of ownership in Vulcan, could
make it difficult for a third party to acquire us, even if doing so might be
beneficial to our other stockholders.
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<PAGE> 30
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS.
To the Board of Directors and Stockholders
High Speed Access Corp.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of comprehensive loss,
of stockholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of High Speed Access Corp. and
its subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for the year ended December 31, 1999 and
the period April 3, 1998 (inception) through December 31, 1998 in
conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States, which requires 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 my management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
February 22, 2000
30
<PAGE> 31
HIGH SPEED ACCESS CORP.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 53,310 $ 17,888
Short term investments 125,420
Accounts receivable, net of allowance for doubtful accounts of $63
and $13, respectively 393 83
Prepaid expenses and other current assets 4,308 123
------------ ------------
Total current assets 183,431 18,094
Property, equipment and improvements, net 39,308 5,807
Intangible assets, net 3,300 3,603
Deferred distribution agreement costs, net 4,042
Other assets 345
------------ ------------
Total assets $ 230,426 $ 27,504
============ ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable $ 10,226 $ 2,741
Accrued compensation and related expenses 3,842 744
Other current liabilities 3,916 395
Long-term debt, current portion 1,527 8
Capital lease obligations, current portion 3,176 44
------------ ------------
Total current liabilities 22,687 3,932
Long-term debt 4,035 530
Capital lease obligations 7,574 219
------------ ------------
Total liabilities 34,296 4,681
------------ ------------
Commitments and contingencies (Note 13)
Mandatorily redeemable convertible preferred stock:
Series A, $.01 par value, 5,000,000 shares designated, issued and
outstanding at December 31, 1998 47,050
Series B, $.01 par value, 10,000,000 shares designated, issued and
outstanding at December 31, 1998 102,200
Series C, $.01 par value, 5,000,000 shares designated, no shares issued
and outstanding at December 31, 1998
------------
Total mandatorily redeemable convertible preferred stock 149,250
------------
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 10,000,000 shares authorized, none
issued and outstanding
Common stock, $.01 par value, 400,000,000 shares authorized,
54,276,130 issued and outstanding - December 31, 1999;
6,200,000 shares authorized,
issued and outstanding - December 31, 1998 543 62
Class A common stock, 100,000,000 shares authorized, none issued and
outstanding - December 31, 1999
Additional paid-in-capital 618,823 4,237
Deferred compensation (288) (84)
Accumulated deficit (422,807) (130,642)
Accumulated other comprehensive loss (141)
------------ ------------
Total stockholders' equity (deficit) 196,130 (126,427)
------------ ------------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
equity (deficit) $ 230,426 $ 27,504
============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
31
<PAGE> 32
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 3, 1998
YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Net revenue $ 3,446 $ 337
Costs and expenses:
Operating 24,021 2,067
Engineering 9,255 2,266
Sales and marketing 18,134 3,696
General and administrative (excluding non-cash compensation expense from
stock options) 11,888 2,323
Non-cash compensation expense from stock options 3,039
Amortization of distribution agreement costs 3,723
----------------- -----------------
Total costs and expenses 70,060 10,352
----------------- -----------------
Loss from operations (66,614) (10,015)
Investment income 6,181 94
Interest expense (519) (54)
----------------- -----------------
Net loss (60,952) (9,975)
Mandatorily redeemable convertible preferred stock dividends (1,122) (385)
Accretion to redemption value of mandatorily redeemable convertible
preferred stock (229,148) (120,282)
----------------- -----------------
Net loss available to common stockholders $ (291,222) $ (130,642)
================= =================
Basic and diluted net loss available to common stockholders per share $ (8.69) $ (21.07)
================= =================
Weighted average shares used in computation of basic and diluted
net loss available to common stockholders per share 33,506,735 6,200,000
</TABLE>
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 3, 1998
YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
Net loss $ (60,952) $ (9,975)
Net unrealized loss on investments (141)
----------------- -----------------
Comprehensive loss $ (61,093) $ (9,975)
================= =================
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
32
<PAGE> 33
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD APRIL 3, 1998 (INCEPTION) TO DECEMBER
31, 1998 AND THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------ PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
------ ------ ------- ------------
<S> <C> <C> <C> <C>
Issuance of common stock in connection
with acquisition of CATV and HSAN 6,200,000 $ 62 $ 3,153
Mandatorily redeemable convertible
preferred stock dividends
Accretion to redemption value of mandatorily
redeemable convertible preferred stock
Grant of option to purchase Series C mandatorily
redeemable convertible preferred stock 1,000
Deferred compensation from grants of stock
options to purchase common stock 84 $ (84)
Net loss
----------- ------ ---------- ---------
BALANCE AT DECEMBER 31, 1998 6,200,000 62 4,237 (84)
Mandatorily redeemable convertible
preferred stock dividends
Accretion to redemption value of mandatorily
redeemable convertible preferred stock
Distribution of Darwin Networks, Inc common stock
to shareholders 569
Issuance of common stock warrants in
connection with purchase of customer base 208
Issuance of vested compensatory stock options 1,793
Deferred compensation from grants of stock
options to purchase common stock 1,450 (1,450)
Amortization of deferred compensation 1,246
Conversion of mandatorily redeemable convertible
preferred stock and accrued dividends to
common stock 31,115,887 311 404,195
Issuance of common stock warrants in connection
with distribution agreements 7,766
Exercise of stock options and warrants 484,470 5 830
Net proceeds from sale of common stock 16,475,773 165 197,775
Net unrealized loss on investments
Net loss
----------- ------ ---------- ---------
BALANCE AT DECEMBER 31, 1999 54,276,130 $ 543 $ 618,823 $ (288)
=========== ====== ========== =========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
DEFICIT LOSS EQUITY (DEFICIT)
------- ---- ----------------
<S> <C> <C> <C>
Issuance of common stock in connection
with acquisition of CATV and HSAN $ 3,215
Mandatorily redeemable convertible
preferred stock dividends $ (385) (385)
Accretion to redemption value of mandatorily
redeemable convertible preferred stock (120,282) (120,282)
Grant of option to purchase Series C mandatorily
redeemable convertible preferred stock 1,000
Deferred compensation from grants of stock
options to purchase common stock --
Net loss (9,975) (9,975)
----------- ------- -----------
BALANCE AT DECEMBER 31, 1998 (130,642) (126,427)
Mandatorily redeemable convertible
preferred stock dividends (1,122) (1,122)
Accretion to redemption value of mandatorily
redeemable convertible preferred stock (229,148) (229,148)
Distribution of Darwin Networks, Inc common stock
to shareholders (943) (374)
Issuance of common stock warrants in
connection with purchase of customer base 208
Issuance of vested compensatory stock options 1,793
Deferred compensation from grants of stock
options to purchase common stock --
Amortization of deferred compensation 1,246
Conversion of mandatorily redeemable convertible
preferred stock and accrued dividends to
common stock 404,506
Issuance of common stock warrants in connection
with distribution agreements 7,766
Exercise of stock options and warrants 835
Net proceeds from sale of common stock 197,940
Net unrealized loss on investments (141) (141)
Net loss (60,952) (60,952)
----------- ------- -----------
BALANCE AT DECEMBER 31, 1999 $ (422,807) $ (141) $ 196,130
=========== ======= ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
33
<PAGE> 34
HIGH SPEED ACCESS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
APRIL 3, 1998
YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (60,952) $ (9,975)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 6,681 1,344
Provision for doubtful accounts receivable 252 13
Write-off of capitalized software costs 464
Realized gain on sale of investments (236)
Non-cash compensation expense from stock options 3,039
Amortization of distribution agreement costs 3,723
Changes in operating assets and liabilities excluding the
effects of acquisitions:
Accounts receivable (562) (49)
Prepaid expenses and other current assets (4,221) (106)
Other non-current assets (345)
Accounts payable 5,549 739
Accrued compensation and related expenses 3,098 629
Other current liabilities 3,521 211
----------------- -----------------
Net cash used in operating activities (39,989) (7,194)
----------------- -----------------
INVESTING ACTIVITIES
Purchase of short-term investments (551,844)
Sales and maturities of short-term investments 426,519
Purchase of property, equipment and improvements, net of leases (26,900) (4,235)
Purchase of customer base (511)
Cash acquired in the purchase of CATV and HSAN -- 907
----------------- -----------------
Net cash used in investing activities (152,736) (3,328)
----------------- -----------------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 197,940
Net proceeds from issuance of mandatorily redeemable convertible
preferred stock 24,987 27,583
Payments on capital lease obligations (639) (17)
Proceeds from long-term debt 5,508 1,000
Payments on long-term debt (484) (156)
Proceeds from exercise of stock options and other 835
----------------- -----------------
Net cash provided by financing activities 228,147 28,410
----------------- -----------------
Net change in cash and cash equivalents 35,422 17,888
Cash and cash equivalents, beginning of period 17,888
----------------- -----------------
Cash and cash equivalents, end of period $ 53,310 $ 17,888
================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 473 $ 14
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock and employee stock options in connection with the
purchase of CATV and HSAN $ 3,215
Equipment acquired under capital leases $ 11,126 $ 241
Issuance of note payable as consideration for advance from related party $ 650
Issuance of preferred stock in exchange for cancellation of notes payable -
related parties $ 1,000
Property and equipment purchases payable $ 3,366 $ 1,429
Distribution of Darwin Networks, Inc. subsidiary to shareholders $ 943
Warrants issued in connection with acquisitions $ 208
Warrants issued in connection with Microsoft Corp. agreements $ 3,235
Warrants earned in connection with distribution agreements $ 4,530
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
34
<PAGE> 35
HIGH SPEED ACCESS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND 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. 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 also offers to our cable partners a partial turnkey solution.
In a partial turnkey solution, the Company will deliver fewer services and incur
lower costs than a full turnkey solution but will also earn a smaller percentage
of the subscription revenue or a fixed fee on a per subscriber basis. The
Company's cable partners will typically bill the end user and will remit the
Company's percentage of the revenue or the fixed fee. During the year ended
December 31, 1999, the Company initiated partial turnkey services in ten cable
systems. The Company anticipates that partial turnkey solutions will become a
more significant part of our business mix.
We also provide certain services, primarily engineering services related to
design and installation of data network hardware and software necessary to offer
Internet service via cable modems, on a fee for service basis.
Business Combination and Basis of Presentation
The Company 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 held significant
investments in Broadband Solutions I, LLC and Broadband Solutions II, LLC
(collectively Broadband), two entities with identical ownership.
Broadband 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 the Company. The Company 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
statements of operations include the results of the Predecessors since April 3,
1998.
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:
35
<PAGE> 36
<TABLE>
<CAPTION>
CATV HSAN
-------- --------
<S> <C> <C>
Fair value of assets acquired, including goodwill ..... $ 2,334 $ 3,486
Fair value of liabilities assumed ..................... (219) (1,386)
Cash paid by Broadband for mandatorily redeemable
convertible preferred stock of predecessors ......... (500) (500)
Fair value of common stock and common stock options
issued .............................................. (1,615) (1,600)
-------- --------
Cash paid ............................................. $ -- $ --
======== ========
</TABLE>
The following unaudited pro forma financial information for 1998 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 to April 2, 1998. Since the pro forma
financial information which follows is based upon the operating results of CATV
and HSAN during the period when they were not under the control of management of
the Company, the information presented may not be indicative of the results
which would have actually been obtained had the acquisitions occurred on January
1, 1998 nor are they indicative of future operating results.
<TABLE>
<S> <C>
Net revenues............................................................. $ 450
Net loss................................................................. $ (11,923)
Net loss available to common stockholders................................ $ (132,590)
Basic and diluted net loss per share available to common stockholders.... $ (21.39)
</TABLE>
Recapitalization
In May 1999, the Company completed a 1.55 for 1 split of its common stock.
This stock split resulted in a corresponding change in the conversion rate for
all shares of Preferred Stock such that each share of Preferred Stock was
convertible into 1.55 shares of common stock after the split. In addition,
certain outstanding warrants, if earned, may be exercised to acquire 1.55 shares
of common stock after the split. The accompanying financial statements have been
restated for all periods presented to reflect the effects of the stock split.
Also, the Board of Directors of the Company authorized 100 million shares
of Class A common stock and increased the number of shares of the Company's $.01
par value common stock authorized to 400 million shares.
Initial Public Offering
In June 1999, the Company sold 14,950,000 shares of its common stock in an
initial public offering (the Offering), including the underwriters'
over-allotment option, which generated proceeds of $179.4 million, net of the
underwriters' discount and other offering costs. Concurrently with the Offering,
the Company registered and sold 618,557 shares, 82,474 shares, and 824,742
shares of its common stock to Cisco Systems, Inc., Com21, Inc. and Microsoft
Corp., respectively, under stock purchase agreements which generated $18.5
million.
Conversion Of Preferred Stock
Series A, B, and C mandatorily redeemable convertible preferred stock,
(Preferred Stock) at December 31, 1998 consisted 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 acquisitions 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.
36
<PAGE> 37
In April 1999, the Company received $25 million in cash proceeds from the
sale of 5,000,000 shares of Series C mandatorily redeemable convertible
preferred stock to Vulcan Ventures Incorporated (Vulcan), under the terms of the
agreements further described in Note 9.
The Preferred Stock ranked 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.
Upon the closing of the Offering, all 20,000,000 shares of the Preferred
Stock outstanding at the time of the Offering were converted into an aggregate
of 31,000,000 shares of common stock. In addition, unpaid accumulated dividends
on the Preferred Stock of $1.5 million were paid by the issuance of 115,887
shares of common stock. Prior to the conversion of the Preferred Stock, the
Company had charged accumulated deficit to increase the carrying value of the
shares of each series of Preferred Stock to its estimated redemption value at
the time of the Offering of $13 per share. During the year ended December 31,
1999, the Company recorded $229.1 million, and during the period April 3, 1998
(Inception) through December 31, 1998 ("Inception Period"), the Company recorded
$120.3 million related to this charge. In addition, the Company accrued
dividends on the Preferred Stock of $1.1 million for the year ended December 31,
1999, and $385 for the Inception Period.
Distribution to Stockholders of Darwin Networks, Inc.
On March 15, 1999, the Company transferred to Darwin Networks, Inc.
(Darwin), 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 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 on a non-pro rata
basis. This distribution has been recorded as a net reduction of stockholders
equity in the accompanying consolidated financial statements. In connection with
the asset transfer, the Company entered into a services agreement with Darwin
pursuant to which it provided various financial, accounting and other
professional staff services to Darwin. Fees related to the service agreement
totaled $85 during the year ended December 31, 1999. The Company also loaned
Darwin $500 under a note payable which was subsequently collected. In connection
with the note, Darwin issued to the Company a warrant expiring on March 15, 2000
for the purchase of 1,000,000 shares of Darwin's common stock at an exercise
price of $5.00 per share. On June 11, 1999, Darwin, after a stock split,
replaced the original warrant with a new warrant expiring on March 15, 2004 for
the purchase of 5,000,000 shares of Darwin's common stock at an exercise price
of $1.00 per share. The Company has recorded $46 in 1999 for the estimated value
of the new warrant. 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 1999 or 1998 associated with Darwin.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements for the periods ended December 31,
1999 and 1998 include the operations of the Company for the year ended December
31, 1999 and the Inception Period. All significant intercompany transactions and
balances have been eliminated in consolidation.
Revenue Recognition
Monthly customer subscription revenue, consisting of fees for cable-modem
Internet access services and traditional dial-up services, is reported net of
the contractual share paid to cable system operators and is recognized as
services are provided. Included in subscription revenues are revenues related to
the rental of cable modems to customers in connection with subscription
contracts. 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 advance are recorded as deferred revenue initially and
recognized as income in the period in which the services are provided. In
partial turnkey systems, the cable partner typically bills the customer and the
Company recognizes revenue as a percentage of total revenue or on a fixed fee
basis in the period in which the revenue is earned.
Cash and Cash Equivalents
Cash and cash equivalents include all short-term, highly liquid investments
with an original maturity of 90 days or less. At December 31, 1999 and 1998,
cash equivalents consist principally of money market accounts with a single
financial institution. The Company maintains the majority of its cash at one
financial institution. At most times, such cash is in excess of the FDIC
insurance level. Carrying value approximates fair market value due to the short
term maturities of the investments.
37
<PAGE> 38
Short Term Investments
Short term investments are classified as available for sale and are
accounted for at fair value. Unrealized gains and losses are included in
accumulated other comprehensive loss. For the purpose of determining gross
realized gains and losses, the cost of securities sold is based upon specific
identification.
Long-Lived Assets
Property, equipment and improvements are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the estimated useful lives of the assets for
equipment and software (3 years) and furniture and fixtures (5 years), or the
shorter of useful life or lease term for leasehold improvements or capital
leases. 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.
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, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. Capitalized external software
costs include the actual costs to purchase existing software from vendors.
Capitalized internal software costs generally include personnel costs incurred
in the enhancement and implementation of purchased software packages.
The excess of cost over net identifiable assets acquired of $1,839 relating
to CATV and $2,332 relating to HSAN has been allocated to goodwill and is being
amortized on a straight-line basis over 5 years. Amortization expense for the
periods ended December 31, 1999 and 1998 was $993 and $648, respectively. 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 periods ended December 31, 1999 and 1998 was $29 and
$22, respectively.
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.
During 1999, the Company wrote-off $464 of capitalized costs related to software
no longer in use by the Company.
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
APB Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) and
has adopted the disclosure-only requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123).
Fair Value of Financial Instruments
The carrying amounts for current assets and liabilities, other than notes
payable to related parties and short-term investments, approximate their fair
value due to their short maturity. The fair value of notes payable to related
parties cannot be reasonably and practicably estimated due to the unique nature
of the related underlying transactions and terms. These notes payable are
carried at $530 and $538 at December 31, 1999 and 1998, respectively. However,
given the terms and conditions of these instruments, if these financial
instruments were with unrelated parties, interest rates and payment terms could
be different than their currently stated rates and terms. The fair value of
short term investments was $141 less than the cost at December 31, 1999. The
carrying values of long term debt and capital lease obligations approximate fair
value.
Engineering
Engineering costs are expensed as incurred.
38
<PAGE> 39
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, 1999 and 1998. The Company maintains an allowance for
doubtful accounts receivable based upon its historical experience and the
expected collectibility of all accounts receivable.
Comprehensive Loss
In 1999, SFAS No. 130, Reporting Comprehensive Income (SFAS 130), was
applicable to the Company. SFAS 130 establishes standards for reporting and
display of changes in equity from non-owner sources in the financial statements.
Non-owner changes in stockholders' equity consists of unrealized investment
gains or losses. The application of SFAS 130 did not affect results of operation
or financial position but did affect disclosure of comprehensive loss.
Recently Issued Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivatives and Hedging Activities (SFAS 133), which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 133, as amended by SFAS 137, is
effective for the Company's year ending December 31, 2001. As the Company does
not currently engage in or plan to engage in derivatives, or hedging
transactions there will be no impact on the Company's results of operations,
financial position or cash flows upon the adoption of SFAS 133.
On December 3, 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements. SAB 101 summarizes some of the staff's interpretations of
the application of generally accepted accounting principles to revenue
recognition. All registrants are expected to apply the accounting and disclosure
requirements that are described in SAB 101 no later than the second quarter of
the fiscal year beginning after December 15, 1999. Management of the Company is
currently analyzing the impact of SAB 101 but anticipates that the adoption of
SAB 101 will not have a material effect on the Company's results of operations
or financial position.
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. SHORT TERM INVESTMENTS
Short term investments classified as current assets at December 31, 1999
consisted of $125.4 million of U.S. Government obligations with a gross
unrealized loss of $141.
The contractual maturities of debt securities available for sale are all
due within one year of December 31, 1999. Realized gains and realized losses for
the year ended December 31, 1999 were $360 and $124, respectively. For the
purpose of determining gross realized gains and losses, the cost of securities
sold is based upon specific identification.
4. PROPERTY, EQUIPMENT AND IMPROVEMENTS
The components of property, equipment and improvements at December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Equipment ................................... $ 40,731 $ 6,286
Furniture and fixtures ...................... 960 181
Capitalized Software ........................ 3,145 --
Leasehold improvements ...................... 807 36
------------ ------------
45,643 6,503
Less accumulated depreciation ............... 6,335 696
------------ ------------
$ 39,308 $ 5,807
============ ============
</TABLE>
Equipment includes assets acquired under capital leases, principally
headend equipment, furniture and fixtures, and telephone equipment, with a cost
of $11,126 and $282 at December 31, 1999 and 1998, respectively. Accumulated
depreciation of these assets was $501 and $34 at December 31, 1999 and 1998,
respectively. Total depreciation expense, which includes depreciation of
equipment under capital lease, was $5,659 for the year ended December 31, 1999
and $696 for the Inception Period.
39
<PAGE> 40
5. LEASE OBLIGATIONS
The Company leases certain office facilities under non-cancelable operating
leases that expire at various dates through 2005, and which require the Company
to pay operating costs, including property taxes, insurance and maintenance.
These facility leases generally contain renewal options and provisions adjusting
the lease payments based upon changes in the consumer price index and increases
in real estate taxes and operating expenses or in fixed increments. Rent expense
is reflected on a straight-line basis over the term of the leases. Facility rent
expense was $1,051 for the year ended December 31, 1999 and $144 for the
Inception Period.
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, 1999 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
Year Ending December 31,
2000 ..................................................... $ 1,703 $ 4,158
2001 ..................................................... 1,308 4,207
2002 ..................................................... 1,092 3,537
2003 ..................................................... 1,019 467
2004 ..................................................... 995 405
Thereafter ............................................... 25
---------- ----------
Total minimum lease payments ..................... $ 6,142 12,774
==========
Less amounts representing interest ......................... 2,024
----------
Present value of minimum capital lease obligations ......... 10,750
Less current portion ....................................... 3,176
----------
Noncurrent portion ......................................... $ 7,574
==========
</TABLE>
One of the capital leases is with a company affiliated with an officer of
the Company. The present value of the minimum capital lease payments associated
with this lease is $27 at December 31, 1999.
6. LONG TERM DEBT
Loan Facilities
In July 1999, the Company entered into a $5.0 million loan facility of
which $2.9 million has been drawn down at December 31, 1999. The terms of the
loan facility provide for interest at the rate of the 3-year U.S. Treasury Note
yield plus 9.76% on each draw, 36 equal monthly payments and a balloon payment
of 5.0% of the original loan balance in the 37th month and collateral of the
headend, data center and other field equipment of the Company.
In April 1999, the Company entered into a $3.0 million loan facility of
which $2.6 million has been drawn down at December 31, 1999. The terms of the
master loan agreement provide for interest at the rate of the 3-year U.S.
Treasury Note yield plus 9.76% on each draw, 36 equal monthly payments and a
balloon payment of 12.5% of the original loan balance in the 37th month and
collateral of the headend, data center and other field equipment of the Company.
The interest rate on these draws ranged from 14.63% to 15.52%. These terms are
effective on the date of, and applied separately to, each draw on the total loan
facility.
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 during both 1999 and 1998, respectively with the remaining
balance of
40
<PAGE> 41
$32 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.
The aggregate amount of long term debt maturities, including notes payable
to related parties, at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
2000............................................................. $ 1,527
2001............................................................. 2,256
2002............................................................. 1,779
2003............................................................. 0
2004............................................................. 0
-------
Total principal payments................................. $ 5,562
=======
</TABLE>
7. INCOME TAXES
As of December 31, 1999 and 1998, the Company had deferred tax assets of
approximately $26.5 and $3.8, respectively, primarily related to federal and
state net operating loss carryforwards. The net deferred tax asset has been
fully offset by a valuation allowance based upon the Company's history of
operating losses. The federal and state net operating loss carryforwards of
approximately $63.6 million and $9.0 million, at December 31, 1999 and 1998,
respectively, expire in years 2018 and 2019. Utilization of these net operating
losses may be subject to a substantial annual limitation based upon changes in
the Company's ownership as provided in Section 382 of the Internal Revenue Code
of 1986 and similar state provisions. The annual limitation may result in the
expiration of net operating losses before utilization.
The Company's income tax provision (benefit) for the periods ended December
31, 1999 and 1998 differs from the income tax benefit determined by applying the
U.S. federal statutory rate to the net loss as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Tax provision (benefit) of U.S. statutory rate ............. $ (20,724) $ (3,392)
Net operating losses and temporary differences not
Recognized ............................................... 20,319 3,159
Goodwill and other permanent differences ................... 405 233
------------ ------------
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 purposes. Significant components of
the Company's deferred tax assets and liabilities for federal and state income
taxes at December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .................... $ 26,793 $ 3,401
Depreciation ........................................ (606) (56)
Accrued expenses, not currently deductible .......... 315 439
------------ ------------
Total gross deferred tax assets ............. 26,502 3,784
Less valuation allowance ............................ (26,502) (3,784)
------------ ------------
Net deferred tax assets ..................... $ -- $ --
============ ============
</TABLE>
8. EMPLOYEE BENEFITS
The Company has established a deferred compensation plan in accordance with
Section 401(k) of the Internal Revenue Code. Under the retirement plan,
participating employees may defer a portion of their pretax earnings up to the
annual contribution limit. The Company may make contributions to the plan at the
discretion of the Board of Directors. To date, no such contributions have been
made by the Company.
In 1999, the Company recorded severance and other benefit related costs of
$1.2 million associated with the termination of certain of its employees in the
fourth quarter of 1999. Total costs included a non-cash portion approximating
$323, included in non-cash compensation expense from stock options, associated
with the acceleration of the vesting on certain non-vested stock options of the
terminated employees. At December 31, 1999, approximately
41
<PAGE> 42
$776 related to the cash portion of the costs remained unpaid. The balance
remaining is expected to be paid by the end of the first quarter of 2000.
9. DISTRIBUTION AGREEMENTS
General
As an inducement to certain cable partners to commit systems to the
Company, the Company issues warrants to purchase its common stock in connection
with network service agreements and other agreements, collectively referred to
as distribution agreements.
The Company values warrants to purchase its common stock using an accepted
options pricing model based on the value of the stock when the warrants and
options are earned. The Company recognizes an addition to equity for the fair
value of any warrants issued, and recognizes the related expense over the term
of the agreement with the 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.
Vulcan Ventures Incorporated
In November 1998, the Company entered into a series of agreements with
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. Under these agreements,
Vulcan acquired 8,000,000 shares of Series B and 5,000,000 shares of Series C
Preferred Stock including accrued dividends of $971, which were converted into
22,224,688 shares of common stock in June 1999. Vulcan continues to be a major
shareholder and 3 members of the Company's Board of Directors are affiliated
with Vulcan.
These agreements included a systems access and investment agreement with
Vulcan and its affiliate Charter Communications (Charter), a programming content
agreement with Vulcan, and a related network services agreement with Charter.
Under these agreements, Charter committed to provide the Company exclusive
access to at least 750,000 homes passed. The term "homes passed" refers to the
number of homes that potentially can be served by a cable system. Charter has an
equity incentive to provide us additional homes passed, although it is not
obligated to do so. Under the agreements, the Company agreed to pay Charter 50%
of its gross revenues for cable modem access services, 15% of its gross revenues
for dial up access services, and 50% of its gross revenues for all other
optional services. In addition, if the Company sells equipment to a subscriber,
it agreed to pay Charter 50% of the gross profit it receives from the sale. If
Charter sells equipment to a subscriber, Charter keeps 100% of the gross
revenues from the sale. The Company also agreed that Charter's share of gross
revenues will not be less than that paid to other cable operators to whom it
provides services. Charter can terminate the agreement, remove a particular
agreement or terminate exclusivity rights, on a system-by-system basis, if the
Company fails to meet performance benchmarks or otherwise breaches its
agreement, including its agreement to provide content designated by Vulcan. The
performance benchmarks include requiring the Company to achieve minimum
penetration rates, to add equipment or bandwidth capacity when Internet data
traffic on a system reaches set levels, to maintain a designated response rate
at its call center and resolve a designated percentage of all non-cable plant
related trouble calls within specific time frames, and to provide monthly
reports to Charter tracking the Company's compliance with these requirements.
Charter can also terminate this agreement, for any reason, as long as it
purchases the associated cable headend equipment and modems at book value and
pays the Company a termination fee based on the net present value of revenues
the Company otherwise would earn for the remaining term of the agreement from
end users subscribing to the Company's services as of the termination date.
During the term of the agreements, the Company has agreed not to compete with
Charter in any market in which it owns or operates a cable system and will not
deploy Worldgate, Web TV(R) or various other digital TV products in the market
areas of any committed system or in areas in which Charter operates a cable
system. The agreements will continue until the Company ceases to provide
services to an end user residing in a home passed in a committed system.
The Company also agreed to issue a warrant to Charter that will, in the
aggregate, entitle Charter to purchase 7,750,000 shares of the Company's common
stock at a purchase price of $3.23 per share. The warrants become exercisable at
the rate of 1.55 shares of common stock for each home passed in excess of
750,000. A minimum of 3,875,000 warrants must be earned by Charter on or before
July 31, 2001, and a minimum of 3,875,000 warrants must be earned by Charter on
or before July 31, 2003. Each warrant issued to Charter must be exercised on or
before one year from the date that the warrants may be earned. The warrants may
be forfeited in certain circumstances, generally if the number of homes passed
in committed systems is reduced.
In May 1999, Charter and the Company entered into a limited service
agreement which reduced the number of warrants issued per home passed in
exchange for a reduction in the revenue share per end user and a more beneficial
cost sharing arrangement for the
42
<PAGE> 43
Company in certain specified cable systems. Under the terms of this limited
service agreement, Charter will earn only 1 warrant per every three homes passed
if it commits systems totaling less than 1 million homes passed, and 1 warrant
for every 2 homes passed if the systems total 1 million or more homes passed.
As of December 31, 1999, Charter has earned 77,738 warrants under these
agreements. Deferred distribution agreement costs of $780 were recorded in
conjunction with these warrants for year ended December 31, 1999. Amortization
of distribution agreement costs of $154 was recognized in the statement of
operations for the same period. Additional deferred distribution agreement costs
may be recorded and amortized in future periods should Charter earn the right to
purchase additional common shares based on the number of homes passed committed
to the Company.
Classic Cable
In July 1999, the Company executed a series of agreements with Classic
Cable, Inc. (Classic). The Company issued warrants to purchase up to 600,000
shares of the Company's common stock at a purchase price of $13.00 per share.
The warrants are earned and exercisable generally at the rate of one share of
common stock per home passed in systems committed subject to certain minimum
homes passed criteria. The warrants may be earned by Classic on or before
December 31, 2003. The warrants must be exercised within three years of the date
earned.
As of December 31, 1999, Classic has earned warrants to purchase 76,095
shares of common stock under these agreements. Deferred distribution agreement
costs of $1.9 million were recorded in connection with the warrants during the
year ended December 31, 1999. Amortization of distribution agreement costs of
$162 was recognized in the statement of operations for the same period.
Additional deferred distribution agreement costs may be recorded and amortized
in future periods should Classic earn the right to purchase additional shares
based on the number of homes passed committed to the Company.
Cable Management Associates
In July 1999, the Company executed a series of agreements with ETAN
Industries Inc. d/b/a Cable Management Associates (CMA). The Company issued
warrants to purchase up to 200,000 shares of the Company's common stock at a
purchase price of $13.00 per share. The warrants are earned and exercisable
generally at the rate of one share of common stock for each home passed in
systems committed to the Company by CMA subject to certain minimum homes passed
criteria. The warrants may be earned by CMA on or before December 31, 2002. The
warrants must be exercised on or before December 31, 2002.
As of December 31, 1999, CMA has earned warrants to purchase 44,911 shares
of common stock under these agreements. Deferred distribution agreement costs of
$1.8 million were recorded in conjunction with the warrants during the year
ended December 31, 1999. Amortization of distribution agreement costs of $171
was recognized in the statement of operations for the same periods. Additional
deferred distribution agreement costs may be recorded and amortized in future
periods should CMA earn the right to purchase additional shares based on the
number of homes passed committed to the Company.
Microsoft Corp.
Microsoft purchased 824,742 shares of the Company's common stock for total
proceeds of $10 million concurrently with the Offering at the offering price net
of the underwriting discount. At the time of the Offering, the Company also had
a non-binding letter of intent with Microsoft covering a number of potential
areas of strategic relationship.
Pursuant to the non-binding letter of intent and subsequent letter
agreement entered into in June 1999, the Company granted Microsoft warrants to
purchase 387,500 shares of common stock at an exercise price of $16.25 per
share. Under the terms of these agreements, Microsoft has agreed, among other
things, to introduce the benefits of the Company's services to Comcast Corp., a
multiple system cable operator. The warrants also provide Microsoft the right to
purchase one share of common stock for each 10 homes passed over 2,500,000 that
are committed by Comcast Corp. to the Company by May 1, 2002.
The Company recorded expense of $3.2 million during the year ended December
31, 1999 related to the issuance of these warrants based on the fair value of
the shares at the time of grant. Additional expense may also be recognized in
future periods should Microsoft earn the right to purchase additional common
stock based on the number of homes passed committed to the Company by Comcast
Corp.
43
<PAGE> 44
ROAD RUNNER AGREEMENT
In July 1999, the Company entered into an agreement with ServiceCo LLC, the
entity that provides Road Runner's cable Internet access and content aggregation
services. The agreement establishes general terms and conditions under which
Road Runner may, if it wishes, engage the Company as a subcontractor to provide
all or some of the Company's network integration services to cable operators who
contract with Road Runner to deploy Road Runner-branded Internet content and
access services. The agreement also grants ServiceCo LLC a warrant to purchase
one share of common stock at a price of $5 per share for each home passed, up to
a maximum of 5 million homes, in those systems where ServiceCo LLC engages the
Company to serve as a subcontractor of services. No warrants have been issued
under this agreement as of December 31, 1999.
10. 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 the 1998 Plan. The Company adopted the 1999 Stock
Option Plan (1999 Plan) and the 1999 Non-Employee Directors Plan (the Directors
Plan) in January 1999. A total of 3,100,000 and 465,000 shares are reserved for
issuances under the 1999 Plan and the Directors Plan, respectively.
The exercise price for the options is determined by the Board of Directors,
but generally shall not be less than 100% of the estimated fair market value of
the common stock on the date the option is granted. Generally, the options vest
over a five-year period for the 1998 Plan and over a four-year period for the
1999 Plan and Directors Plan, after the date of grant and expire ten years after
the date of grant. The 1998 Plan provided for accelerated vesting as a result of
the Offering. 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 1998 Plan.
Stock options with an exercise price of $.65 and $1.61 were granted under
the 1998 Plan with an exercise price equal to the price per share at which
Preferred Stock was issued during the month in which the options were granted.
Stock options granted under the 1998 Plan with an exercise price of $3.23 in
December 1998, were later determined to be compensatory based on a revised
estimate of the fair value of the Company's common stock. Upon the Offering in
1999, the Company recognized non-cash compensation expense from stock options of
$84 related to the acceleration of vesting of stock options outstanding under
the 1998 Plan. Expense recognized in 1998 was insignificant.
Options to acquire an additional 140,740 shares 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. Upon the
Offering, the Company recognized non-cash compensation expense from stock
options of $1,090 related to the acceleration of vesting of these options.
Options to purchase 46,500 shares were granted under the 1999 Plan with an
exercise price of $3.23 per share. These stock options were considered to be
compensatory, and accordingly, the Company recorded deferred compensation of
$360. The Company will recognize this amount over the four year vesting period
of these options. During the year ended December 31, 1999, the Company
recognized $72 of non-cash compensation expense related to these options.
Options to purchase 2,612,615 shares were also granted under the 1999 Plan with
an exercise price equal to the fair market value at the time of grant. The
Company recognized $323 of non-cash compensation expense from stock options for
the acceleration of 44,963 options, granted under the 1999 Plan, in connection
with severance agreements during the year ended December 31, 1999.
Under the Directors Plan, options to purchase 189,875 shares with an
exercise price of $3.23 per share, were granted in January 1999, all of which
were immediately exercisable. These options were considered compensatory and
accordingly, the Company recognized expense of $1,470 of non-cash compensation
expense from stock options during the year ended December 31, 1999 related to
the issuance of these options.
The Company has adopted the disclosure only provisions of SFAS 123. The
weighted average fair value of stock options granted was $15.38 and $.42 for the
periods ended December 31, 1999 and 1998, respectively. Had compensation expense
been recognized pursuant to SFAS 123, the Company's net loss available to common
stockholders and basic and diluted net loss available to common stockholders per
share would have been increased to the pro forma amounts indicated below for the
periods ended December 31, 1999 and 1998:
44
<PAGE> 45
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Net loss available to common stockholders-- as
reported ........................................................ $ (291,222) $ (130,642)
Basic and diluted net loss available to common stockholders
per share-- as reported ...................................... $ (8.69) $ (21.07)
Pro forma basic and diluted net loss available to common
stockholders .................................................. $ (294,766) $ (130,654)
Pro forma basic and diluted net loss available to common
stockholders per share ........................................ $ (8.80) $ (21.07)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the minimum value option pricing method for grants prior to the Offering and the
Black-Scholes pricing model for grants following the Offering, with the
following weighted average assumptions used for grants for the periods ended
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Expected life of options in years............................................. 5 years 5 years
Risk-free interest rate....................................................... 5% 5%
Expected dividend yield....................................................... 0% 0%
Expected volatility (subsequent to Offering).................................. 90% N/A
</TABLE>
The effects of applying SFAS 123 in the pro forma disclosures are not
likely to be representative of the effects on pro forma net loss for future
years because variables such as option grants, exercises and stock price
volatility included in the disclosures may not be indicative of future activity.
The following table summarizes the activity in the Plan:
<TABLE>
<CAPTION>
SHARES UNDER EXERCISE PRICE WEIGHTED AVERAGE
OPTION PER SHARE EXERCISE PRICE
------------------ ------------------------- ----------------
<S> <C> <C> <C>
Outstanding at April 3, 1998 -
Options Granted 709,435 $ 0.65 to $ 3.23 $ 1.36
Options Cancelled (4,650) $ 0.65 to $ 3.23 $ 1.48
------------------ ----------------
Outstanding at December 31, 1998 704,785 $ 0.65 to $ 3.23 $ 1.35
Options Granted 2,989,730 $ 3.23 to $ 27.88 $ 16.41
Options Cancelled (248,503) $ 3.23 to $ 27.88 $ 13.88
Options Exercised (464,320) $ 0.65 to $ 3.23 $ 1.53
------------------ ----------------
Outstanding at December 31, 1999 2,981,692 $ 0.65 to $ 27.88 $ 15.38
================== ================
</TABLE>
The following table summarizes information about options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING STOCK OPTIONS EXERCISABLE
----------------------------------------------------------- -------------------------------
WEIGHTED AVERAGE
RANGE OF REMAINING CONTRACTUAL WEIGHTED AVERAGE WEIGHTED AVERAGE
Exercise Price SHARES LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- ---------------------- ------------ --------------------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.65 to $ 5.00 666,522 9.0 $ 4.39 530,085 $ 2.81
$ 13.00 to $ 13.00 729,545 9.3 $ 13.00 27,551 $ 13.00
$ 17.63 to $ 22.19 1,016,500 9.8 $ 18.82
$ 25.63 to $ 27.88 569,125 9.7 $ 26.46 2,725 $ 26.51
- ------- ------- ------------ --------------------- ---------------- ---------- ----------------
$ 0.65 to $ 27.88 2,981,692 9.5 $ 15.38 560,361 $ 3.42
======= ======= ============ ===================== ================ ========== ================
</TABLE>
45
<PAGE> 46
11. 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, 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 and diluted net
loss available to common stockholders per share for the year ended December 31,
1999 and the Inception Period were $8.69 and $21.07 based on weighted average
shares outstanding of 33,506,735 and 6,200,000, respectively
Diluted earnings per share is determined in the same manner as basic
earnings per share except that the number of shares is increased assuming
exercise of dilutive stock options and warrants using the treasury stock method
and assuming conversion of the Company's Preferred Stock. In addition, income or
loss is adjusted for dividends and other transactions relating to preferred
shares for which conversion is assumed. The diluted earnings per share amount
equals basic earnings per share because the Company has a net loss, thus the
impact of the assumed exercise of the stock options and the assumed preferred
stock conversion is antidilutive. Options and issued warrants to purchase
3,567,936 and 704,785 shares of common stock at December 31, 1999 and 1998,
respectively, were excluded from the calculation above because they are
antidilutive.
In addition, there is a potential to issue additional warrants pursuant to
the agreements set forth in Note 9. These potential warrants have been excluded
from the calculation above because they are not currently measurable and would
be antidilutive. In the future, the Company also may issue additional stock or
warrants to purchase its common stock in connection with its efforts to expand
the distribution of its services. Stockholders could face additional dilution
from these possible future transactions.
12. RELATED PARTY TRANSACTIONS
General
In November 1998, the Company entered into a systems access agreement with
Vulcan, Charter and Marcus a programming content agreement with Vulcan, and a
related networks services agreement with Charter and Marcus, pursuant to which
Vulcan, Charter and Marcus retained the Company to offer and provide Internet
access and related services to cable customers of various cable systems owned
and operated by Charter and Marcus. Vulcan is a significant stockholder and
management of Vulcan and Charter represent 3 of the companies Board of
Directors. See Note 9 "Distribution Agreements" 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 six 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 a share of the gross revenues the Company receives under the agreement.
During 1999 and 1998, the Company paid Gans Multimedia $166 and $76 under the
agreement, respectively.
The Company has an agreement to pay $15 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 $123 and $60 to the private
investment firm at December 31, 1999 and 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 each of the
periods ended December 31, 1999 and 1998.
Notes Payable -- Related Party
See Notes Payable - Related Party in Note 6.
46
<PAGE> 47
13. COMMITMENTS AND CONTINGENCIES
The Company is not a party to any material legal proceedings. In the
opinion of management, the amount of ultimate liability with respect to any
known actions will not materially affect the financial position of the Company.
Significant Agreements:
The company uses high speed data backbone circuits provided by a national
telecommunication company. The contract period for the service agreements is
three years from the date the circuit is installed. Minimum payments under the
service agreements are approximately as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
2000 $ 7,300
2001 7,250
2002 4,950
2003 25
----------
Total $ 19,525
==========
</TABLE>
14. 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 1999, the Company raised cash through the
sale of the Company's Preferred Stock and common stock. At December 31, 1999,
the primary source of liquidity for the Company was $53.3 million of cash and
cash equivalents and $125.4 million of short term investments, as well as $2.5
million in available long term debt and $5.6 million in unused capital lease
financing facilities. Management believes these financing sources will be
sufficient to meet the Company's working capital requirements, including
operating losses, and capital expenditures. Other financing may be obtained from
additional debt and leasing facilities. 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 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.
47
<PAGE> 48
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of unaudited quarterly financial information for the year ended
December 31, 1999 and the period April 3, 1998 (Inception) to December 31, 1998
follows.
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues ..................................... $ 299 $ 641 $ 1,070 $ 1,436
Loss from operations ............................. (8,156) (15,899) (17,027) (25,532)
Net loss ......................................... (8,037) (15,252) (14,325) (23,338)
Net loss available to common stockholders ........ (113,787) (139,772) (14,325) (23,338)
Basic and diluted net loss available to
common stockholders per share ................ (18.35) (7.47) (0.26) (0.43)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
APRIL 3, 1998 ENDED ENDED
TO SEPTEMBER 30, DECEMBER 31,
JUNE 30, 1998 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Net revenues .................................. $ 91 $ 101 $ 145
Loss from operations .......................... (1,789) (3,495) (4,731)
Net loss ...................................... (1,793) (3,506) (4,675)
Net loss available to common stockholders ..... (1,793) (11,091) (117,757)
Basic and diluted net loss available to
common stockholders per share ............. (0.29) (1.79) (18.99)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
48
<PAGE> 49
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information concerning the Company's directors required by Item 10 is
incorporated by reference herein to section entitled "Proposal No. 1 - Election
of Directors" of the Proxy Statement. The information concerning the Company's
executive officers required by Item 10 is incorporated by reference to the
section of the Proxy Statement entitled "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
sections entitled "Executive Compensation" and "Proposal No. 1 - Election of
Directors" of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
section entitled "Security Ownership of Certain Beneficial "Owners and
Management" of the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
section entitled "Certain Transactions" of the Proxy Statement.
With the exception of the information specifically stated as being incorporated
by reference from the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Stockholders (the "Proxy Statement") in Part III of this Annual
Report on Form 10-K, the Company's Proxy Statement is not to be deemed as filed
as part of this report. The Proxy statement will be filed with the Securities
and Exchange Commission within 120 days of the Company's fiscal year end.
49
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Document filed as part of this report: The Financial Statements
filed as part of this report are listed on the Index to Financial
Statements on page 31.
(b) Reports on Form 8-K None
(c) Exhibits See Exhibit Index on Page ____.
Financial Data Schedule
50
<PAGE> 51
o SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on
March 27, 2000.
o HIGH SPEED ACCESS CORP.
By: /s/ Daniel J. O'Brien
---------------------------------------
Daniel J. O'Brien
President and Chief Executive Officer
By: /s/ George E. Willett
---------------------------------------
George E. Willett
Chief Financial Officer
51
<PAGE> 52
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Dan O'Brien and George E. Willett, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 27, 2000:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By: /s/ Daniel J. O'Brien President and Chief Executive Officer March 27, 2000
--------------------------------------------- (Principal Executive Officer)
Daniel J. O'Brien
By: /s/ George E. Willett Chief Financial Officer, (Principal March 27, 2000
--------------------------------------------- Financial and Accounting Officer
George E. Willett
By: /s/ David A. Jones, Jr. Director, Chairman March 27, 2000
---------------------------------------------
David A. Jones, Jr.
By: Director, Vice Chairman _____ __, 2000
---------------------------------------------
Robert S. Saunders
By: /s/ Irving W. Bailey, II Director March 27, 2000
---------------------------------------------
Irving W. Bailey, II
By: /s/ Michael E. Gellert Director March 27, 2000
---------------------------------------------
Michael E. Gellert
By: /s/ Jerald L. Kent Director March 27, 2000
---------------------------------------------
Jerald L. Kent
By: /s/ William D. Savoy Director March 27, 2000
---------------------------------------------
William D. Savoy
By: Director _____ __, 2000
---------------------------------------------
Stephen E. Silva
</TABLE>
52
<PAGE> 53
EXHIBIT INDEX
<TABLE>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
3.1** Amended and Restated Certificate of Incorporation.
3.2** Amended and Restated Bylaws.
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.
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 as of 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. and 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.
10.13** Employment, Non-Competition and Non-Disclosure Agreement
with Ronnie W. Pitcock, dated April 3, 1998
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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** Non-competition and Non-disclosure 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 between High Speed
Access Corp. and each of the directors and executive
officers.
</TABLE>
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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.
10.38 Master Agreement dated July 22, 1999 between High Speed
Access Corp. and ServiceCo LLC. (Incorporated by reference
to Exhibit 10.1 to Registrants' Quarterly Report on Form
10-Q for the quarter ended June 30, 1999.)
10.39 Securities Purchase Warrant dated July 22, 1999 between High
Speed Access Corp. and ServiceCo LLC (Incorporated by
reference to Exhibit 10.2 to Registrants' Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999.)
10.40 Letter Agreement dated June 15, 1999 between Microsoft Corp.
and High Speed Access Corp. (Incorporated by reference to
Exhibit 10.3 to Registrants' Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999.)
10.41 Securities Purchase Warrant dated June 15, 1999 between
Microsoft Corp. and High Speed Access Corp. (Incorporated by
reference to Exhibit 10.4 to Registrants' Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999.)
10.42 Master Agreement to Lease Equipment dated May 18, 1999
between Cisco Systems Capital Corporation and High Speed
Access Corp. (Incorporated by reference to Exhibit 10.5 to
Registrants' Quarterly Report on Form 10-Q for the quarter
ended June 30, 1999.)
10.43 Form of Securities Purchase Warrant entered into between
High Speed Access Corp. and cable partners. (Incorporated by
reference to Exhibit 10.6 to Registrants' Quarterly Report
on Form 10-Q for the quarter ended June 30, 1999.)
10.44 Additional System Notice and Partial HSAC Services
Supplement dated as of April 28, 1999 between Charter
Communications, Inc. and High Speed Access Corp.
(Incorporated by reference to Exhibit 10.7 to Registrants'
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999.)
10.45 Letter Agreement dated as of May 26, 1999 between Vulcan
Ventures, Incorporated, Marcus Cable Operating Company, LLC,
Charter Communications, Inc. and High Speed Access Corp.
(Incorporated by reference to Exhibit 10.8 to Registrants'
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999.)
10.46 Securities Purchase Warrant dated June 3, 1999 between
Classic Cable, Inc. and High Speed Access Corp.
(Incorporated by reference to Exhibit 10.1 to Registrants'
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.)
10.47 Securities Purchase Warrant dated June 4, 1999 between ETAN
Industries, Inc. and High Speed Access Corp. (Incorporated
by reference to Exhibit 10.2 to Registrants' Quarterly
Report on Form 10-Q for the quarter ended September 30,
1999.)
10.48 Cherry Creek Plaza Office Building Lease dated May 18, 1999
between Plaza II, Ltd. and High Speed Access Corp.
(Incorporated by reference to Exhibit 10.3 to Registrants'
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.)
10.49 Deed of Lease dated August 20, 1999 between Realty
Associates Fund III. LP and High Speed Access Corp.
(Incorporated by reference to Exhibit 10.4 to Registrants'
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.)
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10.50 Sublease dated August 20, 1999 between R Squared
Distributing of Colorado and High Speed Access Corp.
(Incorporated by reference to Exhibit 10.5 to Registrants'
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.)
10.51 Letter Agreement dated January 31, 2000 between High Speed
Access Corp. and Ronnie N. Pitcock, Sr.
10.52 Employment Agreement dated as of October 1, 1999 between
High Speed Access Corp. and Daniel J. O'Brien.
10.53 Supplemental Executive Compensation Agreement dated as of
October 1, 1999 between High Speed Access Corp. and Daniel
J. O'Brien.
10.54 Stock Option Agreement dated as of October 1, 1999 between
High Speed Access Corp. and Daniel J. O'Brien.
21.1** Subsidiaries.
23.1 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney (included on signature page to this Report).
27.1 Financial Data Schedule.
</TABLE>
- ------------------
** Incorporated by reference to identically numbered exhibit included in the
Registrant's Registration Statement on Form S-1 (File No. 333-74667)
# Confidential treatment requested for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
<PAGE> 1
EXHIBIT 10.51
January 31, 2000
Mr. Ronnie W. Pitcock, Sr.
38 Lark Bunting Lane
Littleton, CO 80127
Dear Ron:
The purpose of this letter is to memorialize our agreement concerning
your duties and compensation as Vice-Chairman of High Speed Access Corp.
To recap, you resigned as President of HSA effective December 31, 1999.
Effective January 1, 2000, you became Vice Chairman of the company. This is a
non-executive, non-director, consultant role that will continue, unless extended
by mutual agreement, for one year. Your duties include advising and supporting
HSA's board and officers, as they may reasonably request from time to time.
The company will compensate you at an annual rate of pay of $200,000,
which will be paid to you in substantially equal installments throughout the
year. You will not be eligible for company benefits, but we will pay for
continued health and dental benefits for you and Patti under COBRA. You will
also be eligible on December 31, 2000, for a bonus of up to $100,000. This bonus
is dependent upon HSA's financial and operating performance in 2000 in relation
to its goals and objectives as determined by the Board. We will also accelerate
the vesting schedule of the non-qualified options to purchase 125,000 shares of
HSA common stock under our 1999 Stock Option Plan that were granted to you on
June 3, 1999 (100,000 shares) and August 3, 1999 (25,000 shares), such that the
options will become fully vested on January 1, 2001.
You will not, in any calendar quarter of the year 2000, sell or dispose
of more than 25% of the 1,519,000 HSA shares that you own directly or
beneficially through the Pitcock Family Limited Partnership ("PFLP"). You may
collar your or the PFLP's position, provided the put/call positions are closed
with cash or do not otherwise result in sales or other dispositions exceeding
the volume limitations stated above. You may also pledge the shares, but any
sale forced by margin call or other transfer in lieu of foreclosure must comply
with the timing and volume limitations stated above. Of course, you and PFLP
remain subject to SEC Rule 144, and may not trade in HSA shares while in the
possession of any material, non-public information.
You, for yourself and your heirs and assigns, release the company and
its officers, directors and other representatives (collectively its
"constituents") from any and all claims relating to your
<PAGE> 2
Mr. Ronnie W. Pitcock, Sr.
03/27/00
Page 2
employment with the Company and termination therefrom. We both agree not to make
any disparaging statements about one another. Unless disclosure is required by
law, we both agree to keep the terms of this agreement strictly confidential.
You can terminate this agreement "for cause" if the company violates
any of its promises set forth above. The company can terminate the relationship
"for cause" (a) if you compete with the company, or solicit its employees, in a
manner that would violate the provisions of your original Employment,
Non-Competition and Non-Disclosure Agreement with High Speed Access Network,
Inc., (b) if you disparage the company, or (c) if you willfully engage in any
dishonest or fraudulent conduct that in the company's judgment constitutes a
crime or breach of fiduciary duty or materially and adversely affects the
company's operations or reputation. Should either party terminate the agreement
"for cause," the obligations of the other party will continue through December
31, 2000.
This letter sets forth the entire agreement between us, and binds and
benefits both of us and our respective representatives, successor and assigns.
Finally, please find enclosed your bonus check for 1999 in the amount
of $100,000. We thank you for not depositing it until you have returned a
countersigned copy of this letter to me. We also thank you again for your past
and future services to the company.
HIGH SPEED ACCESS CORP.
By: /s/ David A. Jones, Jr.
-----------------------------
David A. Jones, Jr.
Chairman of the Board of Directors
Agreed as stated above:
/s/ Ronnie W. Pitcock, Sr.
------------------------------
Ronnie W. Pitcock, Sr.
2
<PAGE> 1
EXHIBIT 10.52
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into
effective as of the 1st day of October, 1999, by and between HIGH SPEED ACCESS
CORP., a Delaware corporation (the "Company"), and DANIEL J. O'BRIEN, an
individual ("Executive").
RECITAL:
Executive desires to be employed by the Company and the Company desires
to employ Executive on the terms and conditions hereinafter provided.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is agreed by and between the
parties hereto as follows:
1. EMPLOYMENT. The Company hereby employs Executive and Executive
accepts employment by the Company and agrees to serve the Company, upon the
terms and conditions hereinafter set forth. Executive's employment shall
commence on October 1, 1999.
2. DUTIES. Executive shall be employed by the Company as Chief
Operating Officer. As Chief Operating Officer, Executive's duties will be
commensurate with those customarily performed by one with such title and
position at a company similarly situated to the Company. So long as he is
employed hereunder, Executive agrees to devote his full business time and energy
to the business and affairs of the Company, to perform his duties hereunder to
the best of his ability and at a level of competency consistent with the
position occupied, to act on all matters in a manner he reasonably believes to
be in and not opposed to the best interests of the Company, to use his best
efforts, skill and ability to promote the profitable growth of the Company, and
to perform such other duties, consistent with duties customarily performed by
one with such title and position at a company similarly situated to the Company,
as may be assigned to him by the Company's Chief Executive Officer, Chairman or
by the Company's Board of Directors ("Board") from time to time.
3. COMPENSATION AND BENEFITS. For all services rendered by Executive,
the Company shall pay compensation and provide benefits to Executive as follows:
A. SALARY. The Company shall pay Executive an initial salary
("Salary") of $25,000 per month. Commencing on October 1, 2000, Executive's
Salary shall be increased to $29,167 per month. Commencing on October 1, 2001,
Executive's Salary shall be increased to $33,333 per month.
B. BUSINESS EXPENSES. The Company shall reimburse Executive
for his reasonable direct out-of-pocket ordinary and necessary expenses, if any,
incurred by Executive in
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the performance of his services hereunder and for which Executive properly
accounts in accordance with the Company's regulations and procedures in effect
from time to time.
C. VACATION. Executive shall be entitled to four (4) weeks
paid vacation during each 12 month period of Executive's employment with the
Company. Executive shall not be entitled to carry over any unused vacation.
D. LIFE INSURANCE. The Company shall purchase and maintain, so
long as Executive is employed with the Company, a term life insurance policy on
the life of Executive in the amount of Two Million Dollars ($2,000,000), which
policy shall name Executive's spouse or estate, as beneficiary. At the
termination of Executive's employment, Executive shall have the right to elect
to have the Company assign the term life insurance policy to Executive. Should
the Executive exercise the right to assign, Executive shall thereafter be
responsible for all premium payments under the policy.
E. REIMBURSEMENT OF CERTAIN EXPENSES. The Company shall
reimburse Executive up to Five Thousand Dollars ($5,000) per annum for financial
and tax planning expenses incurred by Executive for which Executive properly
accounts in accordance with the Company's regulations and procedures in effect
from time to time.
F. ADDITIONAL BENEFITS. Executive shall be entitled to
participate (on the same terms and conditions as other executive officers of the
Company generally) in any and all employee vacation, retirement, medical, life
and disability insurance, and other benefits plans and perquisites as may be
established and in effect from time to time and made available to employees of
the Company.
4. STOCK OPTIONS.
A. INITIAL OPTION GRANT. Executive will receive an initial
grant of options ("Initial Option Grant") under Company's stock option plan
("Plan") to purchase 750,000 shares of Company common stock pursuant to a Stock
Option Agreement to be executed by Company and Executive in the form attached
hereto as Exhibit A and incorporated by reference herein.
B. SUBSEQUENT OPTION GRANTS. Subject to Executive's continued
employment with Company, (i) Executive will receive options to purchase 100,000
shares of Company's common stock on October 1, 2000, and (ii) Executive will
have the opportunity to receive options to purchase an additional 100,000 shares
of Company's common stock on each of October 1, 2000, October 1,2001 and October
1, 2002, based upon Executive's achievement of specific goals concerning the
performance of Executive and the Company for the preceding twelve (12) month
period, previously established by the Board (or the Compensation Committee
thereof) and Executive. Company and Executive shall establish such specific
goals for the twelve (12) months ended September 30, 2000 within thirty (30)
days from the date hereof and shall establish such specific goals for the twelve
(12) months ended September 30, 2001 and September 30, 2002, respectively, on or
before the preceding
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October 31. Each option granted to Executive under this Section 4.B shall have
an exercise price equal to the fair market value per share of Common Stock on
the date of grant as determined under the Plan. The option grants made to
Executive pursuant to this Section 4.B shall be evidenced by a stock option
agreement to be executed by Company and Executive substantially in the form
attached hereto as Exhibit B.
C. TERMS OF OPTIONS. Subject to the provisions of this Section
4, the option grants made to Executive under Sections 4.A and B will be made
under and subject to the terms of the Plan and will vest in five equal annual
installments commencing on the first anniversary of the date of grant. Without
any representation or warranty by or on the part of Company, to the extent any
of the options granted to Executive hereby can, by the terms set forth herein
and in the Plan, qualify as incentive stock options under the provisions of the
Internal Revenue Code of 1986, as amended, the parties hereto intend that the
same shall be treated as incentive stock options, and to the extent any or all
of the options cannot qualify as incentive stock options under the Code, the
parties hereto intend that the same shall be treated as nonstatutory options.
5. SUPPLEMENTAL AGREEMENT. The Company and Executive shall enter into a
supplemental executive compensation agreement substantially in the form attached
hereto as Exhibit C and incorporated by reference herein ("Supplemental
Agreement").
6. WITHHOLDING. The Company shall be authorized to deduct and withhold
from Executive's compensation such sums as are required by law to be deducted
and withheld.
7. AT WILL EMPLOYMENT. Subject to the provisions of the Supplemental
Agreement, Executive's employment with the Company will be terminable at will.
The employment at will relationship to exist between the Company and Executive
allows either the Company or the Executive to end the employment relationship at
any time, with or without cause.
8. COVENANTS NOT TO SOLICIT OR COMPETE
A. NON-COMPETITION. Executive agrees that, during the
Noncompete Period (as defined in Section 8.D of this Agreement), he shall not in
any manner, directly or indirectly or by assisting others, as a supervisor,
administrator, executive, senior or management level employee, owner,
proprietor, shareholder, consultant or otherwise, engage in any business which
provides high speed internet access, IP telephony or similar services which are
the same or essentially the same as the business of the Company (including, by
way of example @Home, ISP Channel and RoadRunner); provided that Executive shall
not be restricted from owning less than 5% of the outstanding shares of a
company whose shares are publicly traded.
B. NON-SOLICITATION. Executive agrees that, during the
Noncompete Period, he shall not (other than in the regular course of the
Company's business), solicit, directly or indirectly, business of the type then
being performed by the Company from any person, partnership, corporation or
other entity which [a] is a customer of the Company at the time Executive's
employment with the
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Company terminates, or [b] was such a customer within the two-year period
immediately prior thereto, for the purposes of providing products or services
that are competitive with those provided by the Company.
C. NON-INDUCEMENT. Executive agrees that for the period he is
employed by the Company and for a one-year period immediately following the
termination of his employment with the Company for any reason whatsoever, he
shall not directly or indirectly, individually or on behalf of persons not
parties to this Agreement, aid or endeavor to solicit or induce any of the
Company's employees to leave their employment with the Company in order to
accept employment with Executive or another person, partnership, corporation or
other entity.
D. NONCOMPETE PERIOD. For purposes of this Section 8, (i) if
Executive's employment with the Company shall be terminated without Cause (as
defined herein), the Noncompete Period shall mean the period commencing on the
date hereof and continuing for a six (6) month period immediately following his
termination of employment, and (ii) if Executive shall voluntarily terminate his
employment with the Company or Executive is terminated with Cause, the
Noncompete Period shall mean the period commencing on the date hereof and
continuing for a twelve (12) month period immediately following his termination
of employment. "Cause" shall mean that Executive's employment with the Company
shall have terminated upon the occurrence of any of the following events:
(a) The discharge of Executive for willful
misconduct, dishonesty or fraud on Executive's part in connection with
the performance of any of his duties under the Employment Agreement; or
(b) The discharge of Executive for a material breach
by Executive of any of the terms of Sections 8 or 10 of this Agreement;
or
(c) The discharge of Executive upon a determination
by the Board, acting in good faith and with reasonable justification,
that Executive's performance in his position as Chief Operating Officer
of the Company has been unsatisfactory, after first having given
written notice to Executive that his performance has been
unsatisfactory (which notice shall set forth in reasonable detail the
nature of the unsatisfactory performance), and Executive having failed
to cure such unsatisfactory performance within thirty (30) days
thereafter to the reasonable satisfaction of the Board; or
(d) The discharge of Executive for conviction of a
felony or a crime involving moral turpitude.
9. INJUNCTIVE RELIEF FOR BREACH: ENFORCEABILITY. Executive agrees that
Company may not be adequately compensated by damages for a breach by Executive
of any of the covenants contained in Section 8, and that, in addition to all
other remedies, the Company shall be entitled to injunctive relief and specific
performance. In such event, the periods of time referred to in Section
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8 shall be deemed extended for a period equal to the respective period during
which Executive is in breach thereof, in order to provide for injunctive relief
and specific performance for a period equal to the full term thereof. The
covenants contained in Section 8 shall be construed as separate covenants, and
if any court shall finally determine that the restraints provided for in any
such covenants are too broad as to the geographic area, activity or time
covered, said area, activity or time covered may be reduced to whatever extent
the court deems reasonable and such covenants shall be enforced as to such
reduced area, activity or time and Executive expressly agrees that this
Agreement, as so amended, shall be valid and binding.
10. PROPRIETARY RIGHTS.
A. RECOGNITION OF COMPANY'S RIGHTS; NONDISCLOSURE. At all
times during the term of his employment and thereafter, Executive will hold in
strictest confidence and will not disclose, use, lecture upon or publish any of
the Company's Proprietary Information (defined below), except as such
disclosure, use or publication may be required in connection with his work for
the Company, or unless the Chief Executive Officer or the Board of Directors of
the Company expressly authorizes such in writing. Executive shall and hereby
does assign to the Company any rights he may have or acquire in such Proprietary
Information and recognizes that all Proprietary Information shall be the sole
property of the Company and its assigns and that the Company and its assigns
shall be the sole owner of all patent rights, copyrights, trade secret rights
and all other rights throughout the world (collectively, "Proprietary Rights")
in connection therewith. The term "Proprietary Information" shall mean trade
secrets, confidential knowledge, data or any other proprietary information of
the Company which the Company treats as confidential with respect to the general
public. By way of illustration but not limitation, "Proprietary Information"
includes (a) inventions, trade secrets, ideas, processes, formulas, data,
programs, other words of authorship, know-how, improvements, discoveries,
developments, designs and techniques relating to the business or proposed
products of the Company and which were learned or discovered by Executive during
the term of his employment with the Company (hereinafter collectively referred
to as "Inventions"); and (b) information regarding plans for research,
development, new products and services, marketing and selling, business plans,
budgets and unpublished financial statements, licenses, prices and costs,
suppliers and customers which were learned or discovered by him during the term
of his employment with the Company, and information regarding the compensation
of other employees of the Company. For purposes of this Agreement, the term
"Proprietary Information" shall not include information that Executive can show
by competent proof (i) was known to Executive prior to disclosure by the
Company; (ii) was generally known to the public at the time the Company
disclosed the information to Executive; (iii) became generally known to the
public after disclosure by the Company through no act or omission of Executive;
or (iv) was disclosed to Executive by a third party having a bona fide right
both to possess the information and to disclose it to Executive.
B. THIRD PARTY INFORMATION. Executive understands, in
addition, that the Company may from time to time receive from third parties
confidential or proprietary information ("Third Party Information") subject to a
duty on the Company's part to maintain the confidentiality of such information
and to use it only for certain limited purposes. During the term of his
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employment and thereafter, Executive will hold Third Party Information in the
strictest confidence and will not disclose (to anyone other than Company
personnel who need to know such information in connection with their work for
the Company) or use, except in connection with his work for the Company, Third
Party Information unless expressly authorized by the Chairman or Chief Executive
Officer of the Company in writing.
C. RETURN OF COMPANY DOCUMENTS. When Executive leaves the
employ of the Company, he will deliver to the Company all drawings, notes,
memoranda, specifications, devices, formulas, and documents, together with all
copies thereof, and any other material containing or disclosing any Third Party
Information or Proprietary Information of the Company.
D. LEGAL AND EQUITABLE REMEDIES. Because Executive's services
are personal and unique and because Executive may have access to and become
acquainted with the Proprietary Information of the Company, the Company shall
have the right to enforce this Section 10 of the Agreement and any of its
provisions by injunctions, specific performance or other equitable relief,
without bond, without prejudice to any other rights and remedies that the
Company may have for a breach of this Agreement.
11. NOTICES. All notices and other communications hereunder shall be in
writing and shall be given or made by hand delivery, or by certified or
registered mail, return receipt requested, postage prepaid, or by telegram, as
follows, or to such other person or address as shall be hereafter designated by
notice given in accordance with this Section:
A. If to the Company: High Speed Access Corp.
Attn: President
Suite 1150
4100 East Mississippi Avenue
Denver, Colorado 80246
B. If to Executive: Daniel J. O'Brien
31 Golden Eagle Lane
Littleton, Colorado 80127
Any notice or other communication hereunder shall be deemed to have been duly
given or made if made by hand, when delivered against receipt therefor or when
attempted delivery shall be rejected, as the case may be, if made by letter,
upon deposit thereof in the mail, postage prepaid, registered or certified, with
return receipt requested, and if made by telegram, facsimile or reputable
overnight courier when sent. Notwithstanding the foregoing, any notice or other
communication hereunder which is actually received by a party hereto shall be
deemed to have been duly given or made to such party.
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12. MISCELLANEOUS.
A. ASSIGNMENT. This is a contract for personal services by
Executive and may not be assigned by Executive. This Agreement shall inure to
the benefit of and be binding upon the Company and its successors and assigns.
B. WAIVER OF BREACH. Failure or delay by either party to
insist upon compliance with any provision hereof shall not operate as, and is
not to be construed as, a waiver or amendment of such provision. The waiver by
either party of a breach of any provision of this Agreement by the other shall
not operate or be construed as a waiver of any subsequent breach, whether
occurring under similar or dissimilar circumstances.
C. ENTIRE AGREEMENT: CANCELLATION OF PRIOR AGREEMENTS. This
Agreement, the Stock Option Agreement and the Supplemental Agreement contain the
entire agreement of the parties with respect to the subject matter hereof. This
Agreement may not be changed orally, but only by an amendment in writing signed
by the parties hereto. All prior agreements or understandings concerning
Executive's employment by the Company are hereby canceled and superseded by this
Agreement.
D. SEVERABILITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
the remainder of this Agreement.
E. HEADINGS. The headings contained in this Agreement are for
convenience only and shall not be deemed a part of this Agreement in construing
or interpreting the provisions hereof.
F. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado.
G. COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which when
taken together shall constitute one and the same instrument.
H. ARBITRATION. Any controversy arising out of, or relating
to, this Agreement or any modification or extension of this Agreement, including
any claim for damages, recission, specific performance or other legal or
equitable relief, shall be settled by arbitration in the City of Denver, State
of Colorado, in accordance with the rules then obtaining of the American
Arbitration Association. The determination of the arbitrator when made shall be
binding upon all parties bound by the terms of this Agreement. Judgment upon the
award rendered by the arbitrator may be entered in any court of competent
jurisdiction. The foregoing notwithstanding, the Company shall have the right to
seek injunctive or other equitable relief from any court of competent
jurisdiction in the event of any breach or threatened breach of Sections 8 or 10
of this Agreement.
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<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day, month and year first above written.
HIGH SPEED ACCESS CORP.
By: /s/ David A. Jones, Jr.
-----------------------------
Title: Chairman
--------------------------
("Company")
/s/ Daniel J. O'Brien
-----------------------------
DANIEL J. O'BRIEN
("Executive")
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<PAGE> 9
EXHIBIT A
STOCK OPTION AGREEMENT
[see Exhibit 10.54 to this Form 10-K]
9
<PAGE> 10
EXHIBIT B
HIGH SPEED ACCESS CORP.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Agreement") is made and entered
into effective as of the _____ day of _______, _____, by and between HIGH SPEED
ACCESS CORP, a Delaware corporation (the "Corporation"), and DANIEL J. O'BRIEN
("Optionee").
RECITALS:
A. The Corporation has adopted the High Speed Access Corp. 1999 Stock
Option Plan ("Plan") to promote the interests of the Corporation and its
shareholders by providing selected key employees of the Corporation with
additional incentive to invest in shares of the Corporation's common stock, $.01
par value per share ("Shares").
B. The Corporation believes that such investment should increase the
personal interest and special effort of the key employees in providing for the
continued success and progress of the business of the Corporation and should
enhance the Corporation's efforts to attract and retain competent key employees.
C. Optionee is one of the key employees for whom the Plan was adopted
and the Corporation desires to grant Optionee an option to acquire Shares
pursuant to the terms and conditions of the Plan and this Agreement.
D. Concurrently with the execution hereof, the Corporation and Optionee
have entered into an Employment Agreement (the "Employment Agreement") and a
Supplemental Executive Compensation Agreement (the "Supplemental Agreement").
AGREEMENT:
NOW, THEREFORE, the parties hereby agree as follows:
1. GRANT OF OPTION; OPTION PRICE. The Corporation hereby grants to
Optionee the right and option to purchase ("Option") all or any part of an
aggregate of __________ Shares (the "Option Shares") on the terms and conditions
set forth herein, at a purchase price of $____ per Option Share ("Option
Price"). ______ of the Option Shares shall be considered incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and _______ of the Option Shares shall be considered nonstatutory stock
options. The Corporation and Optionee consider the Option Price to be not less
than 100% of the value of the Shares on the date hereof, which is the date on
which the Option was granted to Optionee (the "Date of Grant").
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<PAGE> 11
2. TERM OF OPTION AND VESTING. The Option shall continue for a term
commencing on the date hereof and ending at 5:00 p.m. Eastern Time on
________________ ("Termination Date"), unless sooner terminated as provided in
Section 5. Subject to the other terms and conditions set forth in this
Agreement, including without limitation Sections 6 and 7 hereof, the Option
shall vest and Optionee shall have the right to exercise the Option as follows:
2.1 FIRST YEAR. Up to twenty percent (20%) of the total Option
Shares may be exercised at any time after ____________.
2.2 SECOND YEAR. Up to an additional twenty percent (20%) of
the total Option Shares may be exercised at any time after two (2) years
following _____________.
2.3 THIRD YEAR. Up to an additional twenty percent (20%) of
the total Option Shares may be exercised at any time after three (3) years
following _____________.
2.4 FOURTH YEAR. Up to an additional twenty percent (20%) of
the total Option Shares may be exercised at any time after four (4) years
following ______________.
2.5 FIFTH YEAR. Up to an additional twenty percent (20%) of
the total Option Shares may be exercised at any time after five (5) years
following _______________.
If an installment covers a fractional share, such installment shall be
rounded off to the next highest share, except for the final installment, which
will be for the balance of the total Option Shares.
3. CONDITIONS TO EXERCISE OF OPTIONS.
3.1 EXERCISE OF OPTION. Optionee may exercise the Option by
delivering to the Corporation: [i] seven (7) days' prior written notice
("Exercise Notice") specifying the number of Shares as to which the Option is
being exercised and, if determined by counsel for the Corporation to be
necessary, representing that such Shares are being acquired for investment
purposes only and not for purpose of resale or distribution; and [ii] payment by
the Optionee, or a broker-dealer (as provided in Section 3.2 hereof), of the
Option Price for the number of Shares with respect to which the Option is being
exercised, in the manner provided in Section 3.2.
3.2 PAYMENT OF OPTION PRICE. The Corporation shall accept as
payment for the Option Price cash, a certified or cashiers check, whole shares
of Common Stock owned by the Optionee evidenced by negotiable certificates, such
other consideration as shall constitute lawful consideration for the issuance of
Common Stock and be approved by the Compensation Committee of the Corporation's
Board of Directors (the "Committee") established to administer the Plan
(including without limitation, assurance satisfactory to the Committee from a
broker registered under the Securities Exchange Act of 1934 of the delivery of
the proceeds of an imminent sale of Common Stock to be issued pursuant to the
exercise of such Option, such sale to be made at the direction of
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<PAGE> 12
the Optionee), or a combination of such methods of payment, which payment must
be delivered to the Corporation with the Exercise Notice.
3.3 DELIVERY OF STOCK ON EXERCISE. On or before the expiration
of the seven (7) day Exercise Notice period, and provided that all conditions
precedent contained in this Agreement are satisfied, the Corporation shall,
without transfer or issuance tax or other incidental expenses to Optionee,
deliver to Optionee, at the offices of the Corporation, or at such other place
as may be mutually acceptable, or, at the election of the Corporation, by
certified mail addressed to Optionee at Optionee's address as shown in the
records of the Corporation, a certificate or certificates for the number of
Shares set forth in the Exercise Notice and for which the Corporation has
received payment in the manner prescribed herein. The Corporation may postpone
such delivery until it receives satisfactory proof that the issuance or transfer
of such Shares will not violate any of the provisions of the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, or any
rules or regulations of the Securities and Exchange Commission promulgated
thereunder, or the requirements of applicable state law relating to
authorization, issuance or sale of securities, or until there has been
compliance with the provisions of such acts or rules or the requirements of the
regulations. Options are exercisable only in whole Shares. If Optionee fails to
accept delivery of all or any part of the number of Shares specified in the
Exercise Notice upon tender of delivery thereof, Optionee's right to exercise
this Option with respect to such undelivered shares may be terminated by the
Corporation.
3.4 OPTION NOT TRANSFERABLE EXCEPT IN EVENT OF DEATH. During
Optionee's lifetime, the Option shall be exercisable only by Optionee, and
neither the Option nor any right hereunder shall be transferable except by will
or by the laws of descent and distribution, provided, however, if permitted
under the terms of the Plan, as in effect from time to time, transfers of the
Option, or portions thereof, shall also be permitted under this Agreement. The
Option may not be subject to execution or other similar process. If Optionee
attempts to alienate, assign, pledge, hypothecate or otherwise dispose of the
Option or any of Optionee's rights hereunder, except as provided herein, or in
the event of any levy, attachment, execution or similar process upon the rights
or interests hereby conferred, the Corporation may, in its sole and absolute
discretion, terminate the Option by notice to Optionee and it shall thereupon
become null and void.
4. ACCELERATION OF EXERCISE DATES UPON DEATH OR DISABILITY. The Option
granted by this Agreement shall vest and become fully exercisable on or after
the date of termination of Optionee's employment with the Corporation due to
death or Disability.
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<PAGE> 13
5. TERMINATION.
5.1 TERMINATION OF EMPLOYMENT FOR REASONS OTHER THAN
DISABILITY, DISCHARGE FOR CAUSE, OR DEATH. Upon the termination of Optionee's
employment with the Corporation for a reason other than Optionee's Disability,
discharge for Cause or death, the Option granted hereunder shall be exercisable,
to the extent exercisable at the date of Optionee's termination of employment,
at any time prior to the earlier of [a] three (3) months following receipt by
Optionee or the Corporation of a notice of termination of employment, or [b] the
Termination Date.
5.2 TERMINATION OF EMPLOYMENT BECAUSE OF DISABILITY. If
Optionee's employment with the Corporation terminates because of Optionee's
Disability, the Option granted hereunder shall be exercisable at any time within
a period ending on the earlier of [a] one year after Optionee's Disability or
[b] the Termination Date.
5.3 TERMINATION OF EMPLOYMENT BECAUSE OF DISCHARGE FOR CAUSE.
This Agreement shall terminate and the Option granted hereunder shall be null
and void immediately upon the termination of Optionee's employment with the
Corporation through discharge for Cause, as defined in the Employment Agreement.
5.4 DEATH OF OPTIONEE. If Optionee dies [i] while employed by
the Corporation, or [ii] within three (3) months after ceasing to be an employee
of the Corporation, then the Option granted hereunder shall be exercisable by
Optionee's personal representative or the person or persons to whom Optionee's
rights under the Option shall pass by will or by application of the laws of
descent and distribution, at any time within a period ending on the earlier of
[a] one (1) year after Optionee's date of death or [b] the Termination Date.
6. ACCELERATION UPON A CHANGE OF CONTROL. Notwithstanding any provision
of this Agreement to the contrary, upon a Corporate Transaction, as defined in
the Plan, the provisions of Section 9 of the Plan shall govern the
exerciseability of the Option granted hereunder.
7. ADJUSTMENT OF SHARES. In the event of capital adjustment after the
Date of Grant in the Common Stock of the Corporation by reason of any
reorganization, recapitalization, stock split, stock dividend, combination or
exchange of shares, merger or consolidation, or any other change (after the
effective date of the Plan) in the nature or number of shares of Common Stock of
the Corporation, a proportionate adjustment shall be made in the Option Price
and the number and kind of shares of Common Stock covered by outstanding Options
granted pursuant to this Agreement. By virtue of such a capital adjustment, the
price of any share under Option shall be adjusted so that there will be no
change in the aggregate purchase price payable upon exercise of any such Option.
Such determination by the Compensation Committee shall be conclusive.
8. SECURITIES LAWS. Optionee understands that the shares issuable upon
exercise of the Option have not been registered under the Securities Act of
1933, as amended (the "Act"), or under the laws of any other jurisdiction, and
that the Corporation does not contemplate registering, and is
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<PAGE> 14
under no obligation to register, such securities. Optionee understands and
agrees that the shares issuable upon exercise of the Option may not be sold,
transferred, pledged or otherwise disposed of unless they are subsequently
registered under the Act and, where required, under the laws of other
jurisdictions or an exemption from registration is available and the Corporation
is in receipt of an opinion of counsel satisfactory to the Corporation to such
effect.
9. TAX WITHHOLDING. The Corporation shall have the right to require
Optionee to remit to the Corporation an amount sufficient to satisfy all
federal, state and local withholding tax requirements, or, alternatively, the
Corporation shall have the right to withhold from any payment due Optionee or
retain Common Stock otherwise payable to the Optionee pursuant to exercise of an
Option in an amount sufficient to satisfy such withholding requirements, before
the delivery to the Optionee of any certificate(s) for shares of Common Stock.
10. MISCELLANEOUS PROVISIONS.
10.1 OPTION TERMINATES UPON TERMINATION DATE. Notwithstanding
any provision contained herein to the contrary, this Option shall terminate and
become null and void and of no effect after the Termination Date.
10.2 NO RIGHTS AS A SHAREHOLDER. Optionee shall not have any
of the rights of a shareholder regarding the Option Shares, except to the extent
that certificate(s) for such Option Shares shall have been issued upon the
exercise of the Option as provided herein.
10.3 CAPTIONS. The captions and section headings used herein
are for convenience only, shall not be deemed part of this Agreement and shall
not in any way restrict or modify the context and substance of any section or
paragraph of this Agreement.
10.4 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware.
10.5 ENTIRE AGREEMENT. This Agreement, the Employment
Agreement, the Supplement Agreement and the Plan contain the entire agreement
between the parties regarding its subject matter. It supersedes all prior
written or contemporaneous oral agreements related thereto.
10.6 AMENDMENT AND MODIFICATIONS. No amendment or other
modification to this Agreement shall be binding upon any party unless executed
in writing by all of the parties hereto.
10.7 WAIVER. No waiver by any party of any of the provisions
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether similar, nor will any waiver constitute a continuing waiver.
No waiver will be binding unless executed in writing by the party making the
waiver.
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<PAGE> 15
10.8 CUMULATIVE REMEDIES. No right or remedy conferred upon or
reserved to any of the parties under the terms of this Agreement is intended to
be, nor shall it be deemed, exclusive of any other right or remedy provided
herein or by law or equity, but each shall be cumulative of every other right or
remedy.
10.9 CAPITALIZED TERMS. Capitalized terms in this Agreement
shall have the meaning ascribed to such terms in the Plan unless otherwise
defined herein.
10.10 OPTIONEE BOUND BY PLAN. Optionee acknowledges receipt of
a copy of, and agrees to be bound by, the terms and provisions of, the Plan,
which is incorporated herein by reference.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
HIGH SPEED ACCESS CORP.
By:
--------------------------------------
Title:
-----------------------------------
("Corporation")
-----------------------------------------
DANIEL J. O'BRIEN
("Optionee")
15
<PAGE> 16
EXHIBIT C
SUPPLEMENTAL EXECUTIVE COMPENSATION AGREEMENT
[see Exhibit 10.53 to this Form 10-K]
16
<PAGE> 1
EXHIBIT 10.53
SUPPLEMENTAL EXECUTIVE COMPENSATION AGREEMENT
THIS SUPPLEMENTAL EXECUTIVE COMPENSATION AGREEMENT
("Agreement") is entered into effective as of the 1st day October, 1999, by and
between HIGH SPEED ACCESS CORP., a Delaware corporation (the "Company") and
DANIEL J. O'BRIEN, an individual resident of Colorado ("Executive").
RECITALS:
Executive desires to be employed by the Company and the Company desires
to employ Executive. As a condition of such employment, Executive and the
Company desire to execute this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, it is agreed by and between the
Company and Executive as follows:
1. Definitions. The following words and phrases, when used herein,
shall have the following meanings:
A. "Board" means the Company's Board of Directors.
B. "Cause" means that Executive's employment with the Company
shall have terminated upon the occurrence of any of the following events:
(a) The discharge of Executive for willful
misconduct, dishonesty or fraud on Executive's part in connection with
the performance of any of his duties under the Employment Agreement; or
(b) The discharge of Executive for a material breach
by Executive of any of the terms of Sections 8 or 10 of the Employment
Agreement; or
(c) The discharge of Executive upon a determination
by the Board, acting in good faith and with reasonable justification,
that Executive's performance in his position as Chief Operating Officer
of the Company has been unsatisfactory, after first having given
written notice to Executive that his performance has been
unsatisfactory (which notice shall set forth in reasonable detail the
nature of the unsatisfactory performance), and Executive having failed
to cure such unsatisfactory performance within thirty (30) days
thereafter to the reasonable satisfaction of the Board; or
(d) The discharge of Executive for conviction of a
felony or a crime involving moral turpitude.
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C. "Common Stock' means the $.01 par value per share common
stock of the Company.
D. "Company" means High Speed Access Corp., a Delaware
corporation, and its successors.
E. "Disability" or "Disabled" means a physical or mental
condition which in the Company's judgment, based on medical reports and other
evidence satisfactory to the Company, prevents Executive from satisfactorily
performing his usual duties for the Company as Chief Operating Officer for a
continuous period of six (6) months.
F. "Employment Agreement" means the Employment Agreement
between the Company and Executive dated October 1, 1999.
G. "Good Reason" means that Executive shall have terminated
his employment with the Company upon the determination by Executive that any or
more of the following events has occurred:
(a) a material change in Executive's duties as Chief
Operating Officer or an adverse change in Executive's title; or
(b) any reduction by the Company of Executive's
Salary or a material reduction in Executive's benefits.
I. "Option" means the option to purchase the Option Shares
pursuant to the Option Agreement.
J. "Option Agreement" means the Stock Option Agreement
effective as of October 1, 1999 between the Company and Executive.
K. "Option Shares" means the 750,000 shares of Common Stock
subject to the Option.
L. "Salary" shall have the meaning given it in the Employment
Agreement.
2. Payment Election; Cancellation of Option.
A. If, as of September 30, 2002, the Spread (as defined
herein) is less than Two Dollars ($2.00) per share, Executive may elect, with
respect to all or a portion of the Option Shares then outstanding (including
Option Shares which under the provisions of the Option Agreement are not then
exercisable by Executive), to surrender to the Company for cancellation the
unexercised Option, or portion thereof to which the election relates, and to
receive from the Company in
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<PAGE> 3
exchange therefor a cash payment equal to the product of [i] Two Dollars ($2.00)
multiplied by [ii] the number of Option Shares then outstanding and not
previously exercised by Executive as to which the election relates. Such payment
by the Company shall be in lieu of Executive's exercise of the Option, or the
portion thereof to which the election relates. Executive may exercise this
election by delivering written notice of exercise to the Company (the "Election
Notice") on or before October 10, 2002. "Spread" shall mean the difference
between the exercise price per share of the Option Shares and the Fair Market
Value per share of the Option Shares. "Fair Market Value" per share shall mean
the average of the closing sale prices of the Common Stock as quoted on the
Nasdaq National Market System for the ten (10) consecutive trading days
immediately preceding the date of measurement.
B. If Executive's employment with the Company is terminated
without Cause or for Good Reason, within the six (6) month period following the
hiring by the Company of a chief executive officer, 250,000 of the Option Shares
(to the extent not then vested and exercisable) shall automatically vest and
become immediately exercisable by Executive (the "Vested Option Shares"). If the
Spread on the Vested Option Shares is less than Two Dollars ($2.00) per share as
of the date of Executive's termination of employment, Executive may elect, with
respect to all or any portion of the Vested Option Shares, to surrender to the
Company for cancellation the unexercised Option, or portion thereof to which the
election relates, and to receive from the Company in exchange therefor a cash
payment equal to [i] Two Dollars ($2.00) multiplied by the number of Vested
Option Shares as to which the election relates, multiplied by [ii] the number of
months during which Executive has been employed by the Company (with any partial
month in which Executive has served ten or more days counted as one month),
divided by [iii] 12. Such payment by the Company shall be in lieu of Executive's
exercise of the Option with respect to the Vested Option Shares, or the portion
of the Vested Option Shares to which the election relates. Executive may
exercise this election by delivering an Election Notice within ten (10) days
after the date of Executive's termination of employment.
3. Payment. Subject to Executive's right to defer any payment as
provided in Section 6 of this Agreement, the Company shall pay Executive any
amount to which he is entitled under Section 2 of this Agreement in one lump sum
payment within thirty (30) days after receipt of Executive's Election Notice.
The Company shall deduct from any payments to Executive under this Agreement any
federal, state or local withholding or other taxes or charges which the Company
is required to deduct under applicable law.
4. Forfeiture. Except as provided in Section 2.B of this Agreement, all
rights to any payments to Executive under this Agreement will be discontinued
and forfeited, and the Company will have no further obligation hereunder to
Executive under this Agreement upon the termination of Executive's employment
with the Company for any reason, whether voluntary or involuntary.
5. Accrual of Payment Amounts. The Company shall accrue the sum of Five
Hundred Thousand Dollars ($500,000) per year in each of the first three years of
Executive's employment with the Company to assist it in satisfying its
liability, if any, to Executive under this Agreement. The Company shall remain
the owner of amounts accrued under this Agreement. Executive shall have
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<PAGE> 4
only the Company's unsecured promise to pay. The rights accruing to Executive
shall be those of an unsecured general creditor of Company. Any contract, policy
or other asset which the Company may utilize to assure itself of the funds to
make payment shall not serve in any way as security to Executive for the
Company's performance under this Agreement. Any account established under this
Agreement by the Company is for bookkeeping purposes only and shall not be
considered to create a fund or trust for Executive or his beneficiary.
6. Deferral Election.
A. Deferral Election. Executive may elect to defer the receipt
of all or a portion of the cash payments otherwise payable to him by the Company
under Section 2.A of this Agreement. An election by Executive to defer any
payment shall be made in writing and shall specify the dollar amount of the
payment to be deferred. Executive's written election under this Section 6 must
be delivered to the Company on or before December 31, 2001 and shall be
irrevocable.
B. Ownership and Investment of Deferred Amounts. Amounts
deferred by Executive may be kept in any investment vehicles or assets as may be
selected by the Company in its discretion. The Company shall be the owner of all
amounts deferred by Executive.
C. Disposition of Executive's Account. Payment of any amounts
deferred by Executive hereunder shall be made to Executive on or before the
first business day of the calendar month immediately following the month in
which Executive separates from service with the Company for any reason. Except
as otherwise expressly provided herein, amounts credited to Executive shall be
paid to Executive in a single sum cash payment. If Executive dies before
distribution of all amounts credited to him, any amounts remaining shall be
distributed to his designated beneficiary in a single sum payment. If there is
no valid beneficiary designation filed with the Company at the time of
Executive's death, distribution of amounts otherwise payable to Executive shall
be paid to the personal representative of Executive's estate as a part of his
estate.
7. Nontransferability/Nonalienability. No right of Executive or his
beneficiary to receive any payment pursuant to this Agreement shall be subject
to alienation, transfer, sale, assignment, pledge, attachment, garnishment or
encumbrance of any kind. Any attempt to alienate, sell, transfer, assign, pledge
or otherwise encumber any such payments whether presently or thereafter payable
shall be void. Any payment due shall not in any manner be subject to the debts
or liabilities of Executive, his beneficiary or any other person.
8. No Guarantee of Employment. This Agreement shall not be deemed to
constitute a contract of employment between the parties, nor shall any provision
restrict the Company's right to discharge Executive, with or without cause, or
restrict Executive's right to terminate his employment with the Company.
9. Enforceability. The Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the stock or assets of
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<PAGE> 5
the Company to assume and agree to perform this Agreement in the same manner and
to the same extent that the Company would be required to perform it if no such
succession had taken place.
10. Notices. All notices required or permitted by this Agreement shall
be in writing and shall be given or made by personal delivery or by certified or
registered first-class mail, return receipt requested, postage prepaid, or by a
reputable overnight courier, at the following address, or such other address as
provided in writing by the person to receive the notice to the person providing
the notice: if to the Company: High Speed Access Corp., 4100 East Mississippi
Avenue, Denver, Colorado 80246; if to Executive: Daniel J. O'Brien, 31 Golden
Eagle Lane, Littleton, Colorado 80127. Any notice or other communication
hereunder shall be deemed to have been duly given or made if made by hand, when
delivered against receipt therefor or when attempted delivery shall be rejected,
as the case may be, if made by letter, upon deposit thereof in the mail, postage
prepaid, registered or certified, with return receipt requested, and if by
reputable overnight courier, when sent.
11. Assignment. This Agreement may not be assigned by Executive. This
Agreement shall inure to the benefit of and be binding upon the Company and its
successors and assigns.
12. Waiver of Breach. Failure or delay by either party to insist upon
compliance with any provision hereof shall not operate as, and is not be
construed as, a waiver or amendment of such provision. The waiver by either
party of a breach of any provision of this Agreement by the other shall not
operate or be construed as a waiver of any subsequent breach, whether occurring
under similar or dissimilar circumstances.
13. Entire Agreement; Modification. This Agreement, the Employment
Agreement and the Option Agreement constitute the entire agreement between the
parties with regard to the subject matter hereof, superseding all prior
understandings and agreements, whether written or oral. This Agreement may not
be revoked or revised except by a writing signed by the Company and Executive.
14. Severability. Should a court of competent jurisdiction determine
that any part of this Agreement is not fully enforceable, the unenforceable
portion shall be severed from the Agreement and the remainder of this Agreement
shall be fully enforced.
15. Governing Law. This Agreement shall be governed by the laws of the
State of Colorado.
16. Jurisdiction. The Company and Executive agree and consent to the
exclusive jurisdiction of the courts of the State of Colorado and of any federal
court located in Denver, Colorado in connection with any action or proceeding
arising out of or relating to this Agreement, any document or instrument
delivered pursuant to or in connection with this Agreement, or any breach of
this Agreement or any such document or instrument.
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IN WITNESS WHEREOF, the parties have executed this Agreement
as of the day and year first above written.
HIGH SPEED ACCESS CORP.
By: /s/ David A. Jones, Jr.
--------------------------------------
Title: Chairman
-----------------------------------
/s/ Daniel J. O'Brien
-------------------------
DANIEL J. O'BRIEN
6
<PAGE> 1
EXHIBIT 10.54
HIGH SPEED ACCESS CORP.
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT ("Agreement") is made and entered
into effective as of the 1st day of October, 1999, by and between HIGH SPEED
ACCESS CORP, a Delaware corporation (the "Corporation"), and DANIEL J. O'BRIEN
("Optionee").
RECITALS:
A. The Corporation has adopted the High Speed Access Corp. 1999 Stock
Option Plan ("Plan") to promote the interests of the Corporation and its
shareholders by providing selected key employees of the Corporation with
additional incentive to invest in shares of the Corporation's common stock, $.01
par value per share ("Shares").
B. The Corporation believes that such investment should increase the
personal interest and special effort of the key employees in providing for the
continued success and progress of the business of the Corporation and should
enhance the Corporation's efforts to attract and retain competent key employees.
C. Optionee is one of the key employees for whom the Plan was adopted
and the Corporation desires to grant Optionee an option to acquire Shares
pursuant to the terms and conditions of the Plan and this Agreement.
D. Concurrently with the execution hereof, the Corporation and Optionee
have entered into an Employment Agreement (the "Employment Agreement") and a
Supplemental Executive Compensation Agreement (the "Supplemental Agreement").
AGREEMENT:
NOW, THEREFORE, the parties hereby agree as follows:
1. GRANT OF OPTION; OPTION PRICE. The Corporation hereby grants to
Optionee the right and option to purchase ("Option") all or any part of an
aggregate of 750,000 Shares (the "Option Shares") on the terms and conditions
set forth herein, at a purchase price per Option Share equal to the lower of the
Fair Market Value Per Share (as defined under the Plan) on (i) October 1, 1999
and (ii) January 1, 2000 ("Option Price"). To the extent the Option meets the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended
("Code"), the Option Shares shall be considered incentive stock options as
defined in Section 422 of the Code.
2. TERM OF OPTION AND VESTING. The Option shall continue for a term
commencing on the date hereof and ending at 5:00 p.m. Eastern Time on September
2, 2009 ("Termination Date"), unless sooner terminated as provided in Section 5.
Subject to the other terms and conditions set forth
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in this Agreement, including without limitation Sections 6 and 7 hereof, the
Option shall vest and Optionee shall have the right to exercise the Option as
follows:
2.1 FIRST YEAR. Up to twenty percent (20%) of the total Option
Shares may be exercised at any time after September 2, 2000.
2.2 SECOND YEAR. Up to an additional twenty percent (20%) of
the total Option Shares may be exercised at any time after two (2) years
following September 2, 2001.
2.3 THIRD YEAR. Up to an additional twenty percent (20%) of
the total Option Shares may be exercised at any time after three (3) years
following September 2, 2002.
2.4 FOURTH YEAR. Up to an additional twenty percent (20%) of
the total Option Shares may be exercised at any time after four (4) years
following September 2, 2003.
2.5 FIFTH YEAR. Up to an additional twenty percent (20%) of
the total Option Shares may be exercised at any time after five (5) years
following September 2, 2004.
If an installment covers a fractional share, such installment shall be
rounded off to the next highest share, except for the final installment, which
will be for the balance of the total Option Shares.
3. CONDITIONS TO EXERCISE OF OPTIONS.
3.1 EXERCISE OF OPTION. Optionee may exercise the Option by
delivering to the Corporation: [i] seven (7) days' prior written notice
("Exercise Notice") specifying the number of Shares as to which the Option is
being exercised and, if determined by counsel for the Corporation to be
necessary, representing that such Shares are being acquired for investment
purposes only and not for purpose of resale or distribution; and [ii] payment by
the Optionee, or a broker-dealer (as provided in Section 3.2 hereof), of the
Option Price for the number of Shares with respect to which the Option is being
exercised, in the manner provided in Section 3.2.
3.2 PAYMENT OF OPTION PRICE. The Corporation shall accept as
payment for the Option Price cash, a certified or cashiers check, whole shares
of Common Stock owned by the Optionee evidenced by negotiable certificates, such
other consideration as shall constitute lawful consideration for the issuance of
Common Stock and be approved by the Compensation Committee of the Corporation's
Board of Directors (the "Committee") established to administer the Plan
(including without limitation, assurance satisfactory to the Committee from a
broker registered under the Securities Exchange Act of 1934 of the delivery of
the proceeds of an imminent sale of Common Stock to be issued pursuant to the
exercise of such Option, such sale to be made at the direction of the Optionee),
or a combination of such methods of payment, which payment must be delivered to
the Corporation with the Exercise Notice.
2
<PAGE> 3
3.3 DELIVERY OF STOCK ON EXERCISE. On or before the expiration
of the seven (7) day Exercise Notice period, and provided that all conditions
precedent contained in this Agreement are satisfied, the Corporation shall,
without transfer or issuance tax or other incidental expenses to Optionee,
deliver to Optionee, at the offices of the Corporation, or at such other place
as may be mutually acceptable, or, at the election of the Corporation, by
certified mail addressed to Optionee at Optionee's address as shown in the
records of the Corporation, a certificate or certificates for the number of
Shares set forth in the Exercise Notice and for which the Corporation has
received payment in the manner prescribed herein. The Corporation may postpone
such delivery until it receives satisfactory proof that the issuance or transfer
of such Shares will not violate any of the provisions of the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, or any
rules or regulations of the Securities and Exchange Commission promulgated
thereunder, or the requirements of applicable state law relating to
authorization, issuance or sale of securities, or until there has been
compliance with the provisions of such acts or rules or the requirements of the
regulations. Options are exercisable only in whole Shares. If Optionee fails to
accept delivery of all or any part of the number of Shares specified in the
Exercise Notice upon tender of delivery thereof, Optionee's right to exercise
this Option with respect to such undelivered shares may be terminated by the
Corporation.
3.4 OPTION NOT TRANSFERABLE EXCEPT IN EVENT OF DEATH. During
Optionee's lifetime, the Option shall be exercisable only by Optionee, and
neither the Option nor any right hereunder shall be transferable except by will
or by the laws of descent and distribution, provided, however, if permitted
under the terms of the Plan, as in effect from time to time, transfers of the
Option, or portions thereof, shall also be permitted under this Agreement. The
Option may not be subject to execution or other similar process. If Optionee
attempts to alienate, assign, pledge, hypothecate or otherwise dispose of the
Option or any of Optionee's rights hereunder, except as provided herein, or in
the event of any levy, attachment, execution or similar process upon the rights
or interests hereby conferred, the Corporation may, in its sole and absolute
discretion, terminate the Option by notice to Optionee and it shall thereupon
become null and void.
4. ACCELERATION OF EXERCISE DATES UPON DEATH OR DISABILITY. The Option
granted by this Agreement shall vest and become fully exercisable on or after
the date of termination of Optionee's employment with the Corporation due to
death or Disability.
5. TERMINATION.
5.1 TERMINATION OF EMPLOYMENT FOR REASONS OTHER THAN
DISABILITY, DISCHARGE FOR CAUSE, OR DEATH. Upon the termination of Optionee's
employment with the Corporation for a reason other than Optionee's Disability,
discharge for Cause or death, the Option granted hereunder shall be exercisable,
to the extent exercisable at the date of Optionee's termination of employment,
at any time prior to the earlier of [a] three (3) months following receipt by
Optionee or the Corporation of a notice of termination of employment, or [b] the
Termination Date.
3
<PAGE> 4
5.2 TERMINATION OF EMPLOYMENT BECAUSE OF DISABILITY. If
Optionee's employment with the Corporation terminates because of Optionee's
Disability, the Option granted hereunder shall be exercisable at any time within
a period ending on the earlier of [a] one year after Optionee's Disability or
[b] the Termination Date.
5.3 TERMINATION OF EMPLOYMENT BECAUSE OF DISCHARGE FOR CAUSE.
This Agreement shall terminate and the Option granted hereunder shall be null
and void immediately upon the termination of Optionee's employment with the
Corporation through discharge for Cause, as defined in the Employment Agreement.
5.4 DEATH OF OPTIONEE. If Optionee dies [i] while employed by
the Corporation, or [ii] within three (3) months after ceasing to be an employee
of the Corporation, then the Option granted hereunder shall be exercisable by
Optionee's personal representative or the person or persons to whom Optionee's
rights under the Option shall pass by will or by application of the laws of
descent and distribution, at any time within a period ending on the earlier of
[a] one (1) year after Optionee's date of death or [b] the Termination Date.
6. ACCELERATION UPON A CHANGE OF CONTROL. Notwithstanding any provision
of this Agreement to the contrary, upon a Change of Control, as defined in
Section 6.4 of this Agreement, the provisions of this Section 6 shall govern the
exerciseability of the Option granted hereunder.
6.1 ACCELERATION AMOUNT. The term "Change of Control Vested
Shares" shall mean the greatest of [i] 250,000, [ii] the number of Option Shares
that would have vested in accordance with Section 2 of this Agreement as of the
date of the first anniversary of the Change of Control, or [iii] the number of
Option Shares that would have vested upon a Change of Control in accordance with
Section 9 of the Plan. The term "Termination - Change of Control Vested Shares"
shall mean the greatest of [i] 250,000 or [ii] the number of Option Shares that
would have vested in accordance with Section 2 of this Agreement as of the date
of the second anniversary of the Change of Control.
6.2 VESTING UPON CHANGE OF CONTROL. Upon a Change of Control,
the Change of Control Vested Shares shall automatically vest and become
immediately exercisable by Optionee.
6.3 VESTING UPON TERMINATION FOLLOWING CHANGE OF CONTROL. If
Optionee's employment with the Corporation is terminated without Cause or for
Good Reason (as defined in Section 6.4 of this Agreement) within the six month
period following a Change of Control, then, to the extent not previously vested
and exercisable, the Termination - Change of Control Vested Shares shall
automatically vest and become immediately exercisable by Optionee.
4
<PAGE> 5
6.4 DEFINITIONS.
A. For purposes of this Agreement, "Change of Control" shall
mean (i) the purchase or other acquisition, sale or transfer of more than fifty
percent (50%) of the combined voting power of the Corporation, or (ii) the
approval by the stockholders of the Corporation of a reorganization, merger,
consolidation, or share exchange, in each case with respect to which persons who
were stockholders of the Corporation immediately prior to such reorganization,
merger, consolidation or share exchange do not, immediately thereafter, own more
than fifty percent (50%) of the combined voting power; provided, however, that
none of the foregoing shall be considered a Change of Control if Vulcan Ventures
Incorporated or any affiliate or affiliates thereof shall be the purchasing or
acquiring person or entity or shall as a result of such transaction own fifty
percent (50%) or more of the combined voting power of the Corporation or the
surviving entity in such transaction.
B. For purposes of this Agreement, "Cause" shall mean that
Optionee's employment with the Corporation shall have terminated upon the
occurrence of any of the following events:
(a) The discharge of Optionee for willful misconduct,
dishonesty or fraud on Optionee's part in connection with the
performance of any of his duties under the Employment Agreement; or
(b) The discharge of Optionee for a material breach
by Optionee of any of the terms of Sections 8 or 10 of the Employment
Agreement; or
(c) The discharge of Optionee upon a determination by
the Board of Directors of the Corporation, acting in good faith and
with reasonable justification, that Optionee's performance in his
position as Chief Operating Officer of the Corporation has been
unsatisfactory, after first having given written notice to Optionee
that his performance has been unsatisfactory (which notice shall set
forth in reasonable detail the nature of the unsatisfactory
performance), and Optionee having failed to cure such unsatisfactory
performance within thirty (30) days thereafter to the reasonable
satisfaction of the Board; or
(d) The discharge of Optionee for conviction of a
felony or a crime involving moral turpitude.
C. For purposes of this Agreement, "Good Reason" shall mean
that Optionee shall have terminated his employment with the Corporation upon the
determination by Optionee that any or more of the following events has occurred:
(a) a material change in Optionee's duties as Chief
Operating Officer or an adverse change in Optionee's title; or
5
<PAGE> 6
(b) any reduction by the Corporation in Optionee's
Salary or a material reduction in Optionee's benefits.
7. ACCELERATION UPON CERTAIN TERMINATION EVENTS. Upon Optionee's
termination of employment with the Corporation without Cause or for Good Reason,
within the six month period following the Corporation's hiring of a chief
executive officer, 250,000 of the Option Shares shall (to the extent not then
vested and exercisable) automatically vest and become exercisable by Optionee.
8. ADJUSTMENT OF SHARES. In the event of capital adjustment after the
Date of Grant in the Common Stock of the Corporation by reason of any
reorganization, recapitalization, stock split, stock dividend, combination or
exchange of shares, merger or consolidation, or any other change (after the
effective date of the Plan) in the nature or number of shares of Common Stock of
the Corporation, a proportionate adjustment shall be made in the Option Price
and the number and kind of shares of Common Stock covered by outstanding Options
granted pursuant to this Agreement. By virtue of such a capital adjustment, the
price of any share under Option shall be adjusted so that there will be no
change in the aggregate purchase price payable upon exercise of any such Option.
Such determination by the Compensation Committee shall be conclusive.
9. SECURITIES LAWS. Optionee understands that the shares issuable upon
exercise of the Option have not been registered under the Securities Act of
1933, as amended (the "Act"), or under the laws of any other jurisdiction, and
that the Corporation does not contemplate registering, and is under no
obligation to register, such securities. Optionee understands and agrees that
the shares issuable upon exercise of the Option may not be sold, transferred,
pledged or otherwise disposed of unless they are subsequently registered under
the Act and, where required, under the laws of other jurisdictions or an
exemption from registration is available and the Corporation is in receipt of an
opinion of counsel satisfactory to the Corporation to such effect.
10. TAX WITHHOLDING. The Corporation shall have the right to require
Optionee to remit to the Corporation an amount sufficient to satisfy all
federal, state and local withholding tax requirements, or, alternatively, the
Corporation shall have the right to withhold from any payment due Optionee or
retain Common Stock otherwise payable to the Optionee pursuant to exercise of an
Option in an amount sufficient to satisfy such withholding requirements, before
the delivery to the Optionee of any certificate(s) for shares of Common Stock.
11. MISCELLANEOUS PROVISIONS.
11.1 OPTION TERMINATES UPON TERMINATION DATE. Notwithstanding
any provision contained herein to the contrary, this Option shall terminate and
become null and void and of no effect after the Termination Date.
6
<PAGE> 7
11.2 NO RIGHTS AS A SHAREHOLDER. Optionee shall not have any
of the rights of a shareholder regarding the Option Shares, except to the extent
that certificate(s) for such Option Shares shall have been issued upon the
exercise of the Option as provided herein.
11.3 CAPTIONS. The captions and section headings used herein
are for convenience only, shall not be deemed part of this Agreement and shall
not in any way restrict or modify the context and substance of any section or
paragraph of this Agreement.
11.4 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Delaware.
11.5 ENTIRE AGREEMENT. This Agreement, the Employment
Agreement, the Supplemental Agreement (which is incorporated by reference herein
as if fully set forth herein) and the Plan contain the entire agreement between
the parties regarding its subject matter. It supersedes all prior written or
contemporaneous oral agreements related thereto.
11.6 AMENDMENT AND MODIFICATIONS. No amendment or other
modification to this Agreement shall be binding upon any party unless executed
in writing by all of the parties hereto.
11.7 WAIVER. No waiver by any party of any of the provisions
of this Agreement will be deemed, or will constitute, a waiver of any other
provision, whether similar, nor will any waiver constitute a continuing waiver.
No waiver will be binding unless executed in writing by the party making the
waiver.
11.8 CUMULATIVE REMEDIES. No right or remedy conferred upon or
reserved to any of the parties under the terms of this Agreement is intended to
be, nor shall it be deemed, exclusive of any other right or remedy provided
herein or by law or equity, but each shall be cumulative of every other right or
remedy.
11.9 CAPITALIZED TERMS. Capitalized terms in this Agreement
shall have the meaning ascribed to such terms in the Plan unless otherwise
defined herein.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
HIGH SPEED ACCESS CORP.
By: /s/ David A. Jones, Jr.
--------------------------------------
Title: Chairman
-----------------------------------
("Corporation")
/s/ Daniel J. O'Brien
-----------------------------------------
DANIEL J. O'BRIEN
("Optionee")
8
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-92171) of High Speed Access Corp. of our report
dated February 22, 2000 relating to the financial statements which appears in
this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Louisville, Kentucky
March 28, 2000
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