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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
JULY 19, 2000
REGISTRATION NO. [ ]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
HIGH SPEED NET SOLUTIONS, INC.
(Exact Name of Registrant as Specified in its Charter
<TABLE>
<CAPTION>
FLORIDA 7389 65-0185306
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<S> <C> <C>
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code) Identification Number)
</TABLE>
TWO HANNOVER SQUARE, SUITE 2120,
434 FAYETTEVILLE STREET MALL, RALEIGH, NORTH CAROLINA 27601
(919) 645-2610
(Address, including zip code, and telephone number, including area code of
Registrant's principal executive offices)
--------------------------
COPIES TO:
JIM VERDONIK
KILPATRICK STOCKTON LLP
3737 GLENWOOD AVE
RALEIGH, NORTH CAROLINA 27612
(919) 420-1700
--------------------------
APPROXIMATE COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
--------------------------
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If any securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [x]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
4629(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
PROPOSED
TITLE OF MAXIMUM AMOUNT OF
SHARES TO BE AMOUNT TO BE OFFERING PRICE REGISTRATION
REGISTERED REGISTERED PER SHARE (1) FEE
--------------- ------------ -------------- ------------
<S> <C> <C> <C>
common stock par 1,874,717 $6.375 $3,155.15
value $.001 per
share
</TABLE>
(1) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(c); estimated by taking the Over the Counter Bulletin
Board (OTCBB) close price on Monday, July 10, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY
DETERMINE.
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TABLE OF CONTENTS
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<S> <C>
TABLE OF CONTENTS..............................................................................................3
PROSPECTUS SUMMARY.............................................................................................5
RISK FACTORS..................................................................................................11
FORWARD LOOKING STATEMENTS....................................................................................26
USE OF PROCEEDS...............................................................................................28
PRICE RANGE OF COMMON STOCK...................................................................................28
DIVIDEND POLICY...............................................................................................29
SELECTED FINANCIAL DATA.......................................................................................29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.........................29
BUSINESS......................................................................................................39
MANAGEMENT....................................................................................................52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................................................64
PRINCIPAL AND SELLING SHAREHOLDERS............................................................................71
DESCRIPTION OF CAPITAL STOCK..................................................................................75
PLAN OF DISTRIBUTION..........................................................................................78
LEGAL MATTERS.................................................................................................78
EXPERTS.......................................................................................................78
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT..................................................................79
WHERE YOU CAN FIND MORE INFORMATION...........................................................................80
INDEX TO FINANCIAL STATEMENTS.................................................................................80
PART II........................................................................................................II-1
ITEM 13. EXPENSES OF ISSUANCE AND DISTRIBUTION..............................................................II-1
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS..........................................................II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES............................................................II-2
ITEM 16. EXHIBITS..........................................................................................II-15
ITEM 17. UNDERTAKINGS......................................................................................II-19
SIGNATURES.................................................................................................II-21
</TABLE>
You should rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling stockholders are offering to sell
shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Prospectus Subject to Completion
Dated July 19, 2000
1,874,717 Shares
High Speed Net Solutions, Inc.
[High Speed LOGO]
Common Stock
--------------------------
The Selling Stockholders are offering 1,874,717 Shares. We will not
receive any of the proceeds from the sale of the common stock.
Our designated NASD Over the Counter Bulletin Board (OTCBB) symbol is
HSNS. Currently our trading symbol includes a warning noted by an "E". The "E"
is a warning indicating that we are not current in our reporting obligations
and, consequently and in our situation, that our common stock could become
ineligible for quotation on the OTCBB at any time. On July 10, 2000 the last
reported sale price of the common stock on the NASD Over the Counter Bulletin
Board was $6.375 per share.
THIS INVESTMENT INVOLVES RISK. SEE THE "RISK FACTORS"
SECTION IN THIS PROSECTUS
The Securities and Exchange Commission and state securities regulators
have not approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
July 19, 2000
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PROSPECTUS SUMMARY
The information below is only a summary of more detailed information
included in other sections of this prospectus. This summary may not contain all
of the information that is important to you or that you should consider before
buying shares in the offering. The other information is important, so please
read this entire prospectus carefully.
HIGH SPEED NET SOLUTIONS
OUR BUSINESS
We are launching a new business to provide clients with a service to
deliver audio, video and graphics content and advertising over the Internet. In
February 2000, we entered into agreements with Summus Ltd. (Summus) to license
their MaxxSystem software to help implement our business plan. Summus is the
largest shareholder of our company, with the power to vote 45.4% of our common
stock.
We plan to use MaxxSystem software, plus other third party software,
for content compression and decompression and for management of rich media
content (media that contains one or more of the following: audio, video, images
or animation). We will use MaxxSystem in conjunction with other generally
available software products to implement out business plan. We plan to provide
an Internet service called Rich Media Direct(SM) for rich media delivery.
Our business plan assumes that the Internet will evolve into a
collection of distinct communities and individuals with specific wants, needs
and definable characteristics. If this evolution occurs, our business plan
assumes that the market will increase for services that can entice individuals
to examine companies, products or web sites that appeal to them or for
advertisements geared toward their preferences. We will use Rich Media Direct to
provide services to web commerce companies that seek to increase customer
awareness and revenues by targeting specific groups and individuals for Internet
e-mail advertising and content delivery services. We will also provide our
clients with tracking information related to how many times an advertisement was
viewed and who viewed it.
Currently we have contracts with four customers. We intend to continue
to focus our marketing efforts on dedicated Internet companies with web
properties, as well as traditional companies seeking to take advantage of the
commercial opportunities afforded by Internet direct marketing. We intend to use
a range of marketing activities to pursue our objectives, including trade shows,
trade advertisements, selected media events and our own website and service. We
also intend to publish additional marketing materials to support the sales
process, including company brochures, feature descriptions, technology research
papers and client case studies.
Currently, we only have enough cash to continue operations until
October of 2000 unless we receive additional funds either through earnings or
financing. We anticipate the need to raise approximately $5 million to implement
our business plan and fund our marketing activities for the approximate period
of October of 2000 through October of 2001.
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RECENT DEVELOPMENTS
In June 2000, we entered into a settlement agreement with William R.
Dunavant and Michael Cimino to resolve a litigation suit filed in Florida. The
settlement agreement provides, among other things, that we register 350,000
shares of common stock owned by Mr. Dunavant with the Securities and Exchange
Commission. Under the settlement agreement, we issued 175,000 new shares of our
common stock to Mr. Dunavant on the execution date of the settlement agreement.
In addition, the settlement calls for the payment of $12,750 per month and
25,000 shares of common stock per month until the registration of all shares are
effective. If our registration statement is not effective on or before January
1, 2001, from that date forward and until we have delivered an effective
registration statement, we pay Mr. Dunavant $12,750 and issue 50,000 shares of
common stock each month. We must also register all shares delivered under these
monthly allotments. Finally, we must also issue and register an allotment of
shares of our common stock, which is determined by a calculation that depends on
the date upon which the registration statement becomes effective and the
difference between the price of our common stock as traded on the OTCBB and
$23.00 per share.
In May 2000, we filed a motion for an emergency stay of delisting with
the SEC. In the emergency stay and subsequent brief filed with the SEC, High
Speed alleged that the delisting of High Speed's stock from the OTCBB harmed
High Speed shareholders. The SEC is currently reviewing the brief.
On June 30, 2000 we acquired a marketing and advertising company,
Douglas May & Co., Inc., a Texas corporation, for approximately $1,376,000 in
fair market value consideration granted in the form of new issuances of our
common stock. We plan to hold and operate Douglas May & Co. as a wholly-owned
subsidiary. The sole shareholder of Douglas May & Co. has joined us as an
employee with the position of Executive Vice President and Chief Creative
Officer. Prior to the acquisition, Mr. May was not a stockholder in High Speed
and had no relations with us. Under the terms of the acquisition, we issued
three allotments of our common stock to Mr. Douglas May based on a negotiated
partition of the $1,376,000 valuation assigned to Douglas May & Co. during our
negotiations. The three allotments comprise and guarantee Mr. May approximately
$1,376,000 in consideration for his conveyance to us of all of the outstanding
capital stock of Douglas May & Co.. The common stock we issued was assigned a
value based on its OTCBB trading price around the date of the closing of the
transaction by compiling the ten-day average of the closing price. The terms of
each allotment of common stock vary based on the partitioning of the $1,376,000.
The first allotment corresponded to $500,000 of value and we issued 50,000
shares of our common stock coupled with a guarantee that if the OTCBB trading
price of our common stock one year from the close of the transaction is less
than $10.00 per share then we will issue additional shares of our common stock
to make up the difference in value. The second allotment corresponded to
$576,000 of value and we issued 87,498 shares of our common stock coupled with
contractual obligations that (i) we would register these shares in this
registration and (ii) if the registration is not effective by a certain date
then Mr. May has the right to cause us to repurchase these shares from him by
making six cash installment payments to Mr. May. The third allotment
corresponded to $300,000 of value and we issued 45,572 shares of our common
stock coupled with contractual obligations that (i) we would register these
shares in this registration and (ii) if the registration is not effective by a
certain date then Mr. May has the right to cause us to repurchase these shares
from him by releasing funds the acquisition agreement places into an escrow
account, the funds being from
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certain accounts receivable of Douglas May & Co. valued at $300,000 and
anticipated to be collected during the next several months.
-----------------------------------------------------
Our principal executive offices are located at Two Hannover Square,
Suite 2120, 434 Fayetteville Street Mall, Raleigh, North Carolina. Our telephone
number is (919) 645-2610.
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THE OFFERING
Common stock offered by the
selling shareholders............... 1,874,717 shares, of which 1,109,717 shares
of common stock are currently issued and
outstanding, and of which 765,000 shares
represent shares of our common stock that
would be issued if this entire offering is
sold.
Of the 765,000 shares that would be issued,
115,000 shares represent options that two
selling shareholders could exercise.
Of the 765,000 shares that would be issued,
the remaining 650,000 shares represent an
estimate of the additional shares that we
will have to issue for Mr. William R.
Dunavant on or before the date this
registration statement goes effective
according to the terms of our settlement
agreement with Mr. Dunavant.
Common stock to be outstanding
after this offering if the entire
offering is sold.................. 22,267,719 shares.
This assumes that all 1,874,717 shares of
common stock in this registration are sold,
which would entail the issuance of 765,000
new shares of our common stock. This does
not include: (i) any issuance of shares for
stock options not included in the 765,000
allotment; and (ii) any issuance of shares
for conversion of the Series A Convertible
Preferred Stock that we have outstanding.
As of July 10, 2000, we had 21,502,719
shares of our common stock issued and
outstanding.
Dividend policy................... We do not expect to pay dividends on our
common stock in the foreseeable future. We
anticipate that all future earnings, if any,
generated from operations will be retained
to develop and expand our business.
Use of proceeds.................... We will not receive any proceeds from the
sale of Common stock outstanding after this
offering.
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Risks of investment in our common
stock.............................. An investment in our common stock is subject
to significant risks. Before making your
investment decision, you should consider
carefully the information set forth in the
"Risk Factors" section of this prospectus as
well as the other information set forth in
this prospectus, including our financial
statements and related notes.
NASD Over the Counter Bulletin HSNSE*
Board symbol
*Our designated NASD Over the Counter Bulletin Board (OTCBB) symbol is
HSNS. Currently our trading symbol includes a warning noted by an "E". The "E"
is a warning indicating that we are not current in our reporting obligations
and, consequently and in our situation, that our common stock could become
ineligible for quotation on the OTCBB at any time.
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SUMMARY FINANCIAL DATA
The following is a summary of the more complete financial information
provided in our financial statements appearing elsewhere in this prospectus. The
financial data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
the historical financial statements and notes included in this prospectus. The
statement of operations data for the years ended 1998 and 1999 and the balance
sheet data as of December 31, 1998 and 1999 is derived from the audited
financial statements included in this document. The statement of operations data
for the three months ended March 31, 1999 and March 31, 2000 and the balance
sheet data as of March 31, 2000 were derived from the unaudited financial
statements included in this document.
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<CAPTION>
YEARS ENDED THREE MONTHS ENDED
----------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1998 1999 1999 2000
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Selling, general and administrative expenses $ 374,841 $ 7,541,627 $ 2,125,437 $ 839,890
Interest expense (income), net -- 2,655,749 -- (7,577)
------------ ------------ ------------ ------------
Loss from continuing operations (374,841) (10,197,376) (2,125,437) (832,313)
Loss from discontinued operations (1,265,965) -- -- --
------------ ------------ ------------ ------------
Net loss $ (1,640,806) $(10,197,376) $ (2,125,437) $ (832,313)
============ ============ ============ ============
PER SHARE AMOUNTS:
Loss from continuing operations $ (0.03) $ (0.53) $ (0.12) $ (0.05)
Loss from discontinued operations $ (0.11) -- -- --
------------ ------------ ------------ ------------
Net loss per share $ (0.14) $ (0.53) $ (0.12) $ (0.05)
============ ============ ============ ============
Weighted average shares outstanding 11,898,867 19,080,492 17,220,996 21,112,149
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31 March 31,
1998 1999 2000
-------------------------- ----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and Cash Equivalents $ 18,609 $ 248,740 $1,427,606
Total Assets $ 95,058 $6,717,722 $7,924,565
Total Stockholders' (Deficit) Equity $ (208,957) $5,228,081 $6,024,637
========== ========== ==========
</TABLE>
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RISK FACTORS
This Form S-1 contains forward-looking statements. These
forward-looking statements are based on current expectations, estimates and
projections about our industry, management's beliefs, and certain assumptions
made by management. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks" and "estimates" and similar expressions are intended to
identify forward-looking statements. These statements are not guarantees of
future performance and actual actions or results may differ materially. These
statements are subject to certain risks, uncertainties and assumptions that are
difficult to predict.
We undertake no obligation to update publicly any forward-looking
statements as a result of new information, future events or otherwise, unless
required by law.
You should carefully consider the risks described below, together with
all of the other information included in this Form S-1, before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. If any of the following risks actually occurs, our business,
financial condition or operating results could be harmed. In such case, the
trading price of our common stock could decline, and you could lose all or part
of your investment.
RISKS ARISING FROM HIGH SPEED'S DEPENDENCY ON OUR RELATIONSHIP WITH SUMMUS LTD.
OUR CURRENT SYSTEM REQUIRES ENHANCEMENTS TO ALLOW US TO PROVIDE
SERVICES THAT WILL REMAIN ATTRACTIVE TO POTENTIAL CUSTOMERS.
The services that our current system allows us to provide to our
customers involve attaching video commercials to e-mails. We believe that the
method we use to deliver video commercials with e-mails will need to be enhanced
for our services to compete with competitive services. A critical enhancement we
need in order for us to remain competitive is the ability for a recipient of an
e-mail to immediately begin viewing the video commercial upon initial receipt of
the e-mail. Since we depend on Summus for the media compression and
decompression technology that we will use to deliver our services, we are
dependent on Summus to add to the software we use the capability to immediately
view the video.
Our capabilities must be enhanced to increase the speed of delivery of
video commercials. Our enhancement goal is to produce a video commercial that is
immediately viewable. Our current software forces a viewer to wait until the
entire video has been downloaded before it can be viewed. While this time period
varies, it can sometimes be so long as to cause dissatisfaction in the viewer.
We believe that to keep our product competitive, we will need to use software
that allows the video to begin to play concurrent with its downloading. That is
to say, it should be viewable as it is being received instead of making a
recipient wait for downloading first.
WE DO NOT DEVELOP THE TECHNOLOGY NECESSARY TO EXECUTE OUR BUSINESS
PLAN.
Summus Ltd. has developed the media compression technology we currently
use. We have no technology development capability and all enhancements and new
media compression
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technology we need to execute our business plan will depend upon Summus or third
parties being able to develop such enhancements and new technology.
Because our staff does not include software product developers, we
depend entirely on the media compression software products developed by Summus
Ltd. If Summus does not provide us with these products, then we would be
entirely dependent on the products of other companies. Because we do not have
our own software products, any unfavorable event at Summus that delays or
prevents development of Summus' products would have a material adverse effect on
us. If Summus were to stop developing the software products we plan to use, and
if we were not able to acquire equivalent software products from a third party
source, then our ability to execute our business plan would be materially
affected.
Our technology supplier, Summus, has no contractual obligation to
deliver new technology or enhancements of old technology to us.
The agreements between Summus and us give us nonexclusive rights to
certain software of Summus if it is developed, but the agreements create no
contractual obligation by Summus to develop technology for us other than
MaxxSystem. Summus may fail to develop technology in time for us to sell
products and generate revenue. Future delays could have a material adverse
effect on our business.
WE HAVE LIMITED RIGHTS TO SUMMUS TECHNOLOGY AND OUR RIGHTS ARE
NONEXCLUSIVE.
Our rights to Summus' technology are limited to those rights defined in
the agreements between Summus and us. In addition, our rights are nonexclusive.
Summus retains ownership of all intellectual property rights related to the
software products we license. We have a license to use their products for only a
finite amount of time. We do not have the right to modify or sell their products
nor do we have the right to license its use by third parties.
The only exclusive rights we have is that Summus will not compete with
our business as presently constituted, i.e., as a service bureau, during the
term of the new agreements and that Summus will not sell MaxxSystem to our
competitors for a finite amount of time. After July 1, 2001, Summus is free to
license MaxxSystem to our competitors.
CONFLICTS OF INTEREST BETWEEN SUMMUS AND US MAY LIMIT OUR OPPORTUNITIES
AND THEREFORE HARM OUR ABILITY TO GENERATE REVENUE.
As of July 10, 2000, Summus held 8,474,360 shares of our common stock
(39.4% of our outstanding common stock, and 35.9% on a fully diluted basis).
Summus also has the right to vote an additional 1,279,667 shares of our common
stock under voting agreements with and/or proxies from 14 persons. Total Summus
voting power is 45.4% of our outstanding common stock. One member of our Board
of Directors is an officer of Summus, Dr. Bjorn Jawerth. Our Board of Directors
only has five members and one is a Summus officer. In addition, one of our
officers, Alan R. Kleinmaier, owns Summus stock and has stock options for shares
of Summus common stock and is an Executive Vice President of Summus. Summus
formerly employed Andrew L. Fox, our Acting President and Chief Executive
Officer.
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If Summus decides that our business conflicts with the interests of
Summus, conflicts of interests between us and our major shareholder, our Board
members, and our officers, may limit our ability to operate in a way that is
contrary to the interest of Summus. The duty these Summus officers have to
Summus obligates them to act in Summus' financial interest. Summus' financial
interest may be adverse to our financial interests in some instances but not in
others. If a situation were to arise where a revenue-generating opportunity
could be presented to either Summus or us, but not to both companies, then
members of our Board of Directors who are also officers of Summus have
incentives and duties arising from their relationships with Summus to protect
Summus' interests, possibly to the detriment of High Speed. As a result of this
situation, it is possible that decisions of our Board of Directors may favor
Summus over us in the event that there is a conflict.
Dr. Bjorn Jawerth owns, as of July 10, 2000, 54.0% of the outstanding
shares of Summus and is the chairman of our Board of Directors. The fact that
Dr. Jawerth can also benefit personally from Summus' financial success means
that he has a personal financial incentive to maximize profits in Summus, which
could be adverse to maximizing profits at High Speed. For example, situations
could arise where Summus and High Speed negotiate an agreement between the two
companies to allocate an opportunity in the market.
IF SUMMUS CHANGES ITS TECHNOLOGY DEVELOPMENT DIRECTION, WE COULD BE
DEPRIVED OF VITAL SOFTWARE.
Even if Summus grows and is successful, Summus could decide to dedicate
its development resources to applications that are not useful to us. In that
case, Summus could decide to focus on another unrelated type of software that
Summus determines to be more advantageous for them than the technology that
benefits us. In that case, improvements to the compression/decompression
software that are necessary for us to remain competitive may not or will not be
made.
OUR RELATIONSHIP WITH SUMMUS MAY PREVENT US FROM ENTERING INTO
BENEFICIAL LONG-LASTING BUSINESS AGREEMENTS WITH OTHER COMPANIES.
It may be in our interest to enter into relationships with companies
that are competitive with Summus or that otherwise would not want to have a
relationship with us because of our relationship with Summus. For example,
because our Board of Directors and other officers have access to our
confidential business information, including trade secrets, other businesses
that wish to keep information away from Summus may choose to keep the same
information away from us. Our relationship with Summus, therefore, could cause
us to miss opportunities to enter into alliances with other companies that would
allow us to generate revenue.
Our close relationship with Summus may dissuade some companies from
entering into a relationship with us. Additionally, the overlap in directors
between us and Summus could prevent the formation of beneficial relationships
between us and other companies.
SALES OF OUR SHARES BY SUMMUS MAY HAVE AN ADVERSE EFFECT ON THE MARKET
PRICE OF OUR COMMON STOCK.
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As of July 10, 2000, Summus owns 8,474,360 shares of our common stock.
Summus has sold 2,568,000 shares of our common stock since August 25, 1999 for
prices ranging from $1.35 to $8.50 per share. Our shares are the primary liquid
asset of Summus, and Summus may sell more of the High Speed shares it owns to
finance its own operations. Future sales of our shares by Summus could adversely
affect the market price of our common stock.
SHAREHOLDERS MAY NOT BE ABLE TO EXERCISE CONTROL BECAUSE SUMMUS OWNS OR
HAS VOTING POWER FOR 45.4% OF OUR COMMON STOCK.
As of July 10, 2000 our largest shareholder and important software
supplier, Summus, owns 8,474,360 shares of our common stock (39.4% of our
outstanding common stock, and 35.9% on a fully diluted basis). Dr. Bjorn
Jawerth, the founder and chairman of the board of Summus, beneficially owns
approximately 39.4% of our outstanding common stock and 35.9% of our common
stock on a fully diluted basis. Summus can also vote an additional 1,279,667
shares of our common stock under voting agreements with and/or proxies from 14
persons. Total Summus voting power is 45.4% of our outstanding common stock and
41.4% on a fully diluted basis. As a result, Dr. Jawerth and Summus will likely
have the power to:
- Elect, or defeat the election of, our directors;
- Amend, or prevent amendment of, our articles of incorporation
or bylaws;
- Effect, or prevent, a merger, sale of assets or other
corporate transaction; and
- Control the outcome of any other matter submitted to the
shareholders for vote.
WE NEED TO ENTER INTO RELATIONSHIPS WITH ADDITIONAL COMPANIES IN ORDER
TO BE ABLE TO IMPLEMENT OUR BUSINESS PLAN.
In addition to our relationship with Summus, if we do not enter into
beneficial business relationships with other companies we will:
- Decrease the adoption rate of our services due to a lack of
distribution arrangements;
- Be limited in the type of e-mail video commercial content we
can develop;
- Lose the quantity and availability of attractive video and
graphics content that is available for our e-mail video
commercial direct marketing;
- Not achieve recognition and value of our brand name;
- Decrease the range of businesses that may rely on our
services;
- Not achieve a high degree of quality, performance, and
usefulness of our services.
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RISK RELATED TO OTCBB STATUS AND MARKET FACTORS
OUR STOCK MAY CEASE TO BE QUOTED IN THE OTCBB, RESULTING IN A SEVERE
LOSS OF LIQUIDITY AND VALUE.
Our stock was prohibited from being quoted on the Over the Counter
Bulletin Board ("OTCBB") as of 4:00 p.m., Eastern Standard Time, on May 17,
2000. This occurred because the NASD, the organization that operates the OTCBB,
determined that we were not current in our reporting obligations on that date
and time and consequently concluded that SEC-approved NASD rules barred members
of the OTCBB from quoting our common stock. On May 18, 2000, we appealed the
NASD's determination by petitioning the SEC for an emergency order to suspend
the effect of the NASD determination. On that same day the SEC granted our
emergency order and on May 19, 2000 our common stock resumed trading on the
OTCBB. Since that time our stock has continued to trade on the OTCBB under the
protection of the emergency order. If our stock would again cease to be quoted
on the OTCBB, either temporarily or permanently our shareholders will lose
liquidity, and as trading stops the market value of our stock is likely to
decrease substantially.
Our designated NASD Over the Counter Bulletin Board (OTCBB) symbol is
HSNS. Currently our trading symbol includes a warning noted by an "E". The "E"
is a warning indicating that we are not current in our reporting obligations
and, consequently and in our situation, that our common stock could become
ineligible for quotation on the OTCBB at any time.
The warning on our trading symbol will continue until the issue of
whether we are current in our reporting obligations is resolved. We have
requested that the SEC extend the emergency order that overrode the NASD
determination that our stock should cease to be traded on the OTCBB. The SEC is
currently considering our request. At any time the SEC could decide against
extending the emergency order and our stock could cease to be traded on the
OTCBB.
THE VALUE OF OUR STOCK MAY BE LIMITED BECAUSE OUR STOCK ONLY TRADES IN
THE OTCBB MARKET.
In addition, the stock market in general, and the Over the Counter
Bulletin Board (OTCBB) and the market for Internet and technology companies in
particular, have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of these
companies. These broad market and industry factors may reduce our stock price,
regardless of our operating performance. The trading prices of the stocks of
many technology companies have been at or near historical highs in the past 12
months and reflect price earnings ratios substantially above levels previously
seen in recent decades. These trading prices and price earnings ratios may not
be sustained.
Our shares are traded on the Over the Counter Bulletin Board (OTCBB),
an electronic quotation service. Approximately 17 broker-dealer firms are
currently market makers for our common stock. The OTCBB does not impose listing
standards or requirements, does not provide automatic trade executions and does
not maintain relationships with quoted issuers. Stocks traded on the OTCBB may
face a loss of market makers, lack of readily available bid and ask prices for
its stock, experience a greater spread between the bid and ask
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price of its stock and a general loss of liquidity with its stock. In addition,
many investors have policies against purchasing or holding OTCBB securities.
Both trading volume and the market value of the securities have been, and will
continue to be, affected by trading on the OTCBB.
As an OTCBB company, the market price of our securities has the
potential to be very volatile as a result of many factors, some of which are
outside of our control, including, but not limited to, quarterly variations in
financial results, announcements by us, our competitors, partners, customers,
potential customers or government agencies and predictions by industry analysts,
as well as general economic conditions. Sales by our existing stockholders
(including Summus and/or the selling shareholders whose shares we are
registering in this registration statement), trading by short-sellers and other
market factors may adversely affect the market price of our securities. Any or
all these risks have had and are likely to have a material adverse affect on the
market price of our securities. With the potential for substantially lower
trading volumes that may occur because we are an OTCBB company, the foregoing
factors would then have a greater adverse impact on the market price of the
securities.
OUR STOCK PRICE MAY BE VOLATILE AS A RESULT OF OTHER FACTORS.
The trading price of our common stock has been and is likely to
continue to be highly volatile. For example, during the 52-week period ended
June 30, 2000, the price of our common stock ranged from $1.5 to $31.875 per
share and traded at $6.375 at the close of business on July 10, 2000. We are not
aware of any reason related to our business for the changes in the price of our
stock. Our stock price could be subject to wide fluctuations in response to
factors such as:
- Actual or anticipated variations in our quarterly operating
results;
- Announcements of technological innovations, new products or
services by us or our competitors;
- Changes in our financial estimates or recommendations by
securities analysts;
- Conditions or trends in e-mail video commercial delivery over
the Internet;
- Changes in the market valuations of similar companies;
- Additions of key personnel;
- If key personnel such as, Andrew L. Fox, our Acting President
and Chief Executive Officer, Alan R. Kleinmaier, an Executive
Vice President, Gregory S. Gush, an Executive Vice President,
Robert S. Lowrey, our Chief Financial Officer, and Douglas
May, an Executive Vice President and our Chief Creative
Officer were no longer employed by us;
- Sales of our common stock;
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- Better understanding of our business by the investing public
as the information disclosed in this document becomes
available to the market.
RISKS RELATED TO FINANCIAL RESULTS AND CONDITION
OUR OPERATING HISTORY IS BRIEF, WHICH MAKES IT DIFFICULT TO EVALUATE
OUR BUSINESS.
We have a limited operating history because we terminated operations in
all market segments during the fourth quarter 1998. In the third quarter of
1999, we began preparations to enter the Internet video commercial delivery
services market. We have extremely limited financial results on which future
performance can be predicted as a result of our brief history.
The risks and uncertainties we face include the following:
- Market acceptance of our services is not established and there
is no indication that even if our services were established
that they could be profitable;
- Target markets have not been determined nor have channels of
distribution to those markets been established, in fact they
may not exist;
- We have no brand name recognition;
- We may not be able to develop new services when they are
needed or be able to increase the value of existing services
before they become archaic or obsolete;
- There is no evidence that we can successfully compete with any
competitor company.
Our business strategy may be unsuccessful and we may be unable to
address the risks we face in a cost-effective manner, if at all. Our inability
to successfully address these risks will harm our business. We lack sufficient
financial resources to implement our business plan and in order to continue we
will require additional funding through either debt or equity financing.
WE LACK SUFFICIENT FINANCIAL RESOURCES TO IMPLEMENT OUR BUSINESS PLAN.
On July 10, 2000, we had approximately $350,000 of cash. Two
occurrences have allowed us to pay our expenses over the last nine months.
First, in February of 2000 we sold 2000 shares of Series A Convertible Preferred
Stock to unaffiliated and unrelated investors at a price of $1,000 per share,
resulting in net proceeds of $1,892,202. Second, Summus has advanced us
approximately $250,000 during the period beginning in August 1999 through March
31, 2000 to help us pay our expenses. We have no commitment from Summus to
continue to advance money to sustain operations. Therefore, to implement our
business plan we will need to raise additional capital in the near future from
investors other than Summus. We plan to raise $5,000,000 to implement our
business plan and operate from October of 2000 until October of 2001. There can
be no assurance that we will be able to raise capital on terms that are
favorable to us. We plan to raise the $5,000,000 we need through a private
placement of our capital stock to institutional investors. We may be forced to
sell shares at prices below the market price of our
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stock on the OTCBB. Our sale of shares of capital stock to finance
implementation of our business plan will dilute the ownership of our existing
shareholders. Currently, we only have enough cash to continue operations until
October of 2000 unless we receive additional funds either through earnings or
financing.
WE HAVE A HISTORY OF LOSSES AND MAY NOT BECOME PROFITABLE.
We have not yet generated any revenue and we may never become
profitable. As of May 31, 2000, we had an accumulated deficit of approximately
$13.5 million dollars.
In 1999, we lost $10.2 million dollars. In 1998, we lost $1.6 million.
We plan to build a field and inside sales force and to use our own
services and third party advertising to market our services. To implement our
marketing, sales and promotional plan we will need to expend $1.0 million
between now and October of 2001.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.
As a result of our brief operating history and the rapidly changing
nature of the markets in which we compete, our quarterly and annual revenues and
operating results are likely to fluctuate from period to period. Our revenue
stream will be generated by work we do for our customers. This work will be done
on a project-by-project basis. Our ability to succeed financially will be
dependent on our customers' willingness and ability to pay us and our ability to
implement projects.
In addition, because the market for our services is relatively new and
rapidly changing, it is difficult to predict future financial results. Our sales
and marketing efforts, and business expenditures generally, are partially based
on predictions regarding certain developments for Internet video e-mail delivery
services. To the extent that these predictions prove inaccurate, our revenues
and operating expenses may fluctuate. For these reasons, investors should not
rely on period-to-period comparisons of our financial results as indications of
future results. Our future operating results could fall below the expectations
of public market analysts or investors and significantly reduce the market price
of our common stock. Fluctuations in our operating results will likely increase
the volatility of our stock price.
Of all of these factors that influence fluctuations in our operating
results, the factors beyond our control are:
- The demand for Internet e-mail advertising;
- The emergence and success of new and existing competition; and
- The cost of obtaining capital.
Within our control are factors such as:
- How and when we introduce new services and enhance these
services;
- The timing and success of our brand building and marketing
campaigns;
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- Our ability to establish and maintain strategic relationships;
- Our ability to attract, train and retain key personnel;
- Our ability to manage varying operating costs and capital
expenditures related to the expansion of our business
operations and infrastructure, including the hiring of new
employees; and
- Our ability to manage costs related to the acquisition of
businesses or technology.
RISKS RELATED TO OUR OPERATIONS
WE MAY BE UNABLE TO SUCCESSFULLY COMPETE IN THE INTERNET VIDEO
COMMERCIAL MARKET.
Our services may apply an advertising model to Internet e-mail
commercials by adding high quality video content to enhance the viewer's
experience and give the viewer the option to choose to obtain more information,
provide feedback, or even buy something. There has been no research to date that
indicates that viewers will examine or watch video delivered via e-mail. We may
be unable to develop a successful revenue model or sufficient demand for video
delivered via e-mail to take advantage of any market opportunity that may or may
not exist.
Our business success depends on the general growth of Internet
advertising and the frequency at which consumers visit web sites and use e-mail.
Other Internet content and advertising services that compete with our service
may be more attractive to advertisers, which would harm our ability to generate
revenue.
Our video commercial Internet delivery service will also compete with
other media such as television, radio and print for a share of advertisers'
total advertising budgets. Our advertising sales force and infrastructure are
still in the early stages of development relative to those of our competitors.
We cannot be certain that advertisers will place advertising with us. If we lose
advertising customers, fail to attract new customers, are forced to reduce
advertising rates or otherwise modify what we charge to retain or attract
customers, our revenues or earnings, if any, could be harmed.
Increased competition may result in price reductions, reduced margins,
loss of market share, loss of customers, and a change in our business and
marketing strategies, any of which could harm our revenues or earnings, if any.
DoubleClick and 24/7 are a few of our dominant competitors in the
online advertising and direct marketing space that provide banner-advertising
services. Banner advertisements are advertisements on web pages that connect to
or link to the advertiser's web site or location on the World Wide Web. Our
other dominant competitors are companies that provide e-mail direct marketing
services such as YesMail and Message Media . These companies compete on their
ability to enhance the reach of the advertisement either through access to
banner advertising space (as in the case of DoubleClick and 24/7) and through
the acquisition of e-mail account names (as in the case of YesMail and Message
Media).
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WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH OTHER COMPANIES THAT
OPERATE IN THE BROADER MEDIA DELIVERY MARKET.
Because we only offer one kind of advertising medium, the video
commercial sent by e-mail, we may not be able to compete with companies who
distribute advertisements through multiple media outlets. For example, a company
that has revenue from placing advertisements on television, radio, magazines as
well as the Internet will be able to spread its risks better than us because we
are limited to one type of communication, Internet based video content.
WE MAY NOT SUCCESSFULLY DEVELOP NEW SERVICES.
To date, the software we are currently using from Summus only allows
video and graphical messages to be attached to e-mails. Our growth depends on
our ability to license from Summus, or from third parties, other media
distribution and management solutions. Our business and operating results would
be harmed if we fail to develop future services that achieve widespread market
acceptance or that fail to generate significant revenues to offset development
costs. We may not timely and successfully identify, develop and market new
service opportunities. If we introduce new services, they may not attain broad
market acceptance or contribute meaningfully to our revenues or profitability.
Because the markets for our services are rapidly changing, we must
develop new offerings quickly. Delays and cost overruns could affect our ability
to respond to technological changes, evolving industry standards, competitive
developments or customer requirements. Our services also may contain undetected
errors that could cause increased development costs, loss of revenues, adverse
publicity, reduced market acceptance of the services or lawsuits by customers.
WE DEPEND ON KEY PERSONNEL WHO MAY LEAVE US AT ANY TIME.
Our success depends substantially on the continued employment of our
acting Chief Executive Officer and President, Andrew L. Fox, Alan R. Kleinmaier,
an Executive Vice President, Gregory S. Gush, an Executive Vice President,
Robert S. Lowrey, our Chief Financial Officer, Harris Glover our Vice President
of Software Development and Douglas May an Executive Vice President and Chief
Creative Officer. The loss of the services of these individuals would harm our
business.
With the exception of Mr. May who has an Employment Agreement and Mr.
Lowrey who has a non-competition agreement with us none of our other executive
officers have a contract that guarantees employment or a non-competition
agreements with us. We have in place a "key person" life insurance policy on Mr.
Fox.
WE DO NOT HAVE THE KEY EMPLOYEES REQUIRED TO IMPLEMENT OUR BUSINESS
PLAN AND WE MUST RECRUIT AN ENTIRE NEW TEAM.
We have only thirteen employees, and ten of these employees are new
employees who were only hired within the last several months. In addition, most
of our marketing, service and financial staff must be recruited in the future.
There is a very limited number of people with experience in Internet marketing
and service. In addition, since we lack an operating history or financial
resources, people we desire to recruit may not find us to be an attractive
employer.
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Therefore, we may not be able to recruit a team with the skills and experience
required to implement our business plan.
Our operations also depend on our ability to attract, train and retain
qualified personnel, specifically those with management and service provider
skills. In particular, we must hire skilled technology employees to establish
our service business. Competition for such personnel is intense, particularly
where we are located in Raleigh, North Carolina near the Research Triangle Park,
Durham and Chapel Hill, North Carolina.
In making employment decisions, particularly in the Internet and
high-technology industries, job candidates consider the value of stock options
they may receive in connection with their employment. As a result of potential
volatility in our stock price because we are an OTCBB company, we are
disadvantaged in competing with companies that have not experienced similar
volatility or that have not yet sold their stock publicly. If we do not succeed
in attracting new personnel or retaining and motivating our current personnel,
our business could be harmed.
WE CURRENTLY LACK EQUIPMENT AND SYSTEMS TO IMPLEMENT OUR BUSINESS PLAN.
We are entering a new market with a new business plan. We currently
lack the underlying infrastructure and service network as well as employees
needed to manage these systems. Our inability to successfully implement these
systems in a timely fashion could impede our ability to grow our business and
could harm revenue generation.
The purchase and implementation of our new information software systems
will require expenditure of approximately $1.5 million over the next 36 months.
WE NEED TO BUILD OR ACQUIRE A WEB SITE AND NETWORK INFRASTRUCTURE FOR
OUR BUSINESS TO SUCCEED.
A reduction in the performance, reliability and availability of our web
site and network infrastructure, once acquired, will harm our ability to
distribute our services to our users, as well as our reputation and ability to
attract and retain users, customers, advertisers and content providers. We
estimate that within 3 months we will have a working web site and sufficient
infrastructure to generate revenue, although there is no guarantee that when
this web site is functional that we will generate revenue. In addition, our
systems and operations could be damaged or interrupted by fire, flood, power
loss, telecommunications failure, Internet breakdown, earthquake and similar
events.
Our systems are also subject to break-ins, sabotage, intentional acts
of vandalism and similar misconduct. Our computer and communications
infrastructure, once acquired, will be located at a single leased facility in
Raleigh. If we had a back-up system or systems then the failure of our single
and only system would not be fatal to our operations. Due to insufficient
capital, we do not plan to have fully redundant systems; we have only one system
located in only one place. Operating from a single location makes our business
vulnerable to site specific disturbances such as fire, natural disasters or
power-outages.
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Our electronic commerce and digital content distribution activities
will be managed by sophisticated software and computer systems to be acquired
when we raise capital. We may encounter delays in developing or upgrading these
systems, and the systems may contain undetected errors that could cause system
failures. Any system error or failure that causes interruption in availability
of our services or content or an increase in response time could result in a
loss of potential or existing business services customers, users, advertisers or
content providers. If we suffer sustained or repeated interruptions, our
services and web sites could be less attractive to such entities or individuals
and our business would be harmed.
A sudden and significant increase in traffic on our planned web sites
could strain the capacity of the software, hardware and telecommunications
systems that we plan to use in the future. This could lead to slower response
times or system failures. Our operations will also depend on receipt of timely
content feeds from the content providers we plan to hire in the future, and any
failure or delay in the transmission or receipt of such content feeds could
disrupt our planned operations. In addition, many different factors could
temporarily interrupt our planned web site operations in response to a heavy
load of video commercial e-mail content transmission. These types of
interruptions could continue or increase in the future.
OUR NETWORK WILL BE SUBJECT TO SECURITY RISKS THAT COULD HARM OUR
REPUTATION AND EXPOSE US TO LITIGATION OR LIABILITY
On-line commerce and communications depend on the ability to transmit
confidential information securely over public networks. Any compromise of our
ability to transmit confidential information securely, and costs associated with
preventing or eliminating any problems, could harm our business. On-line
transmissions are subject to a number of security risks. For example, our own or
licensed encryption and authentication technology may be compromised, breached
or otherwise be insufficient to secure customer information. We could also
potentially experience unauthorized access, computer viruses and other
disruptive problems, whether intentional or accidental. It would also be
possible for a third party to circumvent our security measures and
misappropriate proprietary information or interrupt operations.
The occurrence of any of these or similar events could damage our
reputation and expose us to litigation or liability. We may also be required to
expend significant capital or other resources to protect against the threat of
security breaches or to alleviate problems caused by such breaches.
WE WILL RELY ON CONTENT PROVIDED BY THIRD PARTIES TO INCREASE MARKET
ACCEPTANCE OF OUR SERVICES.
We will depend on third parties to develop or offer content such as
audio, video, graphics, and animation to be delivered by us over the Internet.
We and our anticipated future advertisers and anticipated future content
creators will rely on third-party content providers, such as radio and
television stations, record labels, media companies, web sites and other
companies, to develop and offer content in formats that can be delivered using
our services and viewed using our services. We cannot guarantee that third-party
content providers will decide to offer content compatible with our system.
If they do not, then we will not be able to generate revenue.
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RISKS RELATED TO OUR INDUSTRY
THE GROWTH OF OUR BUSINESS DEPENDS ON THE INCREASED USE OF THE INTERNET
BY CONSUMERS FOR COMMUNICATIONS AND ELECTRONIC COMMERCE.
The growth of our business will depend on the continued growth of the
Internet as a medium for communications, electronic commerce and advertising.
Our business will be harmed if Internet usage does not continue to grow,
particularly as a source of information and entertainment and as a vehicle for
trade in goods and services. Our success will also depend on the efforts of
third parties to develop the infrastructure and complementary products and
services necessary to maintain and expand the Internet as a viable commercial
medium. The Internet may not be accepted as a viable commercial medium for
broadcasting the same content consumers are used to receiving via television.
In addition, we believe that other issues, such as security,
reliability, cost, ease of use and quality of service and privacy contribute to
the lack of establishment of the Internet and its related risks. These risks may
affect the amount of business that is conducted over the Internet.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by such growth, specifically the demands of
delivering e-mail video commercials. As a result, its performance and
reliability may decline. In addition, web sites have experienced interruptions
in service as a result of outages and other delays occurring throughout the
Internet. If these outages or delays occur frequently in the future, Internet
usage, as well as the usage of our services and web sites, could grow more
slowly or not grow at all.
CHANGES IN NETWORK INFRASTRUCTURE, TRANSMISSION METHODS AND BROADBAND
TECHNOLOGIES POSE RISKS TO OUR BUSINESS.
It is possible that increased Internet use may depend on the
availability of greater capacity or faster data transmission speeds (also known
as broadband transmission). If broadband access becomes widely available, we
believe it presents a significant business challenge for us. Development of
video commercial services for a broadband transmission infrastructure involves a
number of additional risks. We have not yet begun to develop video commercial
services for broadband transmissions.
We will depend on the efforts of third parties to develop and provide a
successful infrastructure for broadband transmission. Even if broadband access
becomes widely available, heavy use of the Internet may negatively impact the
quality of media delivered through broadband connections. If these third parties
experience delays or difficulties establishing a widespread broadband
transmission infrastructure or if heavy usage limits the broadband experience,
the release of our video commercial services for Internet broadband transmission
could be delayed. Even if a broadband transmission infrastructure is developed
for widespread use, our services may not achieve market acceptance or generate
sufficient revenues to offset our development costs.
RISKS RELATED TO LEGAL UNCERTAINTY
WE ARE SUBJECT TO RISKS ASSOCIATED WITH GOVERNMENTAL REGULATION AND
LEGAL UNCERTAINTIES.
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Few existing laws or regulations specifically apply to the Internet,
other than laws and regulations generally applicable to businesses. Certain U.S.
export controls and import controls of other countries, including controls on
the use of encryption technologies, may apply to our services. However, it is
likely that a number of laws and regulations may be adopted in the United States
and other countries with respect to the Internet. These laws may relate to areas
such as content (i.e., obscenity, indecency and defamation), copyright and other
intellectual property rights, encryption, use of key escrow data, caching or
storing graphics, multimedia and other content found on web sites for faster
access by servers, electronic authentication or "digital signatures," personal
privacy, advertising, taxation, electronic commerce liability, e-mail, network
and information security and the convergence of traditional communication
services with Internet communications, including the future availability of
broadband transmission capability. Other countries and political organizations
are likely to impose or favor more and different regulation than that which has
been proposed in the United States, thus furthering the complexity of
regulation. The adoption of such laws or regulations, and uncertainties
associated with their validity and enforcement, may affect the available
distribution channels for and costs associated with our services, and may affect
the growth of the Internet. If such laws or regulations are enacted or created
by case law, they may harm our business.
We do not know for certain how existing laws governing issues such as
property ownership, copyright and other intellectual property issues, taxation,
illegal or obscene content, retransmission of media and personal privacy and
data protection will be applied to the Internet by case law or regulatory
bodies. The vast majority of such laws were adopted before the advent of the
Internet and related technologies and do not address the unique issues
associated with the Internet and related technologies. Most of the laws that
relate to the Internet have not yet been interpreted. Many judges who may decide
cases dealing with Internet issues may have no knowledge or understanding of
computer technology or the Internet. The nature of controlling legal precedent
could cause unexpected results such as exposing us to significant liabilities
associated with content available on our planned web sites or distributed or
accessed through our services.
On October 28, 1998, the Digital Millennium Copyright Act (DMCA) was
enacted. The DMCA includes statutory licenses for the performance of sound
recordings and for the making of recordings to facilitate transmissions. Under
these statutory licenses, we and customers or our video commercial e-mail
services will be required to pay licensing fees for sound recordings we deliver
in original and archived programming. The DMCA does not specify the rate and
terms of the licenses, which will be determined either through voluntary
inter-industry negotiations or arbitration. We currently anticipate that
representatives of the webcasting industry, who use the Internet, and the world
wide web in particular, to broadcast information, will engage in arbitration
with the Recording Industry Association of America to determine what, if any,
licensee fee should be paid. Depending on the rates and terms adopted for the
statutory licenses, our business could be harmed both by increasing our own cost
of doing business, as well as by increasing the cost of doing business for our
customers.
The Child Online Protection Act and the Child Online Privacy Protection
Act (COPA) were enacted in October 1998. The COPA imposes civil and criminal
penalties on persons distributing material harmful to minors (e.g., obscene
material) over the Internet to persons under the age of 17, or collecting
personal information from children under the age of 13. We do not
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knowingly collect and disclose personal information from such minors. The manner
in which the COPA may be interpreted and enforced cannot be fully determined,
and future legislation similar to the COPA could subject us to potential
liability, which in turn could harm our business. Such laws could also damage
the growth of the Internet generally and decrease the demand for our services.
OUR EFFORTS TO PROTECT OUR TRADEMARKS MAY NOT BE ADEQUATE TO PREVENT
THIRD PARTIES FROM MISAPPROPRIATING OUR REGISTERED TRADEMARKS.
The protective steps we have taken in the past have been, and may in
the future continue to be, inadequate to deter misappropriation of our trademark
rights in the mark Rich Media Direct(SM). Although we do not believe that we
have suffered any material harm from misappropriation to date, we may be unable
to detect the unauthorized use of, or take appropriate steps to enforce our
trademark rights. We have filed for the registration of one of our service
marks, Rich Media Direct, in the United States. In the future we may file for
registration of our marks in Europe and Canada and other countries. Effective
trademark protection may not be available in every country in which we offer or
intend to offer our products and services. Failure to adequately protect our
trademark rights could damage or even destroy our Rich Media Direct(SM) brand
and our company name and impair our ability to compete effectively. Furthermore,
defending or enforcing our trademark rights could result in the expenditure of
significant financial and managerial resources.
WE MAY BE SUBJECT TO ASSESSMENT OF SALES AND OTHER TAXES FOR THE SALE
OF OUR SERVICES.
We may have to pay past sales or other taxes that we have not collected
from our customers. We do not currently collect sales or other taxes on the sale
of our services in states and countries other than those in which we have
offices or employees.
In October 1998, the Internet Tax Freedom Act (ITFA) was signed into
law. Among other things, the ITFA imposes a three-year moratorium on
discriminatory taxes on electronic commerce. Nonetheless, foreign countries or,
following the moratorium, one or more states, may seek to impose sales or other
tax obligations on companies that engage in such activities within their
jurisdictions. Our business would be harmed if one or more states or any foreign
country were able to require us to collect sales or other taxes from current or
past sales of services, particularly because we would be unable to go back to
customers to collect sales taxes for past sales and may have to pay such taxes
out of our own funds.
YEAR 2000 COMPLIANCE ISSUES COULD HARM OUR BUSINESS.
We are in the process of assessing any potential Year 2000 issues
associated with our envisioned services, and the computer systems, software,
other property and equipment we plan to purchase and use. Despite our efforts,
our envisioned services and systems, and those of third parties, including
content providers, advertisers, affiliates and end users, may contain errors or
faults with respect to the year 2000. Known or unknown errors or defects that
affect the operation of our services and systems or those of third parties could
result in delay or loss of revenues, interruptions of services, cancellation of
customer contracts, diversion of development resources, damage to our
reputation, increased service and warranty costs and litigation costs, any of
which could harm our business.
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FORWARD LOOKING STATEMENTS
We have made forward-looking statements in this document, all of which
are subject to risks and uncertainties. These forward-looking statements have
been made pursuant to the provisions of the Private Securities Litigation Reform
Act of 1995. These forward-looking statements are based on current expectations,
estimates and projections about High Speed's industry, management's beliefs, and
certain assumptions made by management. Forward-looking statements include
information concerning our possible or assumed future business success or
financial results. Such forward-looking statements include, but are not limited
to, statements as to our expectations regarding:
- the future development and growth of, and opportunities for
video commercial e-mail advertising and content distribution
services, the Internet and the on-line media delivery market;
- the future adoption of our planned future services and
technologies;
- future revenue opportunities;
- the establishment and future growth of our customer base;
- our ability to successfully develop and introduce future
services;
- future international revenues;
- future expense levels (including cost of revenues, research
and development, sales and marketing and general and
administrative expenses);
- future sales and marketing efforts;
- future capital needs;
- the future of our relationships with Summus and other
companies;
- the effect of past and future acquisitions;
- the future effectiveness of our intellectual property rights
should we acquire any such rights;
- the effect of any litigation in which we would become
involved; and
- the effect of the Year 2000 situation.
When we use words such as "believe," "expect," "plan," "intend,"
"assume," "seek," "estimate" and "anticipate" or similar words, we are making
forward-looking statements.
You should note that an investment in our common stock involves certain
risks and uncertainties that could affect our future business success or
financial results. These forward-looking statements are not guarantees of future
performance and our actual actions or
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results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in this
"Risk Factors" section and elsewhere in this Form S-1.
High Speed undertakes no obligation to update publicly any
forward-looking statements as a result of new information, future events or
otherwise, unless required by law. Readers should, however, carefully review the
risk factors included herein or in other reports or documents to be filed by
High Speed from time to time with the Securities and Exchange Commission,
particularly the Quarterly Report on Form 10-Q and any Current Reports on Form
8-K.
We believe that it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. Before you invest in our
common stock, you should be aware that the occurrence of the events described in
this "Risk Factors" section and elsewhere in this Form S-1 could materially and
adversely affect our business, financial condition and operating results.
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USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the sale
of the shares of common stock that may be sold using this prospectus. We will
not receive any of the proceeds from the sale of these shares of common stock.
PRICE RANGE OF COMMON STOCK.
Our common stock, $.001 par value, is traded in the over-the-counter
market and is quoted on the NASD Over the Counter Bulletin Board ("OTCBB") under
the symbol "HSNS." Prior to January 25, 1999, we were quoted on the OTCBB under
the symbol "ZZNT."
Our designated NASD Over the Counter Bulletin Board (OTCBB) symbol is
HSNS. However, currently our trading symbol includes a warning noted by an "E".
The "E" is a warning indicating that we are not current in our reporting
obligations and, consequently and in our situation, that our common stock could
become ineligible for quotation on the OTCBB at any time.
The following tables set forth the high and low daily bid prices for
each quarter during the entire trading history of our common stock as reported
by the OTCBB. Such quotations reflect inter-dealer prices without markup,
markdown or commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
2000 LOW HIGH
---- ---------- ----------
<S> <C> <C>
First Quarter $ 6.750 $ 31.875
Second Quarter $ 3.000 $ 13.250
Third Quarter through July 10, 2000 $ 5.938 $ 7.375
1999 LOW HIGH
---- ---------- ----------
First Quarter $ 1.000 $ 6.250
Second Quarter $ 1.125 $ 4.875
Third Quarter $ 1.500 $ 6.625
Fourth Quarter $ 2.625 $ 18.250
1998 LOW HIGH
---- ---------- ----------
First Quarter Not Traded Not Traded
Second Quarter Not Traded Not Traded
Third Quarter $ 3.000 $ 8.250
Fourth Quarter $ 2.125 $ 6.125
</TABLE>
The OTCBB is a regulated quotation service that displays real-time
quotes and volume information in over-the-counter (OTC) equity securities. The
OTCBB does not impose listing standards or requirements, does not provide
automatic trade executions and does not maintain relationships with quoted
issuers. Stocks traded on the OTCBB may face a loss of market
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makers, lack of readily available bid and ask prices for its stock, experience a
greater spread between the bids and ask price of its stock and a general loss of
liquidity with its stock. In addition, certain investors have policies against
purchasing or holding OTC securities. Both trading volume and the market value
of our securities have been, and will continue to be, materially affected by the
trading on the OTCBB.
As of June 30, 2000 there were 152 holders of record of the High
Speed's common stock. As of July 10, 2000 we had 21,502,719 shares of common
stock issued and outstanding. As of July 10, 2000, an amount of 1,280,000 shares
of our common stock are subject to outstanding options.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We
anticipate that we will retain earnings, if any, to finance the growth and
development of our business. Therefore, we do not expect to pay cash dividends
on our common stock for the foreseeable future. Any future determination to pay
cash dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, operating results, capital requirements
and such other factors as the board of directors deems relevant.
SELECTED FINANCIAL DATA
We derived the statement of operations data for the years ended
December 31, 1998 and 1999 and the balance sheet data as of December 31, 1998
and December 31, 1999 from the audited financial statements included in this
document. We derived the statements of operation data for the three months ended
March 31, 1999 and March 31, 2000 and the balance sheet data at March 31, 2000
from the unaudited financial statements included in this document.
The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and related notes thereto included
elsewhere in this document. All amounts, except per share amounts, are presented
in dollars. No cash dividends have been declared or paid in any of the periods
presented.
We have been in existence since our original incorporation in 1984,
however, we have had no substantial operations until 1998. We have audited
financial statements of High Speed for 1996 and 1997. These audited financial
statements present the audited balance sheets as of December 31, 1996 and
December 31, 1997 and the related statements of operations and cash flows for
each the two years in the period ended December 31, 1997, however, they show no
assets or liabilities or no revenues or expenses and no activity in the capital
accounts. Consequently, we have not presented statement of operations or balance
sheet data for 1995, 1996, or 1997 in the following table of selected financial
data because any amounts presented for these time periods would show no amounts
except for the outstanding shares of common stock. From the beginning of 1995
through the end of 1997, we had 5,000 shares of our common stock issued and
outstanding.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and accompanying notes, which appear elsewhere
in this document. It contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
those discussed below and elsewhere in this document, particularly under the
heading "Risk Factors."
OVERVIEW
High Speed was incorporated in 1984 and was inactive until it acquired
all of the assets of Marketers World, Inc. ("MWI") on August 24, 1998. Prior to
the merger, High Speed was a non-operating public shell and MWI was a private
operating company. In legal form, this merger was effected by High Speed issuing
its shares in exchange for the net assets of MWI. At the time of the merger,
High Speed had no assets or liabilities, and accordingly, the transaction was
accounted for as a recapitalization of High Speed.
MWI, which was incorporated in January 1998, was not able to execute
its planned activities and consequently ceased all operating activities in
December 1998. Accordingly, the operating results of MWI were presented as
discontinued operations in 1998.
Pursuant to an Agreement and Plan of Merger dated April 18, 2000,
between High Speed and J.S.J Capital Corp. ("JSJ"), a Nevada corporation, High
Speed has acquired all outstanding shares of common stock of JSJ from the sole
stockholder thereof in an exchange for 50,000 shares of restricted common stock
of High Speed in a transaction in which High Speed was the successor
corporation. Legal fees of $420,000 were paid in cash in connection with this
transaction.
In January of 2000, we launched an Internet service for rich media
direct marketing and content delivery. Our service currently allows us to
deliver video advertisements, through electronic mail, to targeted e-mail lists.
We can also provide customers consulting services for creating video
advertisements that maintain a high quality visual experience when compressed
and delivered over the Internet. We plan to derive our revenues from providing a
service that is fully equipped and ready to go into operation for creation,
hosting and delivery of rich media advertisements and content for customer's
campaigns. In addition, we plan to derive revenues from complementary services
that are offered to customers such as call center routing and
voice-over-the-Internet services. We have not generated any revenue to date from
these services. We are a development stage company.
We anticipate that revenues will result from revenue-sharing agreements
as well as fixed rate pricing and flat fees. Revenues will be recognized when
services are provided for initiating a campaign, when rich media advertisements
are delivered and when results of a campaign (such as `revenue' or `reach') are
reported.
Our prospects must be considered in light of our limited operating
history. We face all the risks and uncertainties of development-stage companies.
Our future success depends upon,
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among other things, our ability to generate revenues from future customers.
Specifically, we must:
- Generate sales of our Rich Media Direct service to companies
with web sites, e-commerce companies and other entities
interested in direct marketing on the Internet;
- Generate sales of our complementary service offerings such as
content hosting, streaming content (immediately and steadily
delivering content via the Internet) from the hosted storage
location to the listener or viewer, voice-over-the-Internet
services and call center services;
- Add personnel to establish and begin operating our sales and
marketing programs in connection with our Rich Media Direct
service; and
- Establish our ability to resell our services through reseller
channels.
RECENT DEVELOPMENTS
We have recently accomplished a number of key milestones that are
important to our business and revenue generation. Since the beginning of January
2000 we have accomplished the items described immediately below.
To facilitate the implementation of our business plan, we have
restructured our license agreements with Summus Ltd. The new license agreements
give High Speed a nonexclusive right to use Summus' software product,
MaxxSystem, to distribute compressed content over the Internet or over private
network environments for the purposes of advertising or content delivery. In
addition, the new license agreements with Summus gives us a 20% revenue share of
all upfront or royalty based license revenue that might result from Summus
licensing MaxxSystem to a third party service bureau. As part of the new
agreements, Summus cannot license MaxxSystem to a third party who wants to
establish an online advertising service bureau until July 1, 2001. In addition,
the new license agreements give High Speed a percentage of the revenue Summus
may derive from licensing its products or technology to Samsung Electronics of
America, Inc., if Samsung signs an agreement with Summus. As of yet, no revenue
has been derived from Summus under the new license agreements.
To further describe how we have restructured the license agreements, in
January of 2000, we entered into a Master Agreement with Summus Ltd. ("Summus").
The Master Agreement includes a Software License Agreement ("SLA"), a Software
Maintenance Agreement ("SMA") and a Revenue Sharing Agreement ("RSA")
(collectively with the Master Agreement and a letter agreement between High
Speed and Summus, dated March 13, 2000 ("Letter Agreement"), the "New
Agreements"). The New Agreements entirely replace the Marketing License
Agreement and the related agreements incorporated by it or referenced by it, and
replace the various letter agreements between Summus and us concerning one
potential customer, Samsung Electronics of America, Inc. (collectively, the
"Terminated Agreements"). Under the terminated Marketing License Agreement, we
made payments of $2,250,000 in cash toward payment of the $3,000,000 originally
due under the Marketing License Agreement. We renegotiated the final amount due
under the Marketing License Agreement and agreed to issue 1,500,000 shares of
our common
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stock to Summus in lieu of making the final cash payment of $750,000. These
shares were valued at $2,278,125, bringing the total value of the transaction to
$4,528,125. Summus used the prepaid royalties under the Marketing License
Agreement for working capital, which included working capital used to develop
the products to deliver to us as contemplated by the Marketing License
Agreement.
The New Agreements give us a nonexclusive license to a group of
software products designed to work together that Summus has labeled MaxxSystem.
MaxxSystem allows us to compress, decompress and manage audio, video, animation
and graphical content. We will deliver this content for our customers over the
Internet or over private networks using MaxxSystem. To perform this delivery,
MaxxSystem uses a compression technique developed by Summus and marketed under
the brand name of Dynamic Wavelets. As of July 10, 2000, Summus is approximately
ten days late in delivering two of the various components of MaxxSystem as
called for by the delivery dates set forth in the New Agreements.
On March 31, 2000, we entered into a "Letter of Agreement" with Summus.
This Letter Agreement is one of the New Agreements. Under the New Agreements we
do not have an exclusive license to MaxxSystem or any other Summus product or
technology. However, in the Letter Agreement Summus has agreed that neither
Summus nor its affiliates will operate as an Internet advertising service bureau
during the term of the New Agreements. Further, Summus has also agreed that
until July 1, 2001, it will not license MaxxSystem to others for Internet
advertising service bureau use. For the purpose of this paragraph, an Internet
advertising service bureau under the Letter Agreement means a business that is
directly competitive with our business as constituted at the date of execution
of the Letter Agreement.
We have entered into a "Letter of Intent" with Samsung Electronics of
America, Inc. and Summus Ltd. The Letter of Intent is for the purposes of
integrating and optimizing Summus Dynamic Wavelet compression methodology onto
Samsung's digital signal processor ("DSP") platform for sale as a semiconductor
component. No definitive agreement has been reached as a result of this Letter
of Intent, and no revenue has been derived from this relationship.
With regards to the Samsung relationship, High Speed acted as a
marketing agent for Summus. High Speed was responsible for marketing Summus
technology to Samsung and developing the proposed business venture. As part of
the Revenue Sharing Agreement, High Speed will receive the following revenue
streams from any revenue derived if Summus and Samsung sign an agreement: Year 1
- 50% of all revenue, Year 2 - 50% of all revenue, Year 3 - 40% of all revenue -
Year 4 through 6 - 20% of all revenue.
We have entered into a contract with WorldQuest Networks. The contract
calls for High Speed to deliver media advertisements through e-mail for
WorldQuest Networks e-commerce campaigns. We have generated no revenue from this
agreement to date.
We have entered into a contract with New Millennium Health Services.
The contract calls for High Speed to deliver media advertisements through e-mail
for New Millennium Health Services e-commerce campaigns. We have generated no
revenue from this agreement to date.
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We have entered into a contract with Learnkey. The contract calls for
High Speed to deliver media advertisements through e-mail for Learnkey's
e-commerce campaigns. We have generated no revenue from this agreement to date.
On February 28, 2000, we sold 2,000 shares of Series A Convertible
Preferred Stock to investors at a price of $1,000 per share, resulting in net
proceeds of $1,892,202. The investors who purchased these shares were F. van
Lanschot Bankiers (350 shares), Insinger de Beaufort (250 shares) and AAA Trust
(1,400 shares). In connection with this financing, we entered into a
subscription agreement in the amount of $250,000, which has been collected in
June of 2000. The holders of the preferred stock are unrelated and not
affiliated with High Speed Net Solutions, Summus Ltd. or counterparty to any
agreement of High Speed. The rights of the Series A Convertible Preferred Stock
include the following rights: (i) a cumulative dividend of $80.00 each year per
share of Series A Convertible Preferred Stock, and we have the right to pay this
dividend by issuing additional shares of Series A Convertible Preferred Stock;
(ii) the right to convert the Series A Convertible Preferred Stock into shares
of our common stock at a conversion price of $14.24, subject to antidilution
adjustment in the case of common stock dividends, splits and reorganizations;
and (iii) a liquidation preference of $1,000 per share of Series A Convertible
Preferred Stock, plus accrued unpaid dividends, payable in the event of any
liquidation, dissolution, or winding up of High Speed. After March 1, 2002, we
have the right to redeem any outstanding shares of the Series A Convertible
Preferred Stock at a redemption price of $1,000 per share of Series A
Convertible Preferred Stock plus accrued dividends that have not been paid. A
total of 10,000 shares of Series A Convertible Preferred Stock are authorized.
The 2000 issued shares of Series A Convertible Preferred Stock are convertible
to 140,449 common shares of High Speed common stock.
On June 30, 2000 we acquired a marketing and advertising company,
Douglas May & Co., Inc., a Texas corporation for approximately $1,376,000 in
fair market value consideration granted in the form of new issuances of our
common stock. We plan to hold and operate Douglas May & Co. as a wholly-owned
subsidiary. The sole shareholder of Douglas May & Co. has joined us as an
employee with the position of Executive Vice President and Chief Creative
Officer. Prior to the acquisition, Mr. May was not a stockholder in High Speed
and had no relations with us. Under the terms of the acquisition, we issued
three allotments of our common stock to Mr. Douglas May based on a negotiated
partition of the $1,376,000 valuation assigned to Douglas May & Co. during our
negotiations. The three allotments comprise and guarantee Mr. May approximately
$1,376,000 in consideration for his conveyance to us of all of the outstanding
capital stock of Douglas May & Co.. The common stock we issued was assigned a
value based on its OTCBB trading price around the date of the closing of the
transaction by compiling the ten-day average of the closing price. The terms of
each allotment of common stock vary based on the partitioning of the $1,376,000.
The first allotment corresponded to $500,000 of value and we issued 50,000
shares of our common stock coupled with a guarantee that if the OTCBB trading
price of our common stock one year from the close of the transaction is less
than $10.00 per share then we will issue additional shares of our common stock
to make up the difference in value. The second allotment corresponded to
$576,000 of value and we issued 87,498 shares of our common stock coupled with
contractual obligations that (i) we would register these shares in this
registration and (ii) if the registration is not effective by a certain date
then Mr. May has the right to cause us to repurchase these shares from him by
making six cash installment payments to Mr. May. The third allotment
corresponded to $300,000 of value and
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we issued 45,572 shares of our common stock coupled with contractual obligations
that (i) we would register these shares in this registration and (ii) if the
registration is not effective by a certain date then Mr. May has the right to
cause us to repurchase these shares from him by releasing funds the acquisition
agreement places into an escrow account, the funds being from certain accounts
receivable of Douglas May & Co. valued at $300,000 and anticipated to be
collected during the next several months.
THREE MONTHS ENDED MARCH 31, 2000
REVENUE
We had no revenue during the three months ended March 31, 2000. During
the quarter we launched Rich Media Direct 1.0 and have been working with
potential customers to sign contracts for services.
INTEREST INCOME
Interest income of $7,577 for the three months ended March 31, 2000
represents interest earnings on cash balances in demand deposit accounts.
NET LOSS
Our net loss during the three months ended March 31, 2000 was $832,313,
or $0.05 per share. The net loss was primarily attributable to general and
administrative expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $839,890 for the three months
ended March 31, 2000. This amount includes an increase to the loss contingency
accrual associated with the Dunavant settlement of $184,375, as well as
substantial fees for legal, accounting and other professional services. We
expect professional services fees will continue to be high for the third quarter
of 2000 and as we implement disclosure, financial reporting and other related
activities. The remaining balance of the general and administrative expenses
relate to salaries and other operating costs.
THREE MONTHS ENDED MARCH 31, 1999
REVENUES
We had no revenues during the three months ended March 31, 1999,
because we had neither products to sell nor any capacity to provide services
during this period.
NET LOSS
Our net loss for the three months ended March 31, 1999 was $2,125,437
and was primarily attributable to general and administrative expenses. The net
loss included a non-cash compensation cost of $2,000,000 related to the granting
of a stock option to an employee for services rendered. The stock option had no
exercise price. The remaining loss was attributable to salary and other
operating costs.
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YEAR ENDED DECEMBER 31, 1999
REVENUE
We generated no revenue during the year ended December 31, 1999,
because we had no products to sell or any capacity to provide services during
this period.
NET LOSS
Our net loss during the year ended December 31, 1999 was $10,197,376.
This loss was primarily attributable to general and administrative expenses and
non-cash interest expense.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $7,541,627 for the year ended
December 31, 1999. Of this amount, $5,905,164 relates to non-cash compensation
and consulting costs related to the granting of stock options and stock awards
to employees and stockholders for services rendered and the execution of stock
subscription agreements with per share selling prices set below the traded value
of the common stock. The stock options and stock awards vested upon issuance and
had nominal or no exercise prices. Of the general and administrative expenses,
$800,000 relates to the loss contingency accrual associated with the Dunavant
settlement. The remaining balance of the general and administrative expenses of
approximately $836,463 related to salary and other operating expenses.
INTEREST EXPENSE
Non-cash interest expense of $2,655,749 was incurred relating to the
issuance of convertible debentures during 1999 that included common stock
conversion prices, which were below the fair market value of the common stock on
the date the debentures were issued. Since all the debentures were convertible
into common stock upon their issuance, the beneficial conversion feature of
$2,655,749, which reflects the difference between the debentures' conversion
prices and the fair market value of the common stock, has been recorded as
non-cash interest expense during 1999.
YEAR ENDED DECEMBER 31, 1998
REVENUES
We had no revenues during the year ended December 31, 1998, because we
had no products to sell or any capacity to provide services during this period.
NET LOSS
Our net loss for the year ended December 31, 1998 was $1,640,806, which
consisted of a net loss from continuing operations of $374,841 and a loss from
discontinued operations of $1,265,965.
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The loss from continuing operations included non-cash compensation
expense of $23,500 related to the granting of stock to employees for services
rendered. The remaining loss was attributable to salary and other operating
costs.
The loss from discontinued operations of $1,265,965 reflects the
operating results of MWI for the year ended December 31, 1998. MWI ceased all
operating activity by the end of 1998. During 1998, MWI earned revenues of
$1,335,300 and generated a loss from operations of $1,265,965. MWI incurred no
operating costs subsequent to December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Our operations to date have been primarily funded by private placements
of our preferred and common stock and related party loans and debentures. As of
March 31, 2000, we had cash and cash equivalents of $1,427,606, and other
current assets of $19,000 and current liabilities of $1,899,928 resulting in a
working capital deficiency of $453,322.
Net cash used in operating activities of $291,420 during the three
months ended March 31, 2000 reflects cash paid for salaries and our other
operating expenses.
Net cash used in investing activities of $17,916 during the three
months ended March 31, 2000 represents capital expenditures for office furniture
and computer equipment.
Net cash provided by financing activities of $1,488,202 during the
three months ended March 31, 2000 resulted from the net proceeds of the sale of
our preferred stock of $1,642,202, net of a reduction in the amounts due to
related parties of $154,000.
Net cash used in operating activities from continuing operations during
the three months ended March 31, 1999 of $132,794, resulted from the payment of
salaries and other operating expenses. Net cash provided by financing activities
for the three months ended March 31, 1999 resulted from the sale of our common
stock.
Net cash used in operating activities of $885,885 during the year ended
December 31, 1999 reflects cash paid for salaries and our other operating
expenses plus $60,000 paid to Summus as a prepaid royalty. The total amount of
prepaid royalties paid to Summus as of December 31, 1999 is $4,528,125, which
consists of: (i) the issuance of 1,500,000 shares of our common stock valued at
$2,278,125; (ii) the $60,000 cash payment made by us to Summus; and (iii)
$2,190,000 paid by our shareholders to Summus on our behalf and for which we
issued debentures that were converted into 3,968,640 shares of our common stock.
Net cash used in investing activities of $106,052 during the year ended
December 31, 1999 include $4,052 paid for office furniture, and $102,000 paid in
connection with the acquisition of our ownership interest in Summus. Our total
investment in Summus is $1,897,127, which consists of a cash payment of $102,000
and the issuance of 795,001 shares of our common stock valued at $1,792,127.
Net cash provided by financing activities of $1,222,068 during the year
ended December 31, 1999 resulted from the proceeds of the sale of our common
stock of $242,062, proceeds from the issuance of convertible debentures of
$558,640 and net advances from stockholders totaling
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$421,366. During 1999, $2,097,109 of convertible debentures were issued to a
stockholder as partial settlement for cash advances made by the stockholder to
Summus, on our behalf, for the payment of royalties.
Net cash used in operating activities from continuing operations during
the year ended December 31, 1998 of $291,685, resulted from the payment of
salaries and other operating costs. Net cash used in discontinued operations of
$1,285,965 represents the net cash used to operate MWI during 1998. Net
investing activities for the year ended December 31, 1998 included the purchase
of equipment. Net financing activities during the year ended December 31, 1998
of $1,626,407 included proceeds from the sale of our common stock of $317,000,
stockholder capital contributions of $1,091,648 and stockholder advances of
$445,378, less $227,619 used to acquire 38,500 shares of our stock.
On February 28, 2000, we issued, 2,000 shares of our Series A
Convertible Preferred stock at a price of $1,000 per share. We received net
proceeds from this issuance of $1,892,202, which is inclusive of a stock
subscription receivable of $250,000, which was collected in June 2000. The
proceeds from this issuance will not be sufficient to fund operations for the
next 12 months. Currently we have enough cash to last operations until October
of 2000. However, we anticipate that our existing cash resources, plus our
planned $5,000,000 private placement, plus expected internally generated cash
from customers will be sufficient to fund our capital requirements for the 12
months commencing from October of 2000. We believe we will generate cash from
operations over the next 12 months as a result of revenue sharing contracts that
we have signed with customers for rich media direct marketing campaigns. While
we do expect to generate cash from customers in the next twelve months, we still
expect net cash flow from operations to be negative for that period. As
discussed previously, we are also engaged in discussions to raise additional
capital through a private placement of our capital stock. There can be no
assurance that additional equity or debt financing, if required, will be
available on terms that will be favorable to us.
At March 31, 2000 the company had positive adjusted working capital of
$531,053. This working capital was calculated exclusive of the loss contingency
accrual of $984,375, which we expect to settle primarily through the issuance of
additional stock rather than cash.
Liquidity on a long-term basis is expected to be provided by cash
generated through the sales of our services.
Our continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitability. Management expects that eventually we will obtain customer orders
for our services, which will produce revenues to reduce our operating losses.
Management also expects additional capital can be raised to further fund
operations. However, there can be no assurances that management's plans will be
executed as anticipated.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS 133 requires that derivative instruments be recognized as either assets or
liabilities in the consolidated balance
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sheet based on their fair values. Changes in the fair values of such derivative
instruments will be recorded either in results of operations or in other
comprehensive income, depending on the intended use of the derivative
instrument. The initial application of SFAS 133 will be reported as the effect
of a change in accounting principle. SFAS 133 is effective for all fiscal years
beginning after June 15, 2000. We have not yet determined the effect that the
adoption of SFAS will have on our consolidated financial statements.
YEAR 2000
Because we have no operations and no material operational assets it has
not been necessary for us to undertake traditional Year 2000 measures such as
inventory, assessment, remediation and testing.
Our primary Year 2000 risk exists to the extent that suppliers of
products, service and systems that we anticipate purchasing in the future, and
others with whom we may transact business, do not have business systems or
products that comply with Year 2000 requirements. We plan to obtain assurances
from these future suppliers with regard to Year 2000 compliance of their
products and services as we engage with these suppliers. We believe that
obtaining these assurances will not produce additional material cost beyond the
ordinary and customary costs of interacting with suppliers.
Although we believe that our Year 2000 compliance plan is adequate to
address Year 2000 concerns, there can be no assurance that we will not
experience negative consequences as a result of undetected defects or the
non-compliance of third parties with whom we interact. If realized, these risks
could result in adverse affect on the business, results of operations and
financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes
in interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the section entitled "Risk Factors."
We do not use any derivative financial instruments for hedging,
speculative or trading purposes. We do not own any equity investments other than
the shares of Summus. Because Summus is a private company and is not traded on
any public market, our exposure to market risk is immaterial and does not effect
our operations. However, our investment in Summus is subject to changes in
market conditions since the value of a private company can change according to
perceptions of general market risk or industry-specific market risk despite the
fact that the private company is not being publicly traded.
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BUSINESS
GENERAL
We are launching a new business of providing clients with a service of
delivering audio, video and graphics content and advertising over the Internet.
This business will utilize compression and decompression software licensed from
Summus Ltd. See "New Agreements with Summus."
As of July 10, 2000, Summus held 8,474,360 shares (39.4% of our
outstanding common stock, and 35.9% on a fully diluted basis). Summus also has
the power to vote an additional 1,279,667 shares of our common stock through
voting agreements with and/or proxies from 14 persons. Summus' total voting
power is 45.4% of our outstanding common stock and 41.4% on a fully diluted
basis.
HISTORY OF HIGH SPEED NET SOLUTIONS (HIGH SPEED)
We were incorporated as a Florida corporation in 1984 under the
original name of EMN Enterprises, Inc. High Speed is a development stage company
and our auditors have raised substantial doubt about our ability to continue
operations as a going concern. From our inception in 1984 until mid-1998, High
Speed was inactive and had no significant operations.
In September of 1998, we changed our name from EMN Enterprises to
ZZAP.NET, Inc., in association with a transaction in which we acquired all of
the assets and liabilities of Marketers World, Inc., in exchange for issuing
9,275,000 shares of our common stock. This transaction was accounted for as a
recapitalization of High Speed. While under the name of ZZAP.NET, our common
stock began trading on the NASD's Over the Counter Bulletin Board (OTCBB). On
January 25, 1999, we changed our trading symbol from ZZNT to HSNS to reflect our
new name, High Speed Net Solutions, Inc.
During 1998, we operated our business based on the assets of Marketers
World. Marketers World's principal operations were to lease computer systems to
businesses and to distribute Internet oriented products and perform related
services. During 1998, we were not able to execute these planned activities,
other than the sale of pilot products and services. By the end of 1998, all
business operations based on Marketer's World assets had ceased. During 1999,
our operations were limited to obtaining financing and changing our business
plan. In 1998 we incurred a net loss of $1,640,806 and in 1999 we incurred a net
loss of $10,197,376.
In February 1999, Summus Ltd., and High Speed entered into the
Marketing License Agreement, in which we obtained the right to distribute
certain Summus products and technology. The term of the Marketing License
Agreement was three years. In exchange for these rights, we agreed to make an
upfront payment of $3,000,000 dollars in several installments during the first
year of the Marketing License Agreement. We made payments of $2,250,00 in cash
toward payment of the $3,000,000. We satisfied the final $750,000 due under the
Marketing License Agreement by issuing 1,500,000 shares of our common stock to
Summus. We terminated the Marketing License Agreement on February 18, 2000 and
on that same date entered into new agreements with Summus to support the
requirements of our new business plan. The new agreements are for a six-year
term and give us rights to use certain Summus products
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and rights to maintenance and support for these products. For a description of
the new agreements, see "Business - New Agreements with Summus."
In August 1999, Summus acquired 9,542,360 shares of our common stock
(at that time, approximately 51% of our outstanding shares, and approximately
49% on a fully diluted basis) from the shareholders who obtained our stock in
our acquisition of Marketers World. As of July 10, 2000, Summus held 8,474,360
shares (39.4% of our outstanding common stock, and 35.9% on a fully diluted
basis). Summus also has the power to vote an additional 1,279,667 shares of our
common stock through voting agreements with and/or proxies from 14 persons.
Summus has the power to vote 45.4% of our outstanding common stock and 41.4% on
a fully diluted basis.
Andrew L. Fox became our Acting President and Chief Executive Officer
in August of 1999 to develop and start our business operations. In September of
1999, we moved our operations from Florida to Raleigh, North Carolina into
office space at 434 Fayetteville St. Mall, Suite 2120.
Our current business operations are those of a development stage
company. We are building our team by hiring employees and we are creating an
information system infrastructure with which we plan to deliver our Internet
e-mail advertising and content delivery services. While we have contracts with
four customers, we have not yet generated any revenue. Our energies are
currently devoted to implementing our business plan, both from a sales and
marketing perspective to gain new customers, and from an operational perspective
to be able to serve the customers we do acquire.
Our practices with respect to working capital are typical of companies
that operate in the Internet advertising business.
BUSINESS STRATEGY
In September of 1999, we began investigating Internet opportunities to
generate revenue as a service business. To become a service bureau business, we
plan to license the use of various software products, including using Summus'
software product, MaxxSystem, for digital content compression, decompression and
management. This research and subsequent discussions with potential customers
led us to launch our new service called Rich Media Direct(SM) on January 24,
2000. Rich Media Direct is an Internet service for rich media (media that
contains one or more of the following: audio/video/graphics/animation) direct
marketing, where users can target customers' that have specific demographic
characteristics.
Our Rich Media Direct service will utilize Summus' software but will
not be wholly dependent on it. Our Rich Media Direct service is intended to
provide services to web commerce companies and other entities on the Internet
that desire to increase traffic, awareness and e-commerce revenue. Summus
provides the MaxxSystem product, which allows us to compress, decompress and
manage audio, video, animation and graphical content.
Our business plan assumes that the creation, delivery and consumption
of rich media on the Internet will increase. Our plan further assumes that the
Internet is evolving into a collection of distinct communities and individuals
with specific wants and needs. High Speed's service
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will deliver rich media advertisements and content to defined groups of
individuals based on their preferences, a concept known as microcasting. The
principle of microcasting is that if people only receive what they favor, it
increases the probability of a response. Initially, we intend to use e-mail
applications to deliver advertising to targeted individuals and demographic
groups. However, we plan to expand from e-mail to other techniques that deliver
media content over the Internet, such as streaming, i.e., immediately and
steadily delivering the content via the Internet.
Because of our license agreement with Summus, we have access to
multimedia compression that Summus markets under the name of Dynamic
Wavelets(TM). Dynamic Wavelets is Summus' method for compressing audio, video
and graphic information into smaller file sizes contributing to faster delivery
of this information over networks such as the Internet. Because less information
is actually delivered, the recipient receives an equivalent quality of
uncompressed audio, video or image information at a faster rate.
HIGH SPEED AND SUMMUS RELATIONSHIP
Our business is to deliver audio, video, and graphics content and
advertising over the Internet for our clients. We plan to offer this service
under the brand name of Rich Media Direct(SM). Summus is currently developing
some of the software products we will use to accomplish this delivery for our
customers. There is, however, no assurance that Summus will deliver the software
products we need, or that if delivered, whether the performance and features of
the software products will meet the needs of our business operations.
We have licensed from Summus for a six-year term a group of software
products designed to work together labeled MaxxSystem. The MaxxSystem products
enable us to incorporate audio, video, and graphics content and advertising into
e-mails for delivery over the Internet. As of July 10, 2000, Summus is
approximately ten days late in delivering two of the various components of
MaxxSystem as called for by the delivery dates set forth in the New Agreements.
In addition to the Software License Agreement, Summus and High Speed
have entered into a "Letter Agreement" with Summus that prohibits Summus or any
of its affiliates from using MaxxSystem software or any of the product
functionality contained in the MaxxSystem Software to directly compete with High
Speed, as our business is presently constituted, for the term of the Software
License Agreement. In addition, Summus shall not sell, license or grant any
other rights to use the MaxxSystem software or the product functionality
contained in MaxxSystem to entities that are directly competitive to the
business of High Speed, as our business is presently constituted, through the
earlier of July 1, 2001 or termination of the Software License Agreement.
We announced our service to deliver content and advertising over the
Internet on January 14, 2000. In order to ramp up our business operations and
satisfy anticipated future customer demand, we have borrowed and will borrow
resources from Summus to satisfy basic business needs such as operations,
communications, web site development and product management. Obtaining resources
in this manner is intended to temporarily support our operations until qualified
individuals can be hired to operate these functions. High Speed is obtaining
these
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resources from Summus under an oral agreement and we will pay to Summus, without
interest, the value of the resources we are using. High Speed is currently in
the process of recruiting and hiring its own employees to handle these
functions.
RICH MEDIA DIRECT(SM) SERVICE.
We announced our Rich Media Direct service in January of 2000. Rich
Media Direct is an Internet direct marketing service that delivers advertising
and content over the Internet to targeted demographic groups through
applications such as e-mail where recipients select, or "opt-in," to receiving
content and messages. This service allows customers to distribute content and
advertisements for purposes such as creating or increasing (1) product or brand
awareness, (2) customer traffic to web properties, and (3) revenue for Internet
web sites. Our Rich Media Direct service will provide customers with dedicated
bandwidth and a distributed infrastructure to efficiently distribute content and
advertisements to targeted audiences. Our service will allow our customers to
provide to us the list of e-mail recipients. We will then deliver content or
advertising to the recipients on the list. Alternatively, we can identify a
targeted group and purchase distribution lists from third-parties, provided that
these lists contain individuals who have requested that content and advertising
be sent to them.
In addition, we plan to offer customers the following features in our
Rich Media Direct service after we are able to hire additional employees and
establish our operations:
- Seven days per week and 24 hours per day service and support
- Content packaging and compression
- Online Internet tracking and reporting of campaigns
- Customized videomail player using the Internet to transmit
video data for brand extension and hyperlinks. A hyperlink is
the text on a web site that when "clicked on" takes the
computer user to another web site or different area on the
same web page.
- Online repeat campaign and list selection
- Trustee' compliance (to maintain the privacy of customer data)
- Streaming services which is immediately and steadily
delivering content via the Internet
Our business plan assumes that our Rich Media Direct service will
enable our clients to achieve a higher response rate in the market than
traditional Internet advertisements on a webpage that connect to or link to the
advertiser's website known as banner advertisements. Our Rich Media Direct
advertisements will initially be in the form of a rich media commercial (audio,
video, graphics) attached to an `opt-in' e-mail message. This will offer
advertisers, publishers and media buyers an advertising distribution medium
through e-mail attachments which affords the ability to: (1) target a
demographically selective audience; (2) focus on the first application that
Internet users typically open; and (3) take advantage of the possibility that a
user may forward relevant information to friends and family thereby extending
the effective reach of the campaign.
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COMPETITION
We believe that the primary competitive factors in the rich media
content and advertising delivery services market will include:
- pricing and licensing terms;
- compatibility with new and existing media formats;
- compatibility with the user's existing network components and
software systems;
- scalability of rich media content and advertising delivery
technology and cost per user;
- the quality and reliability of the overall rich media
advertisement or content;
- access to distribution channels necessary to achieve broad
distribution and use of our services;
- the availability of content for delivery over the Internet and
access to necessary intellectual property rights;
- the ability to license or develop and support secure formats
for digital media delivery, particularly video;
- the ability to license and support popular and emerging media
formats for digital media delivery, particularly video, in a
market where competitors may control the intellectual property
rights for these formats;
- the size of the active audience for rich media advertisements
and its appeal to content providers and advertisers;
- features for creating, editing and adapting content for the
Internet;
- ease of use and interactive user features in products;
- ease of finding and accessing content over the Internet;
- challenges caused by bandwidth constraints and other
limitations of the Internet infrastructure.
Our failure to adequately address any of the above factors could harm
our business strategy and operating results.
Our business plan calls for us to use Summus' MaxxSystem software
product for compression/decompression so that our rich media, i.e., video
commercial e-mail messages can be encoded and compressed for delivery over the
Internet using Summus' Dynamic Wavelet compression technique. If Summus' Dynamic
Wavelet technique has better compression performance than other compression
methods then recipients of e-mail advertisements sent by us will have a more
satisfactory viewing experience because they will receive and begin viewing the
content attached or associated with the e-mail more quickly.
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The marketplace for rich media advertisement delivery is extremely
competitive. Traditional Internet advertisement network companies such as CMGI,
24/7 Media and DoubleClick have included rich media advertisements, through
banner ads, as part of their product mix.
We believe our service will be more like direct response marketing than
pure advertising and will not initially compete directly with these companies,
although we recognize that these companies may change their products and
services and compete with us in the future.
We will compete with many companies in the Internet direct marketing
space, including companies that currently utilize e-mail (specifically `opt-in'
e-mail) as a way to target specific demographic groups. These companies include
Message Media, Digital Impact, YesMail, Juno Mail Services, E-commercial.com and
others. Several companies, such as E-commercial.com and RadicalMail are focusing
more specifically on rich media delivery than on traditional banner
advertisements.
We may experience additional competition from Internet service
providers, advertising and direct marketing agencies and other large established
businesses such as America Online, DoubleClick, Microsoft, IBM, AT&T, Yahoo! and
RealNetworks. Each of these companies possesses large, existing customer bases,
substantial financial resources and established distribution channels and could
develop, market or resell a rich media direct marketing service that could
target customer demographic groups through applications like e-mail. These
potential competitors may also choose to enter this marketplace by acquiring one
of our existing competitors or by forming strategic alliances with these
competitors or others, including alliances with Summus.
MARKET OPPORTUNITY
According to Jupiter Communications, a leading consultant on online
advertising, use of e-mail is the number one activity on the web (95.7% of all
users) followed by searching (87.5%) and research products (71.7%). Our business
plan assumes that advertisers are aware of the role that the Internet could play
in influencing purchases and creating awareness, and will increase their
spending for Internet advertising.
ADVERTISING ON THE WEB. Our business plan anticipates that Internet
advertising budgets in the United States and elsewhere will grow as companies'
demand for media exposure continues to increase. Although Internet advertising
was only 1.25% of the total amount spent by advertisers in 1998, by 2003 Jupiter
Communications expects Internet advertising to be 5.3% of the total amount spent
by advertisers in all media. Jupiter Communications believes that online
advertising will grow from $2.1 billion in 1998 to $11.5 billion in 2003, fueled
by increases in the online population, time spent online, and Internet commerce
adoption. Our business plan anticipates that as the general online advertising
market grows, our opportunity within this larger market will expand.
DIRECT RESPONSE MARKETING ON THE WEB. Our business plan assumes that
Internet direct response marketing will play an important role in helping web
sites produce revenue. Forester Research expects direct response marketing on
the web (mainly through e-mail) to make up 60% of all Internet advertising by
2003, compared to 15% in 1998.
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Our business plan anticipates that direct response marketing will
migrate to the Internet, and that rich media will play an increasingly
significant role in that migration.
SALES AND MARKETING
We currently have four contracts with customers. We have been actively
marketing our services since December of 1999, and have two dozen customer
prospects in development or negotiation stage. We currently have five sales
personnel, four full time sales representatives and one part time sales
representative. We intend to sell our rich media direct marketing services
through a combination of both inside and outside sales forces, as well as
resellers. We currently have one reseller, Williams Communications Group, and we
have three outside sales people and two inside sales people.
We intend to focus our marketing efforts on dedicated Internet
companies with web properties, as well as traditional companies seeking to take
advantage of the commercial opportunities afforded by Internet direct marketing.
We intend to use a range of marketing activities to pursue our objectives,
including trade shows, trade advertisements, selected media events and our own
web site and service. Of these methods, to date we have only used our own web
site to market our services. We intend to publish additional marketing materials
to support the sales process, including company brochures, feature descriptions,
technology research papers and client case studies.
Currently, we lack funding for such activities and will need to raise
approximately $5,000,000 to implement our business plan and fund these marketing
activities from October of 2000 to October of 2001. We plan to raise these funds
in a private offering of our capital stock sometime during the remainder of the
year 2000.
RESEARCH AND DEVELOPMENT
We do not invest in research and development of software products or
technology. Instead, we rely on third parties to produce generally available
software products with which we can build our service bureau business. One
important example of these suppliers is Summus.
Our business plan anticipates that we will use third party software
products, including Summus' MaxxSystem software product to implement and
differentiate our services. Because of the central role that compression and
decompression plays in the delivery of video e-mail advertisements, our plans
are somewhat dependant on Summus' research and development progress toward
improving MaxxSystem. However, if necessary, we could change our plans and seek
to license other generally available compression/decompression software
products, although doing so would cause delays in offering our service and
generate additional costs for offering our service.
Summus has a limited track record in developing generally available
commercial software products; however, it has applied its Dynamic Wavelet
compression methodology in defense-related and contract research projects with
success. In the last two years, Summus has focused on commercial applications.
In doing so, it has not developed commercial products as quickly as we
anticipated in 1999 when we first entered into agreements with Summus. Summus is
currently developing a group or suite of software products designed to work
together labeled
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MaxxSystem. To develop MaxxSystem, Summus has recently expanded its management
team and software product development organization to develop this suite of
software products. Summus has 62 full-time employees. Limited financial
resources may limit Summus' ability to develop products. Summus has disclosed to
us that without additional financing (which could include additional sales of
the High Speed common stock it owns) or an increase in sales of its commercial
software products it may not be able to continue its operations.
As of July 10, 2000, Summus is approximately ten days late in
delivering two of the various components of MaxxSystem as called for by the
delivery dates set forth in the New Agreements.
INTELLECTUAL PROPERTY
We do not hold any patents nor do we hold any trademark or service mark
registrations. We do not have any U.S. patent applications pending. We recently
filed a United States service mark application for Rich Media Direct(SM) and we
intend to file applications for the same mark in some foreign countries. There
is no assurance, however, that our service mark application will result in our
service mark being approved.
Our success and ability to compete are substantially dependent upon
technology and intellectual property. We will rely on copyright, trade secret
and trademark law to protect our technology and intellectual property. Neither
Summus nor we have any intellectual property infringement claims or suits
against us of any kind. We also believe that factors such as the technological
and creative skills of our personnel, new service developments and frequent
service enhancements are essential to establishing and maintaining an
intellectual property leadership position.
We anticipate entering into confidentiality agreements with our
employees and consultants. We will implement confidentiality agreements, which
require our employees and consultants to hold in confidence and not disclose any
of our proprietary information. Despite our efforts to protect our proprietary
information, unauthorized parties may attempt to obtain and use our proprietary
information. Policing unauthorized use of our proprietary information is
difficult, and the steps we will take might not prevent misappropriation,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as do the laws of the United States.
We will collect and use data derived from our clients, within the
limits assigned by Trustee, an online privacy rights organization. This creates
the potential for claims to be made against us, either directly or through
contractual indemnification provisions with customers, including copyright or
trademark infringement, invasion of privacy, or other legal theories. Our
insurance may not cover potential claims of this type or may not be adequate to
protect us for all liability that may be imposed.
From time to time, third parties have asserted and may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies and related standards that are important to us or to Summus. We
and/or Summus may increasingly face infringement claims as the number of
competitors in our industry segments grows and the functionality of products and
services in different industry segments overlaps. Neither Summus nor we have any
intellectual
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property infringement claims or suits against us of any kind. Although we have
not been party to any litigation asserting claims that allege infringement of
intellectual property rights, we may be party to litigation in the future. Any
third party claims, with or without merit, could be time-consuming to defend,
result in costly litigation, divert management's attention and resources or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us, if at all. A successful claim of infringement against Summus or us could
harm our future competitiveness and profitability.
NEW AGREEMENTS WITH SUMMUS
To facilitate the implementation of our business plan, in February of
2000, we entered into a Master Agreement with Summus Ltd. ("Summus"). The Master
Agreement includes a Software License Agreement ("SLA"), a Software Maintenance
Agreement ("SMA") and a Revenue Sharing Agreement ("RSA") (collectively with the
Master Agreement and a letter agreement between High Speed and Summus, dated
March 13, 2000 ("Letter Agreement), the "New Agreements"). The New Agreements
entirely replace the Marketing License Agreement and the related agreements
incorporated by it or referenced by it, and replace the various letter
agreements between Summus and us concerning one potential customer, Samsung
Electronics of America, Inc. (collectively, the "Terminated Agreements"). Under
the terminated Marketing License Agreement, we made payments of $2,250,000 in
cash toward payment of the $3,000,000. We satisfied the final $750,000 due under
the Marketing License Agreement by issuing 1,500,000 shares of our common stock
to Summus.
The New Agreements give us a nonexclusive license to a suite of
products Summus has labeled MaxxSystem. MaxxSystem allows us to compress,
decompress and manage audio, video, animation and graphical content. We will
deliver this content for our customers over the Internet or over private
networks using MaxxSystem. To perform this delivery, MaxxSystem uses a
compression technique developed by Summus and marketed under the brand name of
Dynamic Wavelets. As of July 10, 2000, Summus is approximately ten days late in
delivering two of the various components of MaxxSystem as called for by the
delivery dates set forth in the New Agreements.
Our use of MaxxSystem requires us to make ongoing royalty payments of
ten percent (10%) of the revenue we generate from the use of MaxxSystem.
Although the 10% fee is due as soon as we generate revenues, no royalty is
payable by us until our cumulative revenue exceeds $10 million because the New
Agreements grant us a $1,000,000 credit to be applied by offsetting the 10%
revenue fee we would otherwise have to pay. We negotiated this credit as a
condition of terminating the Marketing License Agreement.
The credit will be exhausted when we exceed $10,000,000 in revenues
from our use of MaxxSystem. Our licensed use of MaxxSystem under the New
Agreements also required an up-front license payment of $1,000,000.00. Like the
revenue-based payment, we also negotiated a $1,000,000.00 credit to offset the
up-front license fee as a condition to terminating the Marketing License
Agreement.
Under the New Agreements we also have: (i) rights to maintenance,
support, and any new versions of MaxxSystem at an annual fee of $180,000,
although this fee is waived for the
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first year; and (ii) the right to make a public announcement of our use of
MaxxSystem two weeks in advance of our competition. The capabilities of
MaxxSystem will allow us to offer a variety of customized services for
advertising and content delivery.
The term of the New Agreements is six years, three years longer than
the Terminated Agreements. The New Agreements give us access to software support
and upgrades from Summus Ltd. We had no maintenance or support rights under the
Terminated Agreements.
Under the New Agreements, we have the right to maintenance, support and
all upgrades for six years. For software support and upgrades, we will pay, on
an annual basis, $180,000 annually for maintenance, support and upgrades. Under
the New Agreements, Summus has the right to increase, but is not scheduled or
required to increase, the $180,000 payment at a rate no greater than a U.S.
government published inflationary index. Summus waived the maintenance fee for
the first year. Support from Summus will include the following:
- Level 2 and 3 support. We provide Level 1 support to our
customers. Level 1 support is providing telephone support for
basic questions about how to use a software product and how to
fix regularly recurring problems. Level 2 support is similar
except that Level 2 support provides a support person who has
comprehensive in-depth knowledge of almost all aspects of the
software product. Level 3 support is provided directly by the
software product development team that wrote the software
product.
- Upgrades or `dot' releases of the software system or
components of the software system. These are upgrades that
increment to the right of the `dot' (i.e. Version 1.2 to 1.3)
- Generational releases of the software system. These are
upgrades to the left of the `dot' (i.e. Version 2.0 to 3.0)
We do not have an exclusive license to MaxxSystem or any other Summus
product or technology. Instead, Summus has agreed to pay us 20% of all revenues
that Summus receives during the six-year term of the New Agreements from third
party licensees of MaxxSystem who also operate as a service bureau. Also, under
the Letter Agreement, Summus has agreed that neither Summus nor its affiliates
will operate as an Internet advertising service bureau during the term of the
New Agreements. Further, Summus has also agreed that until July 1, 2001, it will
not license MaxxSystem to others for Internet advertising service bureau use.
Summus has not generated any revenue with MaxxSystem because the system is still
under development. For the purpose of this paragraph, an Internet advertising
service bureau under the Letter Agreement means a business that is directly
competitive with our business as constituted at the date of execution of the
Letter Agreement.
During the six year term of the New Agreements, for all qualified
engagements that we refer to Summus for technology licensing, consulting or
other products and/or service sales, Summus will pay us 15% of the revenue
received from such engagements during the first year of the agreement between
Summus and the customer.
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Under the New Agreements, Summus and we have agreed to a mutual revenue
sharing arrangement for all revenues derived from Samsung Electronics of
America, Inc. We have entered into a letter of intent by and among Samsung,
Summus, and High Speed. There can be no assurance that the letter of intent will
result in an agreement with Samsung or actual revenues for us. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Recent Developments."
The Samsung revenue sharing provisions do not split equally any revenue
we may receive from Samsung. The revenue split changes over time according to
the schedule described in the remainder of this paragraph. To date, we have not
generated any revenue from Samsung and neither Summus nor we have signed a
definitive agreement with Samsung. Under the Samsung provisions, Summus will pay
us 50% of the revenue it receives from Samsung during the first and second years
of an agreement between Summus and Samsung; Summus will pay us 40% of the
revenue it receives during the third year; and Summus will pay us 20% of the
revenue it receives during the fourth, fifth, and sixth years. Similarly, we
will pay Summus 50% of the revenue we receive from Samsung during the first and
second years of an agreement between High Speed and Samsung; we will pay Summus
40% of the revenue we receive during the third year; and we will pay Summus 20%
of the revenue we receive during the fourth, fifth, and sixth years. There can
be no assurance that either Summus or High Speed will enter into any agreement
with Samsung.
TERMINATION OF THE MARKETING LICENSE AGREEMENT
The New Agreements replace entirely the Terminated Agreements. The
Terminated Agreements gave us certain exclusive and nonexclusive rights to
market and distribute Summus products and technology. We no longer have these
rights. Our former rights included:
- Exclusive rights to license a streaming demonstration product
utilizing Summus wavelet technology
- Nonexclusive rights to license MaxxNote 1.0 and 2.0 (a
videomail product)
- Nonexclusive rights to license 4U2C - an image compression
tool
- Nonexclusive rights to license version 1.0 of a video
conferencing product
To date we have not used these rights to generate revenue in the
marketplace.
SUMMUS LTD. OVERVIEW
This section describes material information concerning the business and
products of Summus. This information is included because our future ability to
deliver our services and execute our business plan depends in part upon Summus
products and technology.
HISTORY OF SUMMUS LTD.
Historically, since it's founding in 1991, Summus' business has focused
on contract engineering and research and development for the Department of
Defense. Summus performed projects where they wrote software to analyze images
and pictures so that the software could recognize an object, such as a military
vehicle, in an image or picture. Summus also wrote and
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implemented software for military applications in electronic components that
compressed and transmitted images and pictures over low-bandwidth communications
channels.
As of July 10, 2000, Summus employs 62 persons on a full time basis,
has 10 contract employees and has 12 part time employees. Summus has limited
financial resources. Failure by Summus to raise additional capital will have a
material adverse affect on Summus' ability to deliver key software products to
us. Its founder, Dr. Bjorn Jawerth, owns a majority of Summus' shares and there
is no public market for Summus shares. Summus is a private corporation in the
state of Delaware. Although we own 167,000 shares of Summus common stock and
Summus owns 8,474,360 shares of our common stock, Summus is an independent
entity from High Speed. Except as provided in the agreements between us and
Summus that are described in this document, we have no rights to any products or
technology of Summus. Our 167,000 shares of Summus common stock constituted
approximately 14.1% of the issued and outstanding shares of Summus at July 10,
2000. When options, warrants and convertible securities are taken into account,
we owned only 12.8% of Summus' shares on a fully diluted basis at July 10, 2000.
Summus will continue to seek to raise capital to support its investment in
research and product development. Therefore, there is potential future dilution
to our ownership position in Summus.
Summus' wavelet compression technique uses image outlines or edges as
the basis for information processing to compress and decompress video and other
data. In 1998, Summus commercialized some of its technology through software
development kits and licensed its technology using the software development kits
to the general software market. Summus' business plan calls for continued
commercialization of its technology and expansion into the commercial products
market and Internet solution business. Specific Summus' objectives include
creating widespread use of its wavelet compression technique through licensing
and distribution and completion of its MaxxSystem software product.
PROPERTIES
Our headquarters is in 6,785 square feet of office space located at 434
Fayetteville Street Mall, Suite 2120, in Raleigh, North Carolina. Our lease
expires September 30, 2005. We pay $118,650 annually. We believe the terms are
consistent with local market conditions.
The space that we currently occupy is adequate for our projected growth
needs over the next 12 months.
LEGAL PROCEEDINGS
In June 2000, we entered into a settlement agreement with William R.
Dunavant and Michael Cimino to resolve a litigation suit filed in Florida. The
settlement agreement provides, among other things, that we register 350,000
shares of common stock owned by Mr. Dunavant with the Securities and Exchange
Commission. Under the settlement agreement, we issued 175,000 new shares of our
common stock to Mr. Dunavant on the execution date of the settlement agreement.
In addition, the settlement calls for the payment of $12,750 per month and
25,000 shares of common stock per month until the registration of all shares are
effective. If our registration statement is not effective on or before January
1, 2001, from that date forward and until we have delivered an effective
registration statement, we will pay Mr. Dunavant $12,750 and issue 50,000 shares
of common stock each month. We must also register all shares delivered
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<PAGE> 51
under these monthly allotments. Finally, we must also issue and register an
allotment of shares of our common stock that is determined by a calculation that
depends on the date upon which the registration statement becomes effective and
the difference between the price of our common stock as traded on the OTCBB and
$23.00 per share.
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<PAGE> 52
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
CURRENT DIRECTORS
The following table sets forth information regarding the members of our
Board of Directors:
<TABLE>
<CAPTION>
FIRST YEAR
ELECTED AS TERM
NAME DIRECTOR EXPIRES AGE
---- ---------- ------- ---
<S> <C> <C> <C>
Dr. Bjorn Jawerth 2000 2001 47
Andrew L. Fox 2000 2001 36
Richard F. Seifert 1999 2001 49
Herman Rush 2000 2001 70
C. Cristine Wittress 2000 2001 34
</TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers are elected annually and serve at the pleasure of
the Board of Directors. Our current executive officers are as follows:
<TABLE>
<CAPTION>
NAME OFFICE OFFICER SINCE AGE
---- ------ ------------- ---
<S> <C> <C> <C>
Andrew L. Fox Acting President, Chief Executive Officer and 1999 36
Executive Vice President
Alan R. Kleinmaier Executive Vice President, Secretary and Treasurer 2000 52
Robert S. Lowrey Chief Financial Officer and Vice President of 2000 40
Finance
</TABLE>
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS
Andrew L. Fox is our acting President and Chief Executive Officer and
our Executive Vice President. Before coming to High Speed, Mr. Fox spent over 2
1/2 years at RealNetworks as a Senior Marketing Manager where he managed
marketing and sales operations for the corporate enterprise division of
RealNetworks. Before RealNetworks, Mr. Fox spent 10 years at IBM in a variety of
sales, marketing and product management roles. He was responsible for marketing
and sales for IBM's Wireless Data Division and was a product manager at IBM's
Networking Hardware Division. Summus Ltd. also employed Mr. Fox from August 1999
until January 2000 as its Executive Vice President of Sales and Marketing. Mr.
Fox has a Masters in Business Administration degree from Duke University's Fuqua
School of Business in Durham, North Carolina and an undergraduate degree in
Computer Science and Electrical Engineering from Duke University's School of
Engineering.
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<PAGE> 53
Dr. Bjorn Jawerth, Chairman, President and Founder of Summus Ltd.,
received an Masters of Science in Mathematics and Statistics, as well as an
M.Sc. In Technical Physics and Electrical Engineering in 1974 from Lund
Institute of Technology, Lund, Sweden. He also received his Ph.D. in Mathematics
from Lund Institute in 1977. Dr. Jawerth is the David W. Robinson Palmetto
Professor, Professor of Mathematics and Adjunct Professor of Computer Science at
the University of South Carolina. Dr. Jawerth founded Summus Ltd. in 1991 and
has been employed with Summus since that time. He directs a group of
approximately 50 researchers in Mathematics, Computer Science, Mechanical
Engineering and Chemistry at the University of South Carolina and Chalmers
University of Technology in Gothenburg, Sweden. Dr. Jawerth has more than 25
years of experience as a consultant in the areas of image processing and finite
element analysis. Dr. Jawerth has over 90 publications to his credit in books
and referred journals. He has won and administered numerous grant awards from
both industry and government agencies. His research interests include
computational harmonic analysis and partial differential equations, image
processing and pattern recognition.
Alan R. Kleinmaier is our Executive Vice President, Secretary, and
Treasurer. Mr. Kleinmaier has more than 20 years of management experience. From
1976 to 1992, he served as President and Chief Executive Officer of Specialty
Retail Concepts, Inc., a retail chain of more than 400 confectioneries and
coffee stores which he founded in 1976. From 1993 to 1998, Mr. Kleinmaier was a
principal and consultant for EK Retail Group, Inc., a privately held management
and consulting firm. Mr. Kleinmaier is currently the Acting Chief Financial
Officer of Summus Ltd. He joined Summus in May 24, 1999. Mr. Kleinmaier is a
graduate of the University of North Carolina at Chapel Hill, where he was a
Morehead Scholar. Mr. Kleinmaier is also a graduate of University of North
Carolina at Chapel Hill School of Business's Executive Program and holds his
North Carolina Real Estate Broker's license.
Robert S. Lowrey is our Chief Financial Officer and Vice President of
Finance. Prior to joining High Speed on June 1, 2000, Mr. Lowrey served as a
senior audit manager for Ernst & Young LLP in Raleigh, North Carolina since
November 1993. During this time period, Mr. Lowrey participated extensively on
initial public offerings, secondary debt and equity offerings and merger and
acquisition due diligence. From July 1992 to November 1993, Mr. Lowrey was the
Chief Financial Officer of Florida Dental Care, a company engaged in the
delivery of full service dental care. From January 1985 to June 1992, Ernst &
Young in Tampa, Florida employed Mr. Lowrey. Mr. Lowrey is licensed as a
Certified Public Accountant in North Carolina and is a graduate of Grove City
College in Grove City, Pennsylvania.
Richard F. Seifert is a Director at High Speed, having joined us in
March of 1999 as the Vice President of Operations. In late 1999 Mr. Seifert
discontinued his operational role but continued to serve us as a member of our
board of directors. Under and advisory and consulting agreement with us, Mr.
Seifert has been involved in formulating strategic partnerships and raising
capital for us. Mr. Seifert has over 20 years experience in the areas of
business development, finance, strategic planning and marketing. Mr. Seifert
began his career in the aviation industry where he flew and ran operations for
several private and commercial airlines, including Summit Airlines, Air Indiana,
Nevada Airlines, and the Royal Family of Saudi Arabia. Mr. Seifert holds a
degree in Business Administration from Montgomery County College and Penn State
University.
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<PAGE> 54
Herman Rush is a Director at High Speed, having joined us in March of
2000. Mr. Rush has over 30 years experience in the entertainment industry in
executive, production and sales position. Since 1999 Mr. Rush has been Chairman
of the Board and Chief Executive Officer of Infotainment International, Inc., a
company that produces content for the Internet. He has been a partner in Rush
Cooperman Associates since 1999 and Chairman of the Board of Internet Program
Providers. From 1995 until 1998 Mr. Rush was Chairman of New Tech Entertainment,
an Internet production company that, in association with American Interactive
Media, is currently producing nine Internet program sites. From 1988 until 1997
he was a partner in Katz/Rush Entertainment, a television production company.
Mr. Rush was the Chief Executive Officer and President of Columbia Pictures
Television Group from 1980 to 1989. Mr. Rush was responsible for creating and
producing such shows as The Montel Williams Show from 1991 to 2000, and remains
an executive producer to that series. He also previously served as Chairman and
Chief Executive Officer of Coca-Cola Telecommunications and senior vice
president of the Entertainment Business Sector of The Coca-Cola Company from
1980 to 1989
C. Cristine Wittress is a Director at High Speed, having joined us in
April of 2000. Ms. Wittress has expertise in launching products and services to
various marketplaces. Ms. Wittress was at Microsoft from 1994 to 1996 where she
helped launch eight critical Microsoft products, including Microsoft Excel 3.0
and 4.0, Windows NT, and Microsoft SQL Server. Ms. Wittress was the overall
business and product manager for the worldwide Visual FoxPro business,
Microsoft's first Windows 95 and Internet-enabled product. Ms. Wittress was
recruited by RealNetworks in August 1998 and was there until October 1999. At
RealNetworks she managed strategic customer and third-party relationships for
RealNetworks' business-to-business enterprise software sales, and launched a
line of vertical business solutions to augment enterprise sales. Additionally,
Ms. Wittress helped launch RealNetworks' consumer music product, RealJukebox. In
July 1999, Ms. Wittress co-founded The Chakra Group, a hospitality company,
where she is still currently a co-owner and on the Board of Directors. She is
also on the Board of Advisors on a number of other Internet companies including
Planetsquid.com, RadioRiot.com, BraTopia.com and NutrititionGrocer.com. She
holds a Masters in Business Administration from the Harvard Business School in
Cambridge, Massachusetts, where she focused on Internet entrepreneurship and
public relations.
Executive officers are appointed by the board of directors on an annual
basis and serve until their successors have been duly elected and qualified.
There are no family relationships among any of our directors or executive
officers.
COMPOSITION OF OUR BOARD OF DIRECTORS
Our bylaws provide that the number of members of our board of directors
will consist of at least one director and that the board has the power to
determine the number of directors, when not determined by the stockholders, and
to fill vacancies on the board. Currently, the number of directors is fixed at
five and we have five directors and no vacancies on the board of directors. All
directors are elected annually to serve until the next annual stockholders'
meeting following their election and until their successors are elected and
qualified.
The compensation committee of the board of directors reviews the
performance of all executive officers, determines the salaries and benefits for
all executive officers and administers
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<PAGE> 55
our stock option plan. The entire Board of Directors is currently administering
the duties of the compensation committee. The appointment of a compensation
committee will be on the agenda for the next meeting of the Board of Directors.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table and the narrative text discloses the compensation
paid during 1999, 1998, and 1997 to our current Acting President and Chief
Executive Officer and the three individuals who served at different times during
1999 as our President and Chief Executive Officer. The table also shows the
three (3) other highest paid executive officers whose annual salary and bonuses
exceeded $100,000 during 1999, including individuals who were not serving as an
executive officer at the end of 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ----------------------
AWARDS (3)
---------------------
OTHER ANNUAL RESTRICTED OPTIONS/ ALL OTHER
NAME AND BONUS COMPENSATION STOCK SARS COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) ($) (1) ($) AWARDS (#) (2) ($)
------------------ ---- ---------- ------- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Andrew L. Fox (5) 1999 66,100 55,000 30,891 (4) 240,000 (4)
Director, Acting President 1998 -- -- -- -- -- --
and Chief Executive 1997 -- -- -- -- -- --
Officer, Executive Vice
President
Michael Cimino (6) 1999 (4) (4) 50,879 425,000 (4) (4)
Former President and Chief 1998 (4) (4) 11,000 705,000 (4) (4)
Executive Officer, 1997 -- -- -- -- -- --
Secretary, and Treasurer
Myung K. Kim (7) 1999 66,346 (4) 12,153 (4) 265,000 100,000 (10)
Former President and Chief 1998 -- -- -- -- -- --
Executive Officer 1997 -- -- -- -- -- --
Peter R. Rogina (8) 1999 17,308 (4) 8,895 (4) 240,000 110,000 (10)
Former President and Chief 1998 -- -- -- -- -- --
Executive Officer 1997 -- -- -- -- -- --
Richard F. Seifert(9) 1999 24,000 (4) 112,646 (4) 250,000 (4)
Former Vice President 1998 -- -- -- -- -- --
of Operations 1997 -- -- -- -- -- --
</TABLE>
(1) Amounts in this column include amounts earned during the year
specified but deferred for payment either the following year or thereafter.
(2) Number of shares of common stock issuable upon exercise of
options granted during 1999. We did not grant any Stock Appreciation Rights
during 1999.
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<PAGE> 56
(3) Long Term Incentive Plan compensation for executive officers
is not reported because we did not pay any compensation of this type and we have
never had a Long Term Incentive Plan for our executive officers.
(4) No compensation of this type received.
(5) Mr. Fox has served as our Acting President and Chief Executive
Officer and Executive Vice President from August 25, 1999, to present.
(6) Mr. Cimino served as our President and Chief Executive Officer
from September 10, 1998 to March 1, 1999. He continued to be employed as
Chairman of the Board of Directors from September 10, 1998 to August 25, 1999.
(7) Mr. Kim served as our President and CEO from April 20, 1999 to
August 25, 1999. We agreed to pay Mr. Kim a termination amount of $100,000 per a
verbal agreement. ($21,346.00 was disbursed to Mr. Kim in calendar 1999 and
$78,654 was disbursed in 2000. See footnote 12.)
(8) Mr. Rogina served as our President and CEO from March 15, 1999
to April 20, 1999. We paid Mr. Rogina $110,000 in connection with the
termination of his employment contract, as well as 240,000 options on our common
stock.
(9) Richard F. Seifert served as our Vice President of Operations
from February 10, 1999 to August 25, 1999. The amount under Other Annual
Compensation for Mr. Seifert includes $62,500 that we paid to Mr. Seifert
pursuant to our agreement with him under which Mr. Seifert receives a fee for
identifying successful financing opportunities for us.
(10) Represents disbursements in connection with termination of
employment, see footnote numbers 7 and 8.
EMPLOYMENT AGREEMENTS
The section below summarizes all material terms of the employment
agreements that we have with our officers.
We entered into an employment agreement with Andrew L. Fox by a letter
dated January 20, 2000 (the "Fox Employment Agreement"). Set forth below is a
summary of certain terms of the Fox Employment Agreement. This summary is not a
complete description of the terms and conditions of the Fox Employment Agreement
and is qualified in its entirety by reference to the Fox Employment Agreement, a
copy of which is filed as an exhibit to this registration statement.
56
<PAGE> 57
In August of 1999, under an employment arrangement without a fixed term
that either party may terminate at any time, we employed Andrew L. Fox as our
acting president and chief executive officer and executive vice president and
elected him as a director. Under this agreement, Mr. Fox's base annual salary is
$135,000 and he is eligible to receive a bonus initially targeted to be up to an
amount equal to his base annual salary. The bonus is based upon goals and
objectives to be established by the compensation committee of the board of
directors annually following our fiscal year-end. While employed as acting Chief
Executive Officer, Mr. Fox will receive an additional bonus of $2,500 per month.
These bonuses may be increased or decreased by the compensation committee. Mr.
Fox will receive COBRA reimbursement until we establish our health care plan,
and will receive life insurance coverage through Summus Ltd. until we establish
life insurance coverage. Finally, Mr. Fox receives a $600 per month car
allowance. If we terminate Mr. Fox's employment we are obligated to pay him six
months of salary paid monthly or in a lump sum.
Mr. Fox received an option to purchase 240,000 shares of High Speed
common stock that will vest in three equal installments over a three-year period
beginning on August 25, 1999. The vesting of these options is dependent on the
attainment of certain performance goals such as revenue, EBITDA or other metrics
to be determined by our Board of Directors. The exercise price for the options
is Four Dollars and Thirty-Eight Cents ($4.38) per share for Eighty Thousand
(80,000) of the Two Hundred Forty Thousand (240,000) shares of common stock, and
Thirteen Dollars ($13.00) per share for the remaining One Hundred and Sixty
Thousand (160,000) shares of our common stock.
We entered into an employment agreement with Alan R. Kleinmaier by a
letter dated February 7, 2000 (the "Kleinmaier Employment Agreement"). Set forth
below is a summary of certain terms of the Kleinmaier Employment Agreement. This
summary is not a complete description of the terms and conditions of the
Kleinmaier Employment Agreement and is qualified in its entirety by reference to
the Kleinmaier Employment Agreement, a copy of which is filed as an exhibit to
this registration statement.
In August of 1999, under an employment arrangement without a fixed term
that either party may terminate at any time, we employed Alan R. Kleinmaier as
our executive vice president, secretary, treasurer and acting chief financial
officer. Under this agreement, Mr. Kleinmaier's base annual salary is $100,000
and he is eligible to receive a bonus initially targeted to be up to an amount
equal to his base annual salary. The bonus is based upon goals and objectives to
be established by the compensation committee of the board of directors annually
following our fiscal year-end. These bonuses may be increased or decreased by
the compensation committee. Mr. Kleinmaier will receive full medical, dental and
vision for himself and his dependents. Finally, Mr. Kleinmaier receives a $600
per month car allowance. If we terminate Mr. Kleinmaier's employment, we are
obligated to pay him six months of salary.
Mr. Kleinmaier received an option to purchase 50,000 shares of High
Speed common stock that are fully vested as of August 25, 1999. The exercise
price for the options is Four Dollars ($4.00) per share of our common stock.
Mr. Kleinmaier is also employed by Summus and currently serves as an
Executive Vice President of Summus. Mr. Kleinmaier allocates approximately 10%
of his time to Summus and
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<PAGE> 58
the remainder of his time to High Speed. Mr. Kleinmaier is paid $25,000 annually
by Summus and owns 5,000 shares of Summus common stock. He has been granted an
additional 5,000 shares of Summus stock, which becomes fully vested in May 2000.
Additionally, he has options to purchase 10,000 shares of Summus' common stock,
which vests in May 2001.
We entered into an agreement with Robert S. Lowrey by a letter dated
March 29, 2000 (the "Lowrey Employment Agreement"). Set forth below is a summary
of certain terms of the Lowrey Employment Agreement. This summary is not a
complete description of the terms and conditions of the Lowrey Employment
Agreement and is qualified in its entirety by reference to the Lowrey Employment
Agreement, a copy of which is filed as an exhibit to this registration
statement.
In May 2000, under an employment arrangement without a fixed term that
either party may terminate at any time, we employed Robert S. Lowrey as our
Chief Financial Officer. Under this agreement, Mr. Lowrey's base annual salary
is $125,000 and he is eligible to receive a bonus initially targeted to be up to
an amount equal to one half of his annual base salary. The bonus will be based
upon goals and objectives to be established by the compensation committee of the
board of directors annually following our fiscal year end. Bonuses may be
increased or decreased by the compensation committee. Mr. Lowrey will receive
full medical, dental and vision insurance coverage for himself and his
dependents. Finally, Mr. Lowrey receives a $500 per month car allowance. If we
terminate Mr. Lowrey's employment, we are obligated to pay him six months of
salary.
Mr. Lowrey received an option to purchase 100,000 shares of High Speed
Common stock that will vest in three equal installments over a three-year
period. The exercise price for this option is Seven Dollars and Fifty Cents
($7.50) per share.
STOCK OPTIONS GRANTED
The following table sets forth information about the stock options
granted to our executive officers during 1999. We did not grant any stock
options to our executive officers during 1998.
No stock appreciation rights have ever been exercised by any of our
executive officers because we have never granted any stock appreciation rights.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
% OF TOTAL ANNUAL RATES OF STOCK
OPTIONS MARKET PRICE PRICE APPRECIATION FOR
GRANTED TO EXERCISE OR ON DATE OF OPTION TERM (1)
OPTIONS EMPLOYEES IN BASE PRICE GRANT EXPIRATION -------------------------------------
NAME GRANTED FISCAL YEAR ($/SH) ($/SH) DATE 0% 5% 10%
------------------ ---------- ------------ ----------- ------------ ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael Cimino 425,000(2) 24% $ 0.01 $2.375 01/01/05 $1,005,125 --(3) --(3)
Peter R. Rogina 200,000(4) 11% $ 0.01 $ 2.75 9/22/04 $ 548,000 $699,955 $883,781
Peter R. Rogina 40,000(5) 2% $ 0.01 $ 2.75 9/22/04 $ 109,600 $139,991 $176,756
Richard F. Seifert 50,000(6) 3% $ 4.00 $2.375 5/27/09 --(7) --(7) $108,007
Richard F. Seifert 200,000(6) 11% $ 0.01 $2.375 5/27/09 $ 473,000 --(3) --(3)
</TABLE>
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<PAGE> 59
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Myung K. Kim 200,000(8) 11% $ 0.01 $2.375 4/12/09 $ 473,000 --(3) --(3)
Myung K. Kim 65,000(8) 4% $ 4.00 $2.375 4/12/09 --(7) --(7) 108,007
Andrew L. Fox 160,000(9) 9% $13.00 $ 4.38 8/25/09 --(7) --(7) --(7)
Andrew L. Fox 80,000(9) 5% $ 4.38 $ 4.38 8/25/09 $ 0 $220,365 $558,447
Alan R. Kleinmaier 50,000(10) 3% $ 4.00 $ 4.38 8/25/09 $ 19,000 $156,728 $368,030
</TABLE>
(1) The potential realizable value of the options reported above
was calculated by assuming 5% and 10% annual rates of appreciation of the price
of our common stock from the date of grant of the options until the expiration
of the options. These assumed annual rates of appreciation were used in
compliance with the rules of the Securities and Exchange Commission and are not
intended to forecast future price appreciation of our common stock. We chose not
to report the present value of the options because we do not believe any formula
will determine with reasonable accuracy a present value because of unknown or
volatile factors. The actual value realized from the options could be
substantially higher or lower than the values reported above, depending upon the
future appreciation or depreciation of the common stock during the option period
and the timing of exercise of the options. We have reported the 0% column to
describe the value of the options granted to the named executive on the date of
the grant.
(2) These options were granted in May of 1999 per Mr. Cimino's
verbal employment agreement.
(3) No value is reported because these options have been
exercised. These options are included in this table to show their value to the
named executive on the grant date because the options were granted at an
exercise price below the market price at the date of the grant.
(4) Pursuant to a settlement agreement with Peter R. Rogina, dated
September 22, 1999, we granted Mr. Rogina an option, exercisable in full on
September 22, 1999, to purchase 200,000 shares of common stock having an
exercise price of $0.01. Mr. Rogina may exercise the option at any time during
the five-year period commencing on September 22, 1999. The option includes
protection from dilution due to recapitalizations, issuances of securities at
less than 67% of fair market value, granting of other options or similar rights,
and dividend or distribution rights. We have not issued any new diluting shares
after the grant date of Mr. Rogina's option for 200,000 shares, therefore, Mr.
Rogina's option is now exercisable for 200,000 shares.
(5) Pursuant to the settlement agreement with Mr. Rogina, dated
September 22, 1999, we granted Mr. Rogina an option to purchase 40,000 shares of
common stock having an exercise price of $0.01. Mr. Rogina may exercise the
option during the period commencing on July 1, 2000 and ending on September 22,
2004.
(6) These options were granted on May 27, 1999 per Mr. Seifert's
verbal employment agreement.
(7) There is no calculated potential realized value for these
options for the 5% and 10% annual rates of appreciation because at these rates
the exercise price remains higher than the market price during the entire period
of the options life.
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<PAGE> 60
(8) Mr. Kim's options were originally granted as an option to
purchase 200,000 shares at an exercise price of $0.01 per share of common stock
and an option to purchase 50,000 shares at an exercise price of $4.00 price per
share. Mr. Kim has exercised the option for 200,000 shares. The remaining option
for 50,000 shares included protection from dilution due to recapitalizations,
issuances of securities at less than 67% of fair market value, granting of other
options or similar rights, and dividend or distribution rights. Mr. Kim has
agreed to exchange an additional 15,000 options for termination of his
antidilution rights. The additional 15,000 options are included in Mr. Kim's
total number of options in the above table. Based on this, Mr. Kim's option is
now exercisable for 65,000 shares of our common stock.
(9) These options were granted on August 25, 1999 per Mr. Fox's
employment agreement and become exercisable, subject to continued employment, in
cumulative annual increments of one third each beginning on the date of grant
and the first, second and third anniversaries of the date of grant.
(10) We employed Alan R. Kleinmaier from August of 1999 through May
31, 2000 as our acting Chief Financial Officer. We employed Alan R. Kleinmaier
from August of 1999 through the present as our Executive Vice President,
Secretary and Treasurer. We have granted Mr. Kleinmaier an option to purchase
50,000 shares of our common stock that are immediately exercisable.
STOCK OPTIONS EXERCISED AND YEAR END VALUES OF UNEXERCISED OPTIONS
The following table sets forth information about the stock options
exercised by our named executive officers during 1999.
AGGREGATED OPTION EXERCISES IN 1999
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES ACQUIRED VALUE OPTIONS AT FY-END(#) MONEY OPTIONS AT FY-END($)
ON EXERCISE REALIZED ------------------------- ----------------------------
NAME (#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
----------------- --------------- ----------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Michael Cimino 425,000(3) $952,000(3) 0/0 0/0
Richard F. Seifert 200,000 $448,000 50,000/0 $600,000/0
Myung K. Kim 200,000 $448,000 65,000/0 780,000/0
Peter R. Rogina 0 0 200,000/40,000 3,198,000/$639,600
Andrew L. Fox 0 0 0/240,000 0/$1,409,600
Alan R. Kleinmaier 0 0 50,000/0 600,000/0
</TABLE>
(1) Upon exercise of the option an option holder did not receive
the amount reported above under the column Value Realized. The amounts reported
above under the column Value Realized merely reflect the amount by which the
value of our common stock, on the date the option was exercised, exceeded the
exercise price of the option. The option holder does not realize any cash until
the shares of common stock issued upon exercise of the options are sold.
(2) The value of our common stock on December 31, 1999 was $16.00
per share. Value was determined by taking the last sale price of our common
stock on that date as reported
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by OTCBB. The value of options was determined by subtracting the aggregate
exercise prices of the options from the value of the common stock issuable upon
exercise of the options.
(3) This grant of an option to purchase 425,000 shares of common
stock was exercised by Mr. Cimino for all 425,000 shares. Later, the shares
acquired by Mr. Cimino were reduced to 95,000 shares of common stock through
share cancellations implemented by High Speed. The value realized amount at the
grant date would have been $213,750 if the original option grant had been for
95,000 shares of our common stock.
STOCK OPTION PLAN
The following summary description of Equity Compensation Plan is not
intended to be complete and is qualified by reference to the copy of the Equity
Compensation Plan, filed as an exhibit to this registration statement.
Our Equity Compensation Plan was adopted by our board of directors on
January 27, 2000, and approved by our stockholders on February 11, 2000. The
plan provides that the board may grant stock options for our common stock to
officers, other employees, directors, consultants and independent contractors
who provide services to us pursuant to the terms of the plan. An aggregate of
2,000,000 shares of common stock is reserved for issuance under this plan, some
of which has been issued and is outstanding. If shares subject to outstanding
stock options are not purchased or are reacquired because of termination,
expiration or cancellation of such stock options or for other reasons, the plan
provides that those shares will be available for issuance pursuant to future
stock option grants under the plan. Shares of common stock subject to the stock
option plan are made available from authorized and unissued shares of our common
stock.
The compensation committee of the board of directors currently
administers the plan. The compensation committee may interpret the plan and may
prescribe, amend and rescind rules and make all other determinations necessary
or desirable for the administration of the plan. The stock option plan permits
the compensation committee to select the eligible parties who will receive stock
option awards under the plan and generally to determine the terms and conditions
of those awards.
We may issue two types of stock options under this plan: incentive
stock options, which are intended to qualify for certain tax treatment under
section 422 of the Internal Revenue Code of 1986, as amended, and which may be
granted only to eligible parties who are employees; and nonqualified stock
options, which may be granted to all types of eligible parties. The plan
contains special provisions applicable to incentive stock options granted under
the plan, including but not limited to the requirement that the exercise price
of each incentive stock option be at least equal to the fair market value of a
share of common stock on the date the incentive stock option is granted. Stock
options granted under the plan are generally not transferable by the optionees.
In connection with any underwritten public offering of our equity
securities pursuant to an effective registration statement filed under the
Securities Act of 1933, including an initial public offering, an optionee shall
not sell, make any short sale of, loan, hypothecate, pledge, grant any option
for the purchase of, or otherwise dispose or transfer for value or otherwise
agree
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<PAGE> 62
to engage in any of the foregoing transactions with respect to any, stock
acquired under the plan without our or our underwriters prior written consent.
Such restriction shall be in effect for such period of time from and after the
effective date of the final prospectus for the offering as our underwriters or
we may request.
If a reorganization, recapitalization, reclassification, stock split,
stock dividend, or consolidation of shares of our common stock, merger or
consolidation of High Speed or sale or other disposition by us of all or a
portion of our assets, other change in our corporate structure, or any
distribution to shareholders other than a cash dividend results in the
outstanding shares of our common stock, or any securities exchanged therefore or
received in their place, being exchanged for a different number or class of
shares of our common stock or other securities we might issue, or for shares of
common stock or other securities of any other corporation, or new, different or
additional shares or other securities of the company or of any other corporation
being received by the holders of outstanding shares of common stock, then the
compensation committee of our board of directors shall make equitable
adjustments in the limitation on the aggregate number of shares of common stock
that may be awarded as stock option grants under the plan, the number and class
of stock that may be subject to the grant of stock options under the plan and
which have not been issued or transferred under outstanding stock options, and
the terms, conditions or restrictions of any stock option or the corresponding
award agreement (including the exercise price thereunder). However, the plan
requires that all such adjustments shall be made such that incentive stock
options granted under the plan shall continue to constitute incentive stock
options within the meaning of section 422 of the Internal Revenue Code of 1986,
as amended. The plan provides that our board of directors may amend or terminate
this plan at any time, provided, however, that certain types of amendments
require approval of our stockholders and no such action may be taken which
adversely affects any rights under outstanding stock options without the
holder's consent.
COMPENSATION OF DIRECTORS
Directors who are not full-time employees of High Speed: (i) are
reimbursed for reasonable travel expenses incurred in attending meetings of the
Board or committees of the Board; (ii) are paid a fee of $1,000 for each day on
which the Board and/or committee meets or is in conference, which such Directors
attend, except for committee meetings held on the same date as a Board meeting
or conference; and (iii) in the future may be granted stock options pursuant to
the terms of our Equity Compensation Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We have only recently established our employee stock plan and
compensation committee, and currently all members of the board of directors
serve on the compensation committee. The compensation committee made recent
decisions concerning the compensation of our recently appointed executive
officers, one of which, Andrew L. Fox, serves on our board of directors. Mr. Fox
is the former Executive Vice President of Sales and Marketing and served as a
member on the board of directors of Summus.
Several of the members of our board of directors and our compensation
committee are members of the board of directors of Summus. Dr. Bjorn Jawerth
serves on our board of directors and on our compensation committee. Mr. Bradford
Silvernail was a director of High
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<PAGE> 63
Speed from February 17, 2000 to June 1, 2000 and during this time our entire
board of directors comprised our compensation committee, thus, during this time
Mr. Silvernail was on our compensation committee. Dr. Jawerth is the Chairman of
our board of directors, the Chairman of the board of directors of Summus, and
our largest shareholder.
Other than the interlocking relationships with Summus, no other
interlocking relationships exist.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For all of the transactions described in this section the terms and
conditions associated with each transaction resulted from arms-length
negotiations between each party. The terms of each transaction were as good as
could be obtained from unaffiliated third parties.
Summus directors and executive officers serve on our board of
directors. Dr. Bjorn Jawerth, the Chairman, President, and majority shareholder
of Summus, is the Chairman of the Board of High Speed. Alan R. Kleinmaier, our
Executive Vice President, Secretary, and Treasurer, is an Executive Vice
President of Summus.
OUR OWNERSHIP IN SUMMUS
We own 167,000 shares of Summus Ltd. Our shares represent approximately
14.1% of the outstanding common stock of Summus, but represent only 12.8% of
Summus' common stock on a fully diluted basis. We acquired 1,000,182 shares of
the common stock of Summus Technologies, Inc. during the first half of 1999. We
acquired these Summus Technologies, Inc., shares from transactions with
individuals who owned shares of Summus Technologies, Inc. in exchange for cash
and shares of our common stock. These individuals are given below.
<TABLE>
<CAPTION>
Consideration
in shares of Summus Number of High Speed Shares
Individual Technologies or other consideration
------------------- ------------------- ---------------------------
<S> <C> <C>
William R. Dunavant 250,000 350,000
Wallace Permenter 5,000 18,334
Rick Turbin 27,000 30,000
Robert Chalnick 20,000 25,000
Cale Yarborough 100,000 366,667
StoneLeigh Ltd. 418,182 (1)
(an entity established by Mr.
Bradford Richdale)
Debra Richdale 180,000 (1)
</TABLE>
(1) These shares of the common stock of Summus Technologies, Inc.
were conveyed to High Speed in connection with two related and contemporaneous
transactions: (i) a stock purchase agreement executed in August of 1999 between
Summus and Mr. Bradford Richdale and various entities established by Mr.
Richdale, under which Summus purchased 9,542,360 shares of our common stock from
Mr. Bradford Richdale in exchange for 132,888 shares of Summus Ltd; and (ii) the
merger of Summus Ltd. and Summus Technologies, Inc., described in the paragraph
immediately below. We did not issue any shares of our common stock to the
individual or entity transferring to us the Summus Technologies, Inc. shares
because the consideration such individual or entity received was in connection
with and satisfied under the two related and contemporaneous transactions
described in this footnote.
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<PAGE> 65
months later Marketer's World ceased to function as a business. A number of the
people that received High Speed shares in connection with these transactions
subsequently cancelled them and other parties conveyed other contributions
(specifically the Summus Technology shares) back to High Speed.
In August of 1999 Summus Technologies, Inc. and Summus Ltd merged.
Pursuant to the merger, our 1,000,182 shares of Summus Technologies, Inc. were
converted into 167,000 shares of Summus Ltd. In conjunction with the merger, we
entered into a shareholders agreement in August of 1999 where under certain
conditions we cannot transfer our shares without first granting Summus the
opportunity to purchase our shares. We cannot transfer our Summus shares to a
third party without first offering Summus and then the other Summus shareholders
the opportunity to purchase our shares on the same terms offered to us by the
third party, except that Summus or the Summus shareholder purchasing our shares
may pay 25% of the purchase price in cash and pay the remainder of the purchase
price in three equal annual installments with interest at the prime rate of Bank
of America. However, we can transfer our Summus shares if High Speed is sold via
a stock sale and: (i) the transaction does not have an adverse effect on Summus;
and (ii) the entity purchasing High Speed is not an affiliate of Mr. William R.
Dunavant. The shareholders agreement obligates parties to the agreement to vote
on certain matters as directed by Dr. Bjorn Jawerth, however, High Speed is
exempted from these voting provisions of the shareholder agreement.
THE ASSET PURCHASE OF MARKETERS WORLD, INC.
In August 1998, we acquired the business and assets of, and assumed the
liabilities of, Marketers World, Inc. To pay the sole shareholder of Marketers
World, Mr. Bradford Richdale, we issued 9,275,000 shares of common stock to
Marketers World, Inc. Before this transaction Mr. Richdale was not a related
party to High Speed. Immediately before issuing these 9,275,000 shares of common
stock there were 1,000,000 shares of our common stock issued and outstanding.
Since Marketers World was treated as the accounting acquirer in this
transaction, no new value was assigned to the Marketers World assets. The
recorded value of these assets was maintained on the historical cost basis.
Marketers World assets were primarily office furniture and fixtures and computer
equipment.
In addition to the issuance of these shares, as the related party in
the transaction, the president and then sole director and sole corporate officer
of High Speed, Mr. Rene Hamouth, transferred 725,000 shares of his personal High
Speed common stock to Marketers World to effect the transaction. The transaction
was accounted for as a reverse merger whereby Marketers World was treated as the
accounting acquirer and High Speed as the acquiree. At the time of the merger
High Speed had no assets or liabilities and accordingly, the transaction was
accounted for as a recapitalization of High Speed. At the time of the merger,
High Speed was a non-operating public shell and Marketers World was a privately
owned company. Since High Speed had no assets or liabilities, the transaction
was accounted for as a recapitalization of High Speed and the outstanding shares
were accounted for accordingly. Consequently, based on this accounting
treatment, it was not necessary to value the shares High Speed issued in this
transaction or to determine the fair value of the Marketers World assets.
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<PAGE> 66
Subsequently, the 10,000,000 shares that Marketers World received in
the transaction were assigned by Mr. Richdale as follows: (i) 6,835,000 shares
to Ormond Trust, an entity established by Mr. Richdale; (ii) 140,000 shares to
Mr. Cimino; and (iii) the remaining 3,025,000 shares to 24 other persons.
Marketers World was incorporated in January 1998 and its planned
principal operations were to lease computer systems to businesses and to
distribute Internet oriented products and perform related services. During 1998,
Marketers World was not able execute its planned activities and consequently
ceased all operating activities in December 1998. Since Marketers World was a
development stage enterprise, there were minimal assets to be disposed. Assets
which had no alternative use totaled $36,858 were written off. No proceeds were
realized on the disposition of these assets.
The Marketers World officer executing the asset purchase agreement as
president of Marketers World was Mr. Michael Cimino, who subsequently was
elected the sole director and executive officer of High Speed.
Immediately after and as a result of the foregoing transaction, Mr.
Bradford Richdale became our primary shareholder. No independent valuation was
made of this transaction. Subsequent to the transaction, we decided not to
continue in the line of business we acquired in the transaction. We do not
believe that the transaction added value to our company on an ongoing basis.
1998 OFFERING
In September of 1998 we issued 1,550,000 shares of our common stock to
Mr. Bradford Richdale, our controlling shareholder at the time of the
transaction, as forgiveness of a debt valued at $149,820 that we owed to him.
Mr. Richdale loaned us these funds to finance our operations. We also issued
1,100,000 shares of common stock to StoneLeigh Ltd., an entity established by
Mr. Richdale, and we issued 2,330,000 shares of common stock to Rene Hamouth,
our president, sole director, and sole corporate officer at the time of the
transaction. These shares of our common stock were issued in conjunction with
shares issued to thirty other investors. The aggregate consideration we received
for these issuances was $317,000, including forgiveness of debt.
The price per share of the 1,550,000 shares of our common stock issued
to Mr. Richdale was $0.097 per share, representing the fair value of our common
stock on the date of issuance. The price per share of the 1,100,000 shares
issued to Stoneleigh Ltd., the 2,330,000 shares issued to Rene Hamouth, and the
336,600 shares issued to third parties was $0.084 per share, representing the
fair value of our common stock on the dates of issuance.
BRD ACQUISITION
In September of 1998 we acquired Brad Richdale Direct, Inc., ("BRD").
In exchange for all of the outstanding and issued stock of Brad Richdale Direct
we issued: (i) 775,000 shares of common stock to Ormond Trust, Brad Richdale
Direct's major shareholder, and an entity established by Mr. Bradford Richdale,
our controlling shareholder at the time of the transaction;
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<PAGE> 67
and (ii) 225,000 shares of common stock to Mr. Michael Cimino, who at the
execution of the transaction was president of Brad Richdale Direct and president
of High Speed.
The transaction was accounted for as an acquisition of licensing rights
rather than a business combination because at the time of the acquisition BRD's
primary asset was marketing and licensing rights for Summus technology. In
connection with this transaction, in February of 1999 we issued an immediately
vested option for 1,000,000 shares of common stock to Mr. Bradford Richdale,
exercisable at a price of $0.01 per share. Also, in connection with this
transaction, in September of 1998, we issued 140,000 shares of our common stock
to Mike Cimino. Finally, we issued 100,000 shares to Mr. Cimino as consideration
for his services in effecting this transaction. BRD was incorporated in August
of 1997.
The acquisition of BRD was a transaction between us and a company owned
by our primary shareholder. No independent valuation was made. The value
attributable to the licensing rights totaled $77,500. This amount represents the
775,000 shares issued that were valued using the most recent transactions in our
common stock of approximately $0.10 per share. The acquisition of the licensing
rights from BRD occurred in September 1998. At the time of this transaction, BRD
was not an operating entity and its only significant asset was the marketing and
licensing rights to Summus technology. The decision not to ramp up operations of
BRD was made in December 1998 along with the decision to discontinue the
operations of Marketers World. Since BRD was a non-operating company, no
consideration was received when the decision was made to not operate it.
Subsequent to the transaction we decided not to operate the business we
acquired in the transaction. Other than the licensing rights for Summus
technology, we do not believe that the transaction added value to our company on
an ongoing basis.
NATIONAL DIRECT CORPORATION AND HEALTHTEC ACQUISITION
In September of 1998, under a stock purchase agreement, we issued
300,000 shares of common stock for the purpose of acquiring HealthTec, Inc., and
National Direct Corporation. We issued 100,000 of these shares to Mr. Bradford
Richdale, our controlling shareholder at the time of the transaction, and we
issued 100,000 of these shares to Mr. Michael Cimino, our president and chief
executive officer. The final 100,000 shares were issued to an unrelated party.
This transaction was rescinded in November of 1998 and in August of 1999 we
implemented the cancellation of the 300,000 shares issued for this acquisition.
VR MALL AND GOLF VACATIONS RESORT ACQUISITION
In September of 1998, under a stock purchase agreement, we agreed to
issue 200,000 shares of common stock to Mr. Bradford Richdale, our controlling
shareholder at the time of the transaction, for the purpose of acquiring all of
the stock of VR Mall, Inc. In September of 1998, under a stock purchase
agreement, we agreed to issue 600,000 shares of common stock to Mr. Bradford
Richdale for the purpose of acquiring all of the stock of Golf Vacations Resort.
These two transactions were canceled in November of 1998. The common stock
issuances contemplated by these transactions were never implemented.
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<PAGE> 68
ADVISORY AGREEMENT WITH A DIRECTOR
In February of 1999 we entered into an advisory agreement with Mr.
Richard F. Seifert under which Mr. Seifert provides advisory services for
investor relations and identification of funding and revenue opportunities. Mr.
Seifert is a member of our board of directors. For successful funding
opportunities introduced by Mr. Seifert, we pay 10% of the amount secured for
non-debt funding and revenue opportunities, and for introductions which result
in successful debt funding we pay 5% of the amount secured. As of February 2000,
Mr. Seifert has been paid $62,500 under this agreement.
ISSUANCE OF CONVERTIBLE DEBENTURES
During the period between March 3, 1999 and May 24, 1999, we issued
$1,636,858 principal amount of convertible debentures. The debentures bore
interest at a rate of 8% per annum and were convertible into shares of our
common stock at a conversion rate of $0.50 per share. The principal on these
debentures was due July 31, 2000. The aggregate consideration we received by
issuing these debentures was $1,636,858. All of these debentures were issued to
Mr. Bradford Richdale, our controlling shareholder at the time of these
transactions, or to entities established by Mr. Richdale: Ormond Trust and
StoneLeigh Ltd. On May 24, 1999, all holders converted these debentures into
shares of our common stock and we issued 3,273,716 shares of our common stock
upon conversion of these debentures. The effective price paid by Mr. Richdale
for these shares was $0.50 per share. These debentures were issued and converted
between March 3, 1999 and May 24, 1999. The market value of our common stock
between these dates ranged from a low of $1.13 per share for a high of $4.88 per
share.
On July 15, 1999, we issued a $62,500 principal amount convertible
debenture to Mr. Bradford Richdale. The debenture bore interest at a rate of 8%
per annum and was convertible into shares of our common stock at a conversion
rate of $0.25 per share. The principal on these debentures was due July 15,
2000. The consideration we received for this debenture was $62,500. On July 15,
1999, the holder converted this debenture into shares of our common stock and we
issued 250,000 shares of our common stock upon conversion of this debenture. The
effective price paid by Mr. Richdale for these shares was $0.25 per share. These
debentures were issued and converted on July 15, 1999 and the market value of
our common stock on that date was $1.63 per share at the close of the trading
day.
In August of 1999 we issued $458,640 principal amount of convertible
debentures to Mr. Bradford Richdale and to Ormond Trust, an entity established
by Mr. Richdale. The debentures bore interest at a rate of 8% per annum and were
convertible into shares of our common stock at a conversion rate of $1.00 per
share. The principal on these debentures was due August 5, 2000 and August 12,
2000. The consideration we received for these three debentures was $458,640. On
the date they were issued, the holder converted these debentures into shares of
our common stock and we issued 458,640 shares of our common stock upon
conversion of these debentures. The effective price paid by Mr. Richdale for
these shares was $0.50 per share. These debentures were issued and converted
between August 5, 1999 and August 12, 1999. The market value of our common stock
between these dates ranged from a low of $3.38 per share to a high of $4.72 per
share.
The convertible debentures described above were issued as partial
consideration for $2,190,000 that was directly paid by Mr. Bradford Richdale to
Summus to cover a portion of the
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<PAGE> 69
first three payments that we were obligated to make to Summus under the
Marketing License Agreement. Under the Marketing License Agreement, we were to
make four payments of $750,000 each for our rights under the agreement. The
value attributable to each of the convertible debentures issued to Mr. Richdale
was equal to the stated principal amount of each debenture. These debentures
were issued to Mr. Richdale in consideration for the cash payments he personally
made to Summus on behalf of High Speed. Accordingly, we did not realize any cash
proceeds from the issuance of these debentures.
ISSUANCE OF SHARES FOR BRD OPTION
In August of 1999, we issued 1,000,000 shares of our common stock when
Mr. Bradford Richdale, our controlling shareholder at the time of the
transaction, exercised his common stock option, which were issued with an
exercise price of $0.01 per share. We waived payment of the exercise price in
exchange for Mr. Richdale transferring to us certain marketing rights to Summus
technology. These marketing rights were the rights to market Summus technology
in direct marketing channels. Mr. Richdale received these stock options in
connection with the purchase by High Speed of all of the stock of Brad Richdale
Direct, Inc., as discussed above.
CANCELLATION OF PRIOR ACQUISITIONS
In August of 1999, we canceled 5,461,100 shares of common stock for the
following transactions. We canceled 300,000 shares of common stock because we
rescinded the acquisitions of National Direct Corporation and HealthTec.
Furthermore, we canceled 5,161,100 shares of common stock as part of a partial
voluntary unwinding of the Marketers World acquisition subsequent to Marketers
World ceasing operations.
PAYMENTS TO SUMMUS UNDER THE MARKETING LICENSE AGREEMENT
During February of 1999 we entered into a Marketing License Agreement
with Summus. During 1999, we made payments of $2,250,000 in cash and a payment
in the form of 1,500,000 shares of our common stock, valued at $2,278,125, for
the purpose of making the final cash payment of $750,000 due to Summus under the
Marketing License Agreement as described in the section entitled "Business." Our
original obligation was to pay $750,000 in cash for the final payment, but due
to lack of available cash, we renegotiated the final payment so that we could
pay by issuing our common stock. In exchange for the $2,250,000 cash payment and
the stock payment under the marketing License Agreement, we received the right
to license Summus products and the right to share revenues from Summus
technologies. As described in the section entitled "Business," we have replaced
the Marketing License Agreement and its related agreements with new agreements
under which we will have to make future payments to Summus for our use of their
software products. The new agreements include: a Master Agreement, a Software
License Agreement, a Revenue Sharing Agreement, and a Software Maintenance
Agreement.
As of August of 1999, Summus became our controlling shareholder.
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ISSUANCE OF COMMON STOCK TO THE PARENTS OF A DIRECTOR
In August of 1999, we issued 250,000 shares of our common stock at
$1.00 per share to two investors under a subscription agreement. These investors
are the parents of Mr. Richard F. Seifert, a member of our board of directors.
The market value of these shares when issued was $4.38.
LOANS DUE TO MR. BRADFORD RICHDALE, A HIGH SPEED SHAREHOLDER.
As of December 31, 1999, we owe $435,815 to entities controlled by Mr.
Bradford Richdale. We owe these amounts to Mr. Richdale for loans that he
extended to us to finance our operations. The loans are unsecured and are
payable on demand. We do not pay any interest on these loans.
LOANS DUE TO SUMMUS.
Summus has advanced approximately $250,000 during the period beginning
in August 1999 through March 31, 2000 to us to provide us with funds to operate.
The loans are unsecured and are payable on demand. We do not pay any interest on
these loans.
SUMMUS OWNERSHIP OF HIGH SPEED
In August of 1999, under a stock purchase agreement, Summus purchased
9,542,360 shares of our common stock from Mr. Bradford Richdale and various
entities established by Mr. Richdale in exchange for 132,888 shares of Summus
Ltd. Under amendment number 1 to this agreement, Mr. Richdale agreed that he
would not serve on the board of directors of High Speed without Summus written
consent. Amendment number 2 to this agreement states that the purchase of the
High Speed shares by Summus is conditioned upon Mr. Michael Cimino resigning as
a member of the board of directors of High Speed and Summus, and upon Mr.
Michael Cimino signing a release in favor of High Speed for any claims, past or
future. As of July 10, 2000, Summus held 8,474,360 shares of our common stock
(39.4% of our outstanding common stock, and 35.9% on a fully diluted basis).
Summus can also vote an additional 1,279,667 shares of our common stock under
voting agreements with and/or proxies from 14 persons. Total Summus voting power
is 45.4% of our outstanding common stock and 41.4% on a fully diluted basis.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership of our capital stock as of July 10, 2000 and as adjusted
reflect the potential sale of common stock in this offering by:
* all those known by us to be beneficial owners of more than
five percent of the outstanding shares of common stock;
* all named executive officers;
* each of our current directors;
* all executive officers and directors as a group; and
* each selling shareholder.
Except as otherwise indicated, and subject to applicable community
property laws, the persons named below have sole voting and investment power
with respect to all shares of common stock held by them.
Applicable percentage ownership before the offering in the table is
based on 21,502,719 shares of our common stock outstanding as of July 10, 2000.
If all 1,874,717 shares of common stock in this registration are
obtained for sale or are obtained for sale and are sold this would entail the
issuance of 765,000 new shares of our common stock. This would result in
22,267,719 shares assumed to be outstanding at or shortly after the effective
date of this registration statement. This does not include: (i) any issuance of
shares for stock options not included in the 765,000 allotment; and (ii) any
issuance of shares for conversion of the Series A Convertible Preferred Stock
that we have outstanding.
This registration statement covers 1,874,717 shares of our common
stock, of which 1,109,717 shares of common stock are currently issued and
outstanding, and of which 765,000 shares represent shares of our common stock
that would be issued if this entire offering is sold. Of the 765,000 shares that
would be issued, 115,000 shares represent options that two selling shareholders
could exercise. Of the 765,000 shares that would be issued, the remaining
650,000 shares represent an estimate of the additional shares that we will have
to issue for Mr. William R. Dunavant on or before the date this registration
statement goes effective according to the terms of our settlement agreement with
Mr. Dunavant.
Options that are exercisable within sixty days of July 10, 2000 are
deemed to be outstanding and to be beneficially owned by the stockholder holding
the options for the purpose of computing that stockholder's percentage ownership
but are not treated as outstanding for the purpose of computing the percentage
ownership of any other stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission that deem
shares to be beneficially owned by any person or group who has or shares voting
or investment power with respect to such shares. Unless otherwise indicated, the
persons named on this table have sole voting and investment control with respect
to all shares beneficially owned.
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<TABLE>
<CAPTION>
Shares Beneficially Owned if
Shares Percent of Number of All Registered Shares are
Beneficially Shares Shares Being Issued and Outstanding
Name and Address Owned (1) Outstanding Offered Number Percent
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summus Ltd. 9,754,027 45.4% -- 9,754,027 43.8%
Two Hannover Square, Suite 600 (2)(3) (2)(3)
434 Fayetteville St. Mall
Raleigh, NC 27601
Dr. Bjorn Jawerth 9,754,027 45.4% -- 9,754,027 43.8%
Chairman of our Board of Directors (2)(3) (2)(3)
Two Hannover Square, Suite 600
434 Fayetteville St. Mall
Raleigh, NC 27601
William Bradford Silvernail (16) 8,474,360 39.4% -- 8,474,360 38.1%
Two Hannover Square, Suite 600 (3)(4) (3)(4)
434 Fayetteville St. Mall
Raleigh, NC 27601
Andrew L. Fox --
Director, Acting President and Chief 0(5) * 0(5) *
Executive Officer, and Executive Vice
President(17)
Richard F Seifert 250,000 1.2% -- 250,000 1.1%
Director (17) (6)(7) (6)(7)
Herman Rush 0 * -- 0 *
Director(17)
C. Cristine Wittress 0 -- 0 *
Director(17)
*
Alan R. Kleinmaier 90,000(8) * -- 90,000(8) *
Executive Vice President, Secretary, and
Treasurer(17)
Robert S. Lowrey, Chief Financial 0 * -- 0 *
Officer And Vice President of Finance(17)
Michael M. Cimino 800,000(9) 3.7% -- 800,000(9) 3.7%
Former Director, President, Secretary and
Treasurer(17)
Myung K. Kim 265,000(10) 1.2% 65,000(10) 265,000(10) 1.2%
Former President and Chief Executive
Officer(17)
Peter R. Rogina 240,000(11) 1.1% -- 240,000(11) 1.1%
Former President and Chief Executive
Officer(17)
Ron De Jong(17) 100,000(12) * 100,000(12) 100,000 *
Darlene Beck(17) 25,000 * 25,000 25,000 *
John Hinton(17) 25,000 * 25,000 25,000 *
Mike Bissell(17) 2,000 * 2,000 2,000 *
Tom Godfrey(17) 25,000 * 25,000 25,000 *
Joseph Repko(17) 5,000 * 5,000 5,000 *
William D. Glycenfer(17) 44,647 * 44,647 44,647 *
Richard J. Seifert(17) 125,000 * 125,000 125,000 *
</TABLE>
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<TABLE>
Shares Beneficially Owned if
Shares Percent of Number of All Registered Shares are
Beneficially Shares Shares Being Issued and Outstanding
Name and Address Owned (1) Outstanding Offered Number Percent
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Rita M. Seifert(17) 125,000 * 125,000 125,000 *
William R. Dunavant(17) 550,000 (13) 2.6% 1,200,000(13) 1,200,000(13) 5.4%
(14) (14)
Douglas May(17) 133,070 * 133,070 133,070 *
All current directors and executive 10,094,027 46.9% -- 10,094,027 44.9%
officers as a group (7 Persons) (15) (15)
</TABLE>
* Represents beneficial ownership of less than one percent (1%) of
common stock.
(1) The persons and entities named in the table have sole voting
power and investment power with respect to all shares shown as beneficially
owned by them, except as noted above.
(2) Includes 8,474,360 shares beneficially owned by Summus Ltd.
Summus also has the right to vote an additional 1,279,667 shares of our common
stock under voting agreements with and/or proxies from 14 persons. Total Summus
voting power is 45.4% of our outstanding common stock. Dr. Jawerth owns 54.0% of
the outstanding shares of Summus Ltd., and is the President and Chairman of the
Board of Directors of Summus Ltd. Dr. Jawerth exercises shared voting and
investment power with respect to all High Speed shares owned by Summus Ltd.
(3) Includes 1,279,667 shares for which Summus has voting power
through voting agreements with and/or proxies from 14 persons.
(4) Includes 8,474,360 shares beneficially owned by Summus Ltd.
(5) Mr. Fox has options to acquire 240,000 shares of our common
stock pursuant to stock options exercisable over three years in equal
installments from the anniversary date of August 25, 1999.
(6) These shares include 50,000 shares that Mr. Seifert may
immediately acquire pursuant to stock options.
(7) These shares include 200,000 shares that are beneficially
owned with his wife, Karen Seifert.
(8) These shares include 20,000 shares that Mr. Kleinmaier owns
with Pamela B. Kleinmaier, the wife of Mr. Kleinmaier. These shares include
50,000 shares that Mr. Kleinmaier may acquire pursuant to stock options
immediately exercisable.
(9) These shares include shares that Mr. Cimino beneficially owns
with his wife, Gina M. Cimino.
(10) These shares include 65,000 shares that Mr. Kim may
immediately acquire pursuant to stock options.
73
<PAGE> 74
(11) These shares include 200,000 shares that Mr. Rogina may
immediately acquire pursuant to stock options, and includes stock options
exercisable for 40,000 shares of common stock after July 1, 2000.
(12) These shares include 50,000 shares that Mr. De Jong may
immediately acquire pursuant to stock options.
(13) In June 2000, we entered into a settlement agreement with
William R. Dunavant and Michael Cimino to resolve a litigation suit filed in
Florida. The settlement agreement provides, among other things, that we register
350,000 shares of common stock owned by Mr. Dunavant with the Securities and
Exchange Commission. Under the settlement agreement, we issued 175,000 new
shares of our common stock to Mr. Dunavant on the execution date of the
settlement agreement. In addition, the settlement calls for the payment of
$12,750 per month and 25,000 shares of common stock per month until the
registration of all shares are effective. If our registration statement is not
effective on or before January 1, 2001, from that date forward and until we have
delivered an effective registration statement, we pay Mr. Dunavant $12,750 and
issue 50,000 shares of common stock each month. We must also register all shares
delivered under these monthly allotments. Finally, we must also issue and
register an allotment of shares of our common stock, which is determined by a
calculation that depends on the date upon which the registration statement
becomes effective and the difference between the price of our common stock as
traded on the OTCBB and $23.00 per share.
(14) If all 1,874,717 shares of common stock in this registration
are obtained for sale or are obtained for sale and are sold this would entail
the issuance of 765,000 new shares of our common stock. Of the 765,000 shares
that would be issued, 650,000 shares represent an estimate of the additional
shares that we will have to issue for Mr. William R. Dunavant on or before the
date this registration statement goes effective according to the terms of our
settlement agreement with Mr. Dunavant. This estimate assumes that it will take
approximately four months for this registration statement to become effective
and that the price of our common stock will be at a particular price per share
at that time that is significantly below the $23.00 threshold value specified by
the calculation in the settlement agreement with Mr. Dunavant.
(15) This total counts the percentage of ownership attributable to
the Summus shares only once.
(16) Mr. Silvernail resigned from our board of directors on June 1,
2000. We are not aware of any disagreements between Mr. Silvernail and us.
(17) c/o High Speed Net Solutions, Inc., Suite 2120, 434
Fayetteville St. Mall, Raleigh NC 27601
74
<PAGE> 75
DESCRIPTION OF CAPITAL STOCK
In accordance with our amended and restated certificate of
incorporation, we are authorized to issue up to 50,000,000 shares of common
stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par
value $0.001 per share. As of July 10, 2000, there were 21,502,719 shares of
common stock outstanding. As of July 10, 2000, there were 2000 shares issued and
outstanding of our Series A Convertible Preferred Stock. We have no other class
or series of preferred stock.
COMMON STOCK
As of July 10, 2000, there were 21,502,719 shares of common stock
outstanding. In addition, as of July 10, 2000, there were outstanding stock
options to purchase 1,280,000 shares of common stock. If the 2,000 shares of
Series A Convertible Preferred Stock issued and outstanding were to convert to
common stock, then an additional 140,449 shares of our common stock would be
issued and outstanding. Based upon the number of shares outstanding as of July
10, 2000, and giving effect to the issuance of common stock upon the exercise of
all outstanding stock options, assuming that these options fully vest, and the
conversion of all of the Series A Convertible Preferred Stock into common stock,
there would be 23,573,168 shares of common stock outstanding.
Each share of common stock entitles the holder to one vote on all
matters submitted to a vote of stockholders, including the election of
directors. Holders of common stock are entitled to receive ratably the
dividends, if any, declared from time to time by the board of directors out of
legally available funds. Holders of common stock have no conversion, redemption
or preemptive rights to subscribe to any of our securities. In the event of any
liquidation, dissolution or winding-up of our affairs, holders of common stock
will be entitled to share ratably in our assets remaining after provision for
payment of liabilities to creditors. The rights, preferences and privileges of
holders of common stock may be subject to the rights of the holders of any
shares of preferred stock, which we may issue in the future.
PREFERRED STOCK
As of July 10, 2000, there were 2000 shares issued and outstanding of
our Series A Convertible Preferred Stock. We have no other class or series of
preferred stock. Before February 28, 2000, we had never issued any shares of
preferred stock.
We have recently amended and restated our articles of incorporation to
eliminate the specific rights and privileges originally associated with our
preferred stock. We have replaced these specific rights and privileges with
language in our articles of incorporation granting the board of directors the
power to determine by resolution at a future date the designations, rights and
privileges of the preferred stock.
The board of directors, without further action by shareholders, may
from time to time authorize the issuance of shares of preferred stock in one or
more series and with certain limitations, rights, preferences, qualifications,
or restrictions thereon and the number of shares constituting such series and
the designation of such series. Satisfaction of any dividend preferences on
outstanding preferred stock would reduce the amount of funds available for the
75
<PAGE> 76
payment of dividends on our common stock. Holders of preferred stock would
normally be entitled to receive a preference payment in the event of any
liquidation, dissolution, or winding up of High Speed before any payment is made
to the holders of common stock. In addition, under certain circumstances, the
issuance of such preferred stock may render more difficult or tend to discourage
a change in control of High Speed. The board of directors of High Speed, without
shareholder approval, may issue preferred stock with voting and conversion
rights, which could adversely affect the rights of holders of common stock.
On February 28, 2000, we designated a series of Preferred Stock called
Series A Convertible Preferred Stock consisting of 10,000 shares. The rights of
the Series A Convertible Preferred Stock include the following rights: (i) a
cumulative dividend of $80 each year per share of Series A Convertible Preferred
Stock, and we have the right to pay this dividend by issuing additional shares
of Series A Convertible Preferred Stock; (ii) no voting rights except for the
right to approve by a majority vote of the holders of the Series A Convertible
Preferred Stock our issuance of any shares of a series or class of preferred
stock that ranks senior to the Series A Convertible Preferred Stock and any
voting rights required under Florida law; (iii) the right to convert the Series
A Convertible Preferred Stock into shares of our common stock at a conversion
price of $14.24, subject to anti dilution adjustment in the case of common stock
dividends, splits and reorganizations; and (iv) a liquidation preference of
$1,000 per share of Series A Convertible Preferred Stock, plus accrued unpaid
dividends, payable in the event of any liquidation, dissolution, or winding up
of High Speed. After March 1, 2002, we have the right to redeem any outstanding
shares of the Series A Convertible Preferred Stock at a redemption price of
$1,000 per share of Series A Convertible Preferred Stock plus accrued dividends
that have not been paid.
On February 28, 2000 we issued 2,000 shares of our Series A Convertible
Preferred Stock for gross consideration of $2,000,000. If the 2,000 shares of
Series A Convertible Preferred Stock issued and outstanding were to convert to
common stock, then an additional 140,449 shares of our common stock would be
issued and outstanding. If we sold the total authorized 10,000 shares of Series
A Convertible Preferred Stock, and if all 10,000 shares were to convert to
common stock, then an additional 702,247 shares of our common stock would be
issued and outstanding.
REGISTRATION RIGHTS
The following summary description of registration rights outstanding on
some of our common stock is not intended to be complete and is qualified by
reference to certain exhibits filed with this registration statement.
In June 2000, we entered into a settlement agreement with William R.
Dunavant and Michael Cimino to resolve a litigation suit filed in Florida. The
settlement agreement provides, among other things, that we register 350,000
shares of common stock owned by Mr. Dunavant with the Securities and Exchange
Commission. Under the settlement agreement, we issued 175,000 new shares of our
common stock to Mr. Dunavant on the execution date of the settlement agreement.
In addition, the settlement calls for the payment of $12,750 per month and
25,000 shares of common stock per month until the registration of all shares are
effective. If our registration statement is not effective on or before January
1, 2001, from that date forward and
76
<PAGE> 77
until we have delivered an effective registration statement, we pay Mr. Dunavant
$12,750 and issue 50,000 shares of common stock each month. We must also
register all shares delivered under these monthly allotments. Finally, we must
also issue and register an allotment of shares of our common stock, which is
determined by a calculation that depends on the date upon which the registration
statement becomes effective and the difference between the price of our common
stock as traded on the OTCBB and $23.00 per share.
Excluding Mr. Dunavant, all of the other selling shareholders listed in
the section entitled "Principle and Selling Shareholders" executed a form of the
Selling Shareholder Agreement included with this registration statement as an
exhibit. This Selling Shareholder Agreement terminated any prior registration
rights that the selling shareholder may have had and specified that the
registration rights granted by the Selling Shareholder Agreement would be
implemented and satisfied in full by this registration statement.
RIGHTS TO COMMON STOCK AND OPTIONS FOR COMMON STOCK IN EXCHANGE FOR SERVICES
We have a consulting agreement dated September 24, 1999 with Mr. Kyoung
Park under which Mr. Park receives the rights to 2,000 shares of our common
stock for revenue we derive from Samsung Electronics of America, Inc., a
potential customer of High Speed and Summus. Mr. Park has assisted us in
marketing High Speed and Summus products and services to Samsung. Under this
consulting agreement we also pay Mr. Park 4% of all revenue we receive from this
customer. If revenues with this potential customer in 2000 are $1,000,000 then
Mr. Park would receive 20,000 shares. As revenue levels rise Mr. Park has the
right to proportionally receive more shares for higher revenue levels. To date,
we have no agreement with this potential customer. Consequently, we have not
paid Mr. Park any funds nor issued Mr. Park any shares under this agreement.
77
<PAGE> 78
PLAN OF DISTRIBUTION
The selling stockholders may sell or distribute some or all of the
common stock from time to time through underwriters or dealers or brokers or
other agents or directly to one or more purchasers, including privately
negotiated transactions in the over-the-counter market, or in transactions in
which common stock may be delivered in connection with the issuance of
securities by issuers other than us that are exchangeable for (whether optional
or mandatory), or payable in such common stock (whether such securities are
listed on a national securities exchange or otherwise) or pursuant to which such
common stock may be distributed (which securities issued by others will, to the
extent required by applicable law, be registered under the Securities Act), or
in a combination of such transactions. Such transactions may be effected by the
selling stockholders at market prices prevailing at the time of sale, at prices
related to such prevailing market prices, at negotiated prices or at fixed
prices, which may be changed. Brokers, dealers, agents or underwriters, if any,
participating in such transactions as agent may receive compensation in the form
of discounts, concessions or commissions from the selling stockholder. Such
discounts, concessions or commissions as to a particular broker, dealer, agent
or underwriter might be in excess of those customary in the type of transaction
involved. This Prospectus may be used, with our prior written consent, by the
selling stockholders, or by other persons acquiring common stock and who wish to
offer and sell such common stock under circumstances requiring or making
desirable its use.
The selling stockholders and any such underwriters, brokers, dealers or
agents or underwriters that participate with the selling stockholders in the
distribution of the common stock may be deemed to be "underwriters" within the
meaning of the Securities Act, and any discounts, commissions or concessions
received by any such underwriters, brokers, dealers or agents might be deemed to
be underwriting commissions or discounts under the Securities Act. Neither we
nor the selling stockholders can presently estimate the amount of such
compensation. We know of no existing arrangements between any selling
stockholder and any other selling stockholder, underwriter, broker, dealer or
other agent relating to the sale or distribution of the common stock.
We have agreed to pay all fees and expenses incident to the
registration of the common stock, except commissions and discounts of
underwriters, brokers, dealers or agents and fees and expenses of counsel or any
other professionals or other advisors, if any, to the selling stockholders. Each
selling stockholder may indemnify any broker, dealer, agent or underwriter that
participates in transactions involving sales of the common stock against certain
liabilities, including liabilities arising under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of
common stock offered by this prospectus will be passed upon for us by Kilpatrick
Stockton LLP, Raleigh, North Carolina.
78
<PAGE> 79
EXPERTS
Ernst & Young, LLP, independent auditors, have audited our financial
statements at December 31, 1999 and 1998, and for each of the two years in the
period ended December 31, 1999, as set forth in their report (which contains an
explanatory paragraph describing conditions that raise substantial doubt about
High Speed's ability to continue as a going concern as described in Note 2 to
the financial statements). We've included our financial statements in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.
(A) PREVIOUS INDEPENDENT ACCOUNTANT
(i) In November 1999, we engaged Ernst & Young LLP as our
independent auditors. Ernst & Young has audited our
financial statements for the years ended December 31,
1998 and 1999. Barry L. Friedman, P.C. ("Friedman"),
which had served as our independent auditors in prior
years, was dismissed by High Speed on the date Ernst
& Young was engaged.
(ii) The report of Friedman on the financial statements of
our company for the period January 1, 1998 to July
22, 1998 and for the two years in the period ended
December 31, 1997 included an explanatory paragraph
regarding the company's ability to continue as a
going concern.
(iii) The change in our independent auditors was approved
by our Board of Directors.
(iv) In connection with the audits performed by Friedman,
there were no disagreements with Friedman on any
matter of accounting principles or practices,
financial statement disclosure, or auditing scope or
procedure which disagreements, if not resolved to the
satisfaction of Friedman, would have caused it to
make reference to the subject matter of the
disagreement in connection with its report on the
financial statements of the company for such periods.
(v) During the time period Friedman performed his audits
and through the date of dismissal, there were no
"reportable events", as that term is defined in Item
304(a)(1)(v) of Regulation S-K, with respect to the
services provided by Friedman.
High Speed requested that Friedman furnish it with a letter addressed
to the Commission stating whether it agrees with the above statements and, if
not, stating the respects in which it does not agree. A copy of such letter is
filed as Exhibit 16 to this registration statement.
(B) NEW INDEPENDENT AUDITORS
During our two most recent fiscal years and through the date of the
engagement of such firm, High Speed did not consult with Ernst & Young
LLP on matters (i) regarding the
79
<PAGE> 80
application of accounting principles to a specified transaction or the
type of audit opinion that might be rendered on High Speed's financial
statements, or (ii) which concerned the subject matter of a
disagreement or reportable event with the former auditor (as described
in Regulation S-K, Item 304).
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the Commission's public reference room located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, or at its Southeast Regional Offices located at 1401
Brickell Avenue, Suite 200, Miami, FL 33131 and copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates. You may call the
Commission at 1-800-732-0330 for further information on the operation of such
public reference rooms. You also can request copies of such documents, upon
payment of a duplicating fee, by writing to the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 or obtain copies of such documents from the
Commission's web site at http://www.sec.gov.
FINANCIAL STATEMENTS
The Financial Statements and Supplementary Data required by this Item
are filed as part of this Form S-1. See Index to Financial Statement Information
at Pages F-1 of this Form S-1.
80
<PAGE> 81
HIGH SPEED NET SOLUTIONS, INC.
INDEX TO THE FINANCIAL STATEMENTS
PAGE
----
INTERIM FINANCIAL STATEMENTS - UNAUDITED
Balance Sheets as of December 31, 1999 (audited) and
March 31, 2000 (unaudited)........................................F-2
Statements of Operations for the three months ended
March 31, 1999 and March 31, 2000 and for the period
from January 2, 1998 (Inception) through March 31, 2000
(unaudited).......................................................F-3
Statement of Stockholders' Equity (Deficit).........................F-4
Statement of Cash Flows for the three months ended
March 31, 1999 and March 31, 2000 and for the
period from January 2, 1998 (Inception) through
March 31, 2000 (Unaudited)........................................F-5
Notes to the Financial Statements...................................F-6
ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors......................................F-11
Balance Sheets as of December 31, 1998 and 1999.....................F-12
Statements of Operations for the years ended
December 31, 1998 and 1999 and for the period
from January 2, 1998 (Inception) to December 31, 1999.............F-13
Statement of Shareholders' Equity (Deficit)
for the period from January 2, 1998 (Inception)
to December 31, 1999..............................................F-14
Statement of Cash Flows for the years ended
December 31, 1998 and 1999 and for the period
from January 2, 1998 (Inception) to December 31, 1999.............F-16
Notes to the Financial Statements...................................F-18
<PAGE> 82
High Speed Net Solutions, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999
-------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,427,606 $ 248,740
Other current assets 19,000 --
-------------------------------
Total current assets 1,446,606 248,740
Furniture and equipment, net 19,101 3,720
Investment in common stock of related party 1,894,127 1,894,127
Prepaid royalties 4,528,125 4,528,125
Licensing rights, net 36,606 43,060
-------------------------------
Total assets $ 7,924,565 $ 6,717,772
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Payables to related parties $ 435,815 $ 589,815
Accounts payable and accrued expenses 479,738 99,876
Loss contingency accrual 984,375 800,000
-------------------------------
Total current liabilities 1,899,928 1,489,691
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares authorized,
2,000 shares issued and outstanding 1,892,202 --
Common stock, $.001 par value, authorized 50,000,000 shares;
21,112,149 shares issued and outstanding 21,112 21,112
Additional paid-in capital 17,567,670 17,272,770
Preferred stock subscription receivable (250,000) --
Deficit accumulated during the development stage (12,978,728) (11,838,182)
Treasury stock, at cost (38,500 shares) (227,619) (227,619)
-------------------------------
Total stockholders' equity 6,024,637 5,228,081
-------------------------------
Total liabilities and stockholders' equity $ 7,924,565 $ 6,717,772
===============================
</TABLE>
See accompanying notes.
F-2
<PAGE> 83
High Speed Net Solutions, Inc.
(A DEVELOPMENT STAGE COMPANY)
Statements of Operations
<TABLE>
<CAPTION>
THREE THREE PERIOD FROM
MONTHS MONTHS JANUARY 2, 1998
ENDED ENDED (INCEPTION)
MARCH 31 MARCH 31 TO MARCH 31
2000 1999 2000
--------------------------------------------------
<S> <C> <C> <C>
Selling, general and administrative expenses $ 839,890 $ 2,125,437 $ 8,756,358
Interest expense (income), net (7,577) -- 2,648,749
--------------------------------------------------
Loss from continuing operations (832,313) (2,125,437) (11,404,530)
Loss from discontinued operations -- -- (1,265,965)
--------------------------------------------------
Net loss $ (832,313) $ (2,125,437) (12,670,495)
==================================================
Net loss applicable to common shareholders:
Net loss $ (832,313) $ (2,125,437) $(12,670,495)
Beneficial conversion feature of preferred stock (294,900) -- (294,900)
--------------------------------------------------
Net loss applicable to common shareholders $ (1,127,213) $ (2,125,437) $(12,965,395)
==================================================
Per share amounts (basic and diluted):
Loss applicable to common shareholders from continuing
operations $ (0.05) $ (0.12) $ (0.80)
Loss applicable to common shareholders from discontinued
operations -- -- $ (0.09)
--------------------------------------------------
Net loss $ (0.05) $ (0.12) $ (0.89)
==================================================
Weighted average shares outstanding 21,112,149 17,220,996 14,501,381
==================================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 84
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
PREFERRED
SERIES A CONVERTIBLE STOCK
DATE OF PREFERRED STOCK SUBSCRIPTION COMMON STOCK
TRANSACTION SHARES AMOUNT RECEIVABLE SHARES PAR VALUE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 -- $ -- $ -- 21,112,149 $ 21,112
Issuance of preferred stock at
$1,000 per share February 2000 2,000 2,000,000 -- -- --
Preferred stock subscription February 2000 -- -- (250,000) -- --
Preferred stock issuance costs February 2000 -- (107,798) -- -- --
Beneficial conversion feature
related to preferred stock February 2000 -- -- -- -- --
Preferred stock dividend March 2000 -- -- -- -- --
Net loss -- -- -- -- --
-----------------------------------------------------------------------------------------
Balance at March 31, 2000
(unaudited) 2,000 $ 1,892,202 $ (250,000) 21,112,149 $ 21,112
=========================================================================================
</TABLE>
F-4
<PAGE> 85
DEFICIT
ACCUMULATED
DURING THE
PAID-IN DEVELOPMENT TREASURY
CAPITAL STAGE STOCK TOTAL
--------------------------------------------------------------------------
$17,272,770 $ (11,838,182) $ (227,619) $ 5,228,081
-- -- -- 2,000,000
-- -- -- (250,000)
-- -- -- (107,798)
294,900 (294,900) -- --
-- (13,333) -- (13,333)
-- (832,313) -- (832,313)
--------------------------------------------------------------------------
$17,567,670 $ (12,978,728) $ (227,619) $ 6,024,637
==========================================================================
See accompanying notes.
<PAGE> 86
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION)
THREE MONTHS ENDED THROUGH
MARCH 31 MARCH 31
2000 1999 2000
------------------------------------------------
(Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations $ (832,313) $(2,125,437) $(11,404,530)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss on disposal of equipment -- -- 36,858
Non cash compensation and consulting charges relating to
stock awards and stock subscriptions -- 2,000,000 5,698,038
Depreciation and amortization 8,989 6,459 57,051
Common stock issued for services -- -- 116,064
Interest expense relating to beneficial conversion feature
of convertible debt -- -- 2,655,749
Changes in operating assets and liabilities:
Prepaid royalties -- -- (60,000)
Accounts receivable and other current assets (19,000) 7,559 (19,000)
Accounts payable and accrued expenses 366,529 (8,457) 466,135
Loss contingency 184,375 -- 984,375
------------------------------------------------
Net cash used in operating activities from continuing operations (291,420) (132,794) (1,468,990)
Net cash used in discontinued operations -- -- (1,265,965)
------------------------------------------------
Total net cash used in operating activities (291,420) (132,794) (2,734,955)
INVESTING ACTIVITIES
Capital expenditures (17,916) -- (72,116)
Cash investment in related party -- -- (102,000)
------------------------------------------------
Net cash used in investing activities (17,916) -- (174,116)
FINANCING ACTIVITIES
Net proceeds from sale of preferred stock 1,642,202 -- 1,642,202
Proceeds from sale of common stock -- 127,500 559,062
Shareholder capital contributions -- -- 1,091,648
Advances from stockholders -- -- 876,230
Repayments to stockholders (154,000) -- (163,486)
Proceeds from issuance of convertible debentures -- -- 558,640
Purchase of treasury stock -- -- (227,619)
------------------------------------------------
Net cash provided by financing activities 1,488,202 127,500 4,336,677
------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,178,866 (5,294) 1,427,606
Cash and cash equivalents at beginning of period 248,740 18,609 --
------------------------------------------------
Cash and cash equivalents at end of period $ 1,427,606 $ 13,315 $ 1,427,606
================================================
</TABLE>
F-5
<PAGE> 87
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION)
THREE MONTHS ENDED TO
MARCH 31 MARCH 31
2000 1999 2000
------------------------------------------------------
<S> <C> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Common shares issued for investment in related party $ -- $ -- $ 1,792,127
======================================================
Common stock issued in exchange for convertible debentures $ -- $ -- $ 2,665,749
======================================================
Common stock issued for prepaid royalties $ -- $ -- $ 2,278,125
======================================================
Prepaid royalties paid by shareholder on behalf of company $ -- $ 750,000 $ 2,190,000
======================================================
Debentures issued for shareholder advances on behalf of company $ -- $ -- $ 2,097,109
======================================================
Common stock issued for licensing rights $ -- $ -- $ 77,500
======================================================
Common stock issued for payment of debt to stockholder $ -- $ -- $ 149,000
======================================================
</TABLE>
See accompanying notes.
<PAGE> 88
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements
1. BUSINESS, ORGANIZATION AND DEVELOPMENT STAGE COMPANY
High Speed Net Solutions, Inc. ("the Company" or "HSNS") was incorporated in
1984 and was inactive until it merged with Marketers World, Inc. ("MWI") on
August 24, 1998. Prior to the merger, HSNS was a non-operating public shell and
MWI was a private operating company. In legal form, this merger was effected by
HSNS issuing its shares in exchange for the net assets of MWI. At the time of
the merger, HSNS had no assets or liabilities, and accordingly, the transaction
was accounted for as a recapitalization of HSNS.
MWI was incorporated in January 1998 and its planned principal operations were
to lease computer systems to businesses and to distribute Internet oriented
products and perform related services. During 1998, MWI was not able to execute
its planned activities, other than the sale of pilot products and services, and
consequently ceased all operating activities in December 1998. MWI was
subsequently legally dissolved in September 1999. Accordingly, the operating
results of MWI have been presented as discontinued operations during 1998. These
amounts have been presented in the Statement of Operations for the period from
January 2, 1998 (inception) to March 31, 2000. Revenues of MWI during 1998 were
approximately $1,335,300 and the loss totaled $1,265,965. As of December 31,
1998, the Company had completed its disposal of the discontinued operations of
MWI. There were no remaining assets or liabilities related to MWI at December
31, 1998. Since the Company has not yet completed its planned principal
operations and since MWI also never commenced its planned principal operations,
the accompanying financial statements are presented as those of a development
stage company.
In the opinion of management, all normal and recurring adjustments necessary to
present fairly the financial position, results of operations and cash flow of
the Company at March 31, 2000 and for all periods presented have been recorded.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the basis that High
Speed Net Solutions, Inc. will continue as a going concern. The Company has
incurred operating losses since inception and has experienced negative cash
flows and expects these losses and negative cash flows to continue into the
foreseeable future. The Company's ability to continue operations as a going
concern is predicated on its ability to continue to raise capital, including
significant new capital in 2000, the successful completion of its operational
plan and ultimately, upon achieving profitable operations.
F-6
<PAGE> 89
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICES (CONTINUED)
STOCK BASED COMPENSATION
The Company accounts for stock based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. In accordance with APB 25,
the Company has valued employee stock awards and stock issued to employees for
services performed based on the traded value of the Company's common stock, or
its estimated fair value prior to it becoming traded, at the measurement date of
the stock options or awards.
INCOME TAXES
Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
LOSS PER SHARE
Loss per share has been calculated in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share." The Company has potential
common stock equivalents related to its outstanding stock options. These
potential common stock equivalents were not included in loss per share for all
periods presented because the effect would have been antidilutive.
INVESTMENT IN COMMON STOCK OF RELATED PARTY
Investment in common stock of related party represents the Company's 14.0%
ownership interest in Summus. The Company accounts for its investment in Summus
using the cost method. Under this method, the investment is recorded at its
historical cost. Although the market value of this investment is not readily
determinable, management believes its fair value is not less than its carrying
amount.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 2000. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new statement will have a significant effect on operations
or the financial position of the Company.
F-7
<PAGE> 90
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
EQUIPMENT AND FURNITURE
Equipment and furniture is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets beginning
when assets were placed in service. Based on the discontinuance of MWI's
operations in 1998, along with no future alternative use, the net book value of
MWI's equipment and furniture at December 31, 1998, totaling $36,858 was written
off.
PREPAID ROYALTIES AND LICENSING RIGHTS
Prepaid royalties represent prepayments made to Summus Ltd, ("Summus"), a
related party, under various licensing agreements. As future revenues from
services subject to the provisions of these agreements are earned, the prepaid
royalties will be charged to royalty expense over the terms of the various
agreements.
Licensing rights represent the cost of acquiring the right to license certain
products developed by Summus. These costs are being amortized on a straight-line
basis over the term of the related agreements, which was initially a three-year
agreement and was extended to six years in January 2000.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of unrestricted cash accounts and highly
liquid investments with an original maturity of three months or less when
purchased.
F-8
<PAGE> 91
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. CONVERTIBLE DEBENTURES
During 1998, the company issued convertible debentures to officers, stockholders
and third parties. These debentures were convertible at the date of issuance.
Since the conversion price of the debentures was below the fair market value of
the common stock, the Company recorded a $2,655,749 beneficial conversion
feature as debt discount and additional paid-in-capital on the date the
debenture were issued. The resulting interest expense was immediately recognized
in 1998 because the debentures were convertible upon issuance.
5. PREFERRED STOCK
On February 28, 2000, the Company sold 2,000 shares of its $.001 par value
Series A Convertible Preferred Stock ( the "Preferred Stock") at a price of
$1,000 per share. Proceeds, net of issuance costs of $107,798 and a subscription
receivable in the amount of $250,000 for 250 shares, were $1,642,202. The
subscription receivable is expected to be collected in June 2000.
The Preferred Stock holders are entitled to receive cumulative cash dividends at
rate 8% per annum of the initial liquidation preference of $1,000 per share (the
"Liquidation Preference"). Dividends shall be cumulative from the date of
issuance and shall be payable, when, as and if declared by the Board of
Directors on March 31 and September 31 of each year commencing on September 30,
2000. As of March 31, 2000 cumulative dividends accrued were $13,333.
Each share of the Preferred Stock shall be convertible at the option of the
holder, at any time after the date of issuance, into shares of common stock
equal to the Liquidation Preference divided by initial conversion price of
$14.24. The conversion price is subject to adjustment as defined in the
Company's articles of incorporation. Since the Preferred Stock was convertible
at the date of issuance and since the conversion price was below the fair value
of the common stock, the Company recorded a beneficial conversion feature in the
amount of $294,900. The beneficial conversion feature has been added to the
historical net loss for the three month period ended March 31, 2000, for
purposes of computing the net loss applicable to common shareholders.
F-9
<PAGE> 92
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. LITIGATION CONTINGENCY
In January 2000, a former shareholder of Summus Technologies, Inc. who received
350,000 shares of HSNS common stock and $100,000 in cash in exchange for his
shares of Summus Technologies, Inc. stock filed a lawsuit against the Company,
seeking damages of $13.3 million resulting from the Company's alleged failure to
register such shares under the Securities Act of 1933 (the "Act"). Under an
agreement between the former shareholder and the Company, the Company is
required to issue and include in a registration statement under the Act an
additional 25,000 shares of the Company's common stock for each additional month
that passes subsequent to the Company's initial deadline date to register the
350,000 shares. Management is attempting to settle this matter out-of-court. The
Company has accrued approximately $985,000 for settlement of this matter,
representing management's best estimate of the ultimate outcome. However, the
ultimate exposure could be more or less, depending on the outcome of settlement
discussions, the length of time that passes prior to the effectiveness of a
registration statement covering shares of the Company held by the plaintiff and
the ultimate value of the Company's shares on the date of settlement. Because
the matter is expected to be resolved by issuing additional shares, the ultimate
outcome is not expected to have an adverse impact on the Company's liquidity or
cash flow.
7. SUBSEQUENT EVENT
On April 24, 2000, the Company acquired 100% of the issued and outstanding
shares of common stock of JSJ Capital Corp., a Nevada Corporation ("JSJ"), in
exchange for 50,000 shares of 144 restricted common stock of the Company. As a
result of HSNS's 100% ownership of JSJ, the Board of Directors of HSNS approved
the merger of JSJ into HSNS whereby HSNS will be the surviving corporation. The
acquisition was accounted for as an issuance of HSNS common stock in exchange
for the net monetary assets of JSJ, accompanied by a recapitalization.
The 50,000 shares issued by the Company in connection with the acquisition of
JSJ are considered a nominal issuance to effect the acquisition. All share and
per share data presented herein have been restated to reflect the issuance of
these shares. The pro forma impact of the JSJ acquisition is a $400,000 charge
to retained earnings on the Company's balance sheet, representing cash legal
fees paid in excess of net assets acquired. This charge was recognized in
earnings upon consummation of the acquisition.
F-10
<PAGE> 93
Report of Independent Auditors
The Board of Directors and Shareholders
High Speed Net Solutions, Inc.
We have audited the accompanying balance sheets of High Speed Net Solutions,
Inc. (a development stage company) as of December 31, 1999 and 1998, and the
related statements of operations, stockholders' equity (deficit), and cash flows
for the years ended December 31, 1999 and 1998 and for the period from January
2, 1998 (inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of High Speed Net Solutions, Inc.
(a development stage company) at December 31, 1999 and 1998, and the results of
its operations and its cash flows for the years ended December 31, 1999 and 1998
and for the period from January 2, 1998 (inception) to December 31, 1999 in
conformity with accounting principles generally accepted in the Unites States.
The accompanying financial statements have been prepared assuming that High
Speed Net Solutions, Inc. (a development stage company) will continue as a going
concern. As more fully described in Note 2, the Company has incurred operating
losses since inception and will require additional capital in 2000 to continue
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
February 15, 2000, except for Note 12, as to which the date is April 24, 2000
Raleigh, North Carolina
F-11
<PAGE> 94
High Speed Net Solutions, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,609 $ 248,740
Accounts receivable 7,559 --
----------- ------------
Total current assets 26,168 248,740
Furniture and equipment, net -- 3,720
Investment in common stock of related party -- 1,894,127
Prepaid royalties -- 4,528,125
Licensing rights, less accumulated amortization of $8,610
and $25,830 in 1998 and 1999 68,890 43,060
----------- ------------
Total assets $ 95,058 $ 6,717,772
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Payables to related parties $ 295,558 $ 589,815
Accounts payable and accrued expenses 8,457 99,876
Loss contingency accrual -- 800,000
----------- ------------
Total current liabilities 304,015 1,489,691
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.001 par value, authorized 50,000,000
shares; issued and outstanding 16,651,700 and
21,112,149 shares 16,652 21,112
Additional paid-in capital 1,642,816 17,272,770
Deficit accumulated during the development stage (1,640,806) (11,838,182)
Treasury stock, at cost (38,500 shares) (227,619) (227,619)
----------- ------------
Total stockholders' equity (deficit) (208,957) 5,228,081
----------- ------------
$ 95,058 $ 6,717,772
=========== ============
</TABLE>
See accompanying notes.
F-12
<PAGE> 95
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Selling, general and administrative expenses $ 374,841 $ 7,541,627 $ 7,916,468
Interest expense -- 2,655,749 2,655,749
------------ ------------ ------------
Loss from continuing operations (374,841) (10,197,376) (10,572,217)
Discontinued operations (Note 1):
Loss from discontinued operations (1,265,965) -- (1,265,965)
------------ ------------ ------------
Net loss $ (1,640,806) $(10,197,376) $(11,838,182)
============ ============ ============
Per share amounts (basic and diluted):
Loss from continuing operations $ (0.03) $ (0.53) $ (0.74)
============ ============ ============
Loss from discontinued operations $ (0.11) $ -- $ (0.09)
============ ============ ============
Net loss $ (0.14) $ (0.53) $ (0.83)
============ ============ ============
Weighted average shares outstanding 11,898,867 19,080,492 14,324,778
============ ============ ============
</TABLE>
See accompanying notes.
F-13
<PAGE> 96
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
DATE OF COMMON STOCK
TRANSACTION SHARES PAR VALUE
------------------ --------------- --------------
<S> <C> <C> <C>
Balance at January 2, 1998 (inception) reflecting the
recapitalization of the Company 9,325,000 $ 9,325
Founders shares issued for no consideration Jan. 1998 100 -
Shareholders capital contributions June-July 1998 - -
Common stock issued to acquire net assets of Marketers World, Inc. Aug. 1998 1,000,000 1,000
Common stock sold for cash at $0.08 per share Sept. 1998 3,766,600 3,767
Common stock issued for payment of debt to a shareholder at $0.10
per share Sept. 1998 1,550,000 1,550
Treasury stock acquired for cash - -
Common stock issued to acquire licensing rights at $0.10 per share Sept. 1998 775,000 775
(Note 5)
Common stock issued for services at $0.10 per share (Note 8) Sept. 1998 765,000 765
Net loss for the year ended December 31, 1998 - -
Cancellation of compensatory stock Sept. 1998 (530,000) (530)
--------------- --------------
Balance at December 31, 1998 16,651,700 16,652
Compensation expense related to grant of stock option to purchase
1,000,000 shares at no exercise price (Note 8) Feb. 1999 - -
Common stock sold for cash at $1.08 per share March 1999 118,188 118
Common stock sold for cash at $1.00 per share April 1999 220,000 220
Compensation expense related to grant of options to purchase
825,000 shares at $.01 per share (Note 8) May 1999 - -
Common stock issued for investment in related party at $2.25 per May 1999 795,001 795
share (Note 8)
Common stock issued for services at $1.53 per share (Note 8) July 1999 85,500 85
Common stock issued for advance royalty payment at $1.52 per July 1999 1,500,000 1,500
share (Note 4)
Common stock issued in exchange for convertible debentures at
$0.55 per share Aug. 1999 4,852,860 4,853
Beneficial conversion feature related to convertible debt (Note 6) Aug. 1999 - -
Common stock canceled in connection with merger between High
Speed Net Solutions, Inc. and Marketers World, Inc. in August
1998 (Note 8) Aug. 1999 (5,161,100) (5,161)
Cancellation of compensatory stock Aug. 1999 (25,000) (25)
Stock option exercises Aug. 1999 1,825,000 1,825
Common stock issued in conjunction with subscription agreement,
250,000 shares at $1.00 per share (Note 8) Aug. 1999 250,000 250
Compensation expense related to grant of option to purchase 240,000
shares at $.01 per share (Note 8) Sept. 1999 - -
Net loss for the year ended December 31, 1999 - -
--------------- --------------
Balance at December 31, 1999 21,112,149 $ 21,112
=============== ==============
</TABLE>
F-14
<PAGE> 97
DEFICIT
ACCUMULATED
DURING THE
PAID-IN DEVELOPMENT TREASURY
CAPITAL STAGE STOCK TOTAL
----------------- ----------------- -------------- -----------------
$ (9,325) $ - $ - $ -
- - - -
1,091,648 - - 1,091,648
(1,000) - - -
313,233 - - 317,000
148,270 - - 149,820
- - (227,619) (227,619)
76,725 - - 77,500
75,735 - - 76,500
- (1,640,806) - (1,640,806)
(52,470) - - (53,000)
----------------- ----------------- -------------- -----------------
1,642,816 (1,640,806) (227,619) (208,957)
2,000,000 - - 2,000,000
127,382 - - 127,500
219,780 - - 220,000
1,640,000 - - 1,640,000
1,791,332 - - 1,792,127
130,729 - - 130,814
2,276,625 - - 2,278,125
2,650,896 - - 2,655,749
2,655,749 - - 2,655,749
5,161 - - -
(38,225) - - (38,250)
(1,825) - - -
1,094,750 - - 1,095,000
1,077,600 - - 1,077,600
- (10,197,376) - (10,197,376)
----------------- ----------------- -------------- -----------------
$17,272,770 $(11,838,182) $ (227,619) $ 5,228,081
================= ================= ============== =================
See accompanying notes.
F-15
<PAGE> 98
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31
1998 1999 1999
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations $ (374,841) $(10,197,376) $(10,572,217)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of equipment 36,858 -- --
Non cash compensation and consulting charges
relating to stock awards and stock subscriptions -- 5,698,038 5,698,038
Depreciation and amortization 21,900 26,162 48,062
Common stock issued for services 23,500 92,564 116,064
Interest expense relating to beneficial conversion
feature of convertible debt -- 2,655,749 2,655,749
Changes in operating assets and liabilities:
Prepaid royalties -- (60,000) (60,000)
Accounts receivable (7,559) 7,559 --
Accounts payable and accrued expenses 8,457 91,419 99,876
Loss contingency -- 800,000 800,000
----------- ------------ ------------
Net cash used in operating activities from continuing
operations (291,685) (885,885) (1,177,570)
Net cash used in discontinued operations (1,265,965) -- (1,265,965)
----------- ------------ ------------
Total net cash used in operating activities (1,557,650) (885,885) (2,443,535)
INVESTING ACTIVITIES
Capital expenditures (50,148) (4,052) (54,200)
Cash investment in related party -- (102,000) (102,000)
----------- ------------ ------------
Net cash used in investing activities (50,148) (106,052) (156,200)
FINANCING ACTIVITIES
Proceeds from sale of common stock 317,000 242,062 559,062
Shareholder capital contributions 1,091,648 -- 1,091,648
Advances from stockholders 445,378 430,852 876,230
Repayments to stockholders -- (9,486) (9,486)
Proceeds from issuance of convertible debentures -- 558,640 558,640
Purchase of treasury stock (227,619) -- (227,619)
----------- ------------ ------------
Net cash provided by financing activities 1,626,407 1,222,068 2,848,475
----------- ------------ ------------
Net increase in cash and cash equivalents 18,609 230,131 248,740
Cash and cash equivalents at beginning of period -- 18,609 --
----------- ------------ ------------
Cash and cash equivalents at end of period $ 18,609 $ 248,740 $ 248,740
=========== ============ ============
</TABLE>
F-16
<PAGE> 99
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31
1998 1999 1999
--------- ---------- ----------
<S> <C> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Common shares issued for investment in related party $ -- $1,792,127 $1,792,127
========= ========== ==========
Common stock issued in exchange for convertible
debentures $ -- $2,665,749 $2,665,749
========= ========== ==========
Common stock issued for prepaid royalties $ -- $2,278,125 $2,278,125
========= ========== ==========
Debentures issued for shareholder advances on
behalf of company $ -- $2,097,109 $2,097,109
========= ========== ==========
Common stock issued for licensing rights $ 77,500 $ -- $ 77,500
========= ========== ==========
Common stock issued for payment of debt to
stockholder $ 149,820 $ -- $ 149,820
========= ========== ==========
</TABLE>
See accompanying notes.
F-17
<PAGE> 100
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1999
1. BUSINESS, ORGANIZATION AND DEVELOPMENT STAGE COMPANY
High Speed Net Solutions, Inc. ("the Company" or "HSNS") was incorporated in
1984 and was inactive until it merged with Marketers World, Inc. ("MWI") on
August 24, 1998. Prior to the merger, HSNS was a non-operating public shell and
MWI was a private operating company. In legal form, this merger was effected by
HSNS issuing its shares in exchange for the net assets of MWI. Total outstanding
shares of HSNS common stock subsequent to the merger were 10,275,000, which
consisted of the 1,000,000 shares outstanding prior to the merger and the
9,275,000 shares issued to acquire the net assets of MWI. At the time of the
merger, HSNS had no assets or liabilities, and accordingly, the transaction was
accounted for as a recapitalization of HSNS, and the outstanding shares are
recorded accordingly.
MWI was incorporated in January 1998 and its planned principal operations were
to lease computer systems to businesses and to distribute Internet oriented
products and perform related services. During 1998, MWI was not able to execute
its planned activities, other than the sale of pilot products and services, and
consequently ceased all operating activities in December 1998. MWI was
subsequently legally dissolved in September 1999. Accordingly, the operating
results of MWI have been presented as discontinued operations for the year ended
December 31, 1998. Revenues of MWI during the year ended December 31, 1998 were
approximately $1,335,300, the loss totaled $1,265,965. As of December 31, 1998,
the Company had completed its disposal of the discontinued operations of MWI.
There were no remaining assets or liabilities related to MWI at December 31,
1998. Results for the year ended December 31, 1999 represent solely the activity
of HSNS which primarily related to raising capital and establishing strategic
relationships. Since the Company has not yet commenced its planned principal
operations and since MWI also never commenced its planned principal operations,
the accompanying financial statements are presented as those of a development
stage company.
In 1984, the Company was incorporated under the name EMN Enterprises, Inc. The
Company was inactive from the time of its incorporation in 1984 until the time
of the MWI transaction in 1998. In September 1998, in conjunction with the MWI
merger, the Company changed its name to ZZAP.NET, Inc. and in January 1999 the
name changed to High Speed Net Solutions, Inc.
F-18
<PAGE> 101
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. BUSINESS, ORGANIZATION AND DEVELOPMENT STAGE COMPANY (CONTINUED)
In August 1999, Summus Ltd. ("Summus") acquired 51% of the outstanding common
stock of the Company. Subsequently, Summus sold certain of the shares it
acquired and at December 31, 1999, Summus owned 40.7% of the Company's
outstanding common stock. The Company's operating and business strategy is
dependent on the development of Summus' technology and products under the terms
of various agreements between both parties. Summus is developing media
compression and delivery software that the Company intends to use to deliver its
services to its customers.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the basis that High
Speed Net Solutions, Inc. will continue as a going concern. The Company has
incurred operating losses since inception and has experienced negative cash
flow and expects these losses and negative cash flow to continue into the
foreseeable future. The Company's ability to continue operations as a going
concern is predicated on its ability to continue to raise capital, including
significant new capital in 2000, the successful completion of its operational
plan and, ultimately, upon achieving profitable operations.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
EQUIPMENT AND FURNITURE
Equipment and furniture is stated at cost. Depreciation, as recorded by MWI, was
computed using the straight-line method over the estimated useful lives of the
assets beginning when assets were placed in service. Depreciation expense
amounted to $13,290 for the year ended December 31, 1998. Based on the
discontinuance of MWI's operations in 1998, along with no future alternative
use, the net book value of MWI's equipment and furniture at December 31, 1998,
totaling $36,858, was written off.
F-19
<PAGE> 102
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREPAID ROYALTIES AND LICENSING RIGHTS
Prepaid royalties represent prepayments made to Summus under various agreements
further described in Note 4. As future revenues from services subject to the
provisions of these agreements are earned, the prepaid royalties will be charged
to royalty expense over the terms of the various agreements.
Licensing rights represent the cost of acquiring the right to license certain
products developed by Summus. These costs are being amortized on a straight-line
basis over the term of the related agreements, which was initially a three-year
agreement. The term of the licensing agreement was extended to six years in
January 2000 (see Note 4). At the time the new agreements become effective in
2000, the net book value of the capitalized license rights will be amortized in
accordance with the terms of the new agreement.
Management continuously evaluates the future realization of the prepaid
royalties and licensing rights and currently anticipates fully recovering these
costs and, accordingly, no valuation adjustment has been recorded to date. The
carrying value of the intangible assets is reviewed by management to determine
if facts and circumstances exist which would suggest that the intangible asset
may be impaired.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of unrestricted cash accounts and highly
liquid investments with an original maturity of three months or less when
purchased.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. In accordance with APB 25,
the Company has valued employee stock awards and stock issued to employees for
services performed based on the traded value of the Company's common stock, or
its estimated fair value prior to it becoming traded, at the measurement date of
the stock options and awards.
F-20
<PAGE> 103
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
(See Note 10).
LOSS PER SHARE
Loss per share has been calculated in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share." The Company has potential
common stock equivalents related to its outstanding stock options. These
potential common stock equivalents were not included in loss per share for all
periods because the effect would have been antidilutive.
INVESTMENT IN COMMON STOCK OF RELATED PARTY
Investment in common stock of related party represents the Company's 14.0%
ownership interest in Summus (see Note 8). The Company accounts for its
investment in Summus using the cost method. Under this method, the investment is
recorded at its historical cost. Although the market value of this investment is
not readily determinable, management believes its fair value is not less than
its carrying amount.
REVENUE RECOGNITION
Revenue was recognized by MWI when products were shipped and services were
performed. Operating activity for MWI has been presented as discontinued
operation for the year ended December 31, 1998. To date, no revenues have been
generated by HSNS.
F-21
<PAGE> 104
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 2000. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new statement will have a significant effect on operations
or the financial position of the Company.
ADVERTISING
MWI expensed advertising costs as incurred. Advertising expense was
approximately $128,000 for the year ended December 31, 1998. To date, High Speed
Net Solutions has not incurred any advertising expense.
4. PREPAID ROYALTIES
In February 1999, the Company entered into a Marketing and Licensing Agreement
("MLA") with Summus. As consideration for this agreement, the Company prepaid
royalty payments to Summus. The amount of prepaid royalties consists of cash
payments of $2,250,000 ($2,190,000 of which was made by a stockholder on behalf
of the Company) and the issuance of 1,500,000 shares of the Company's common
stock valued at $2,278,125, for a total aggregate value of $4,528,125. The value
assigned to the 1,500,000 common shares was based on the traded value of the
Company's common stock on the date of the transaction. This amount is presented
as a non-current asset in the accompanying balance sheet as of December 31,
1999.
The shareholder of the Company who made the cash payments to Summus on behalf of
the Company controlled a trust which owned 8.2% of Summus Technologies, Inc. On
August 16, 1999, Summus Technologies, Inc. and Summus, Ltd. merged (see Note 8).
The Company recorded a payable to the shareholder which was subsequently offset
by debentures issued to the shareholder (see Note 6).
In January 2000, the Company and Summus entered into a Master Agreement, which
includes a Software License Agreement ("SLA"), a Software Maintenance Agreement
("SMA") and an Agency and a Revenue Sharing Agreement ("RSA") (collectively with
the Master License Agreement, the "New Agreements"). The New Agreements entirely
replace the MLA entered in February 1999.
F-22
<PAGE> 105
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. PREPAID ROYALTIES (CONTINUED)
The SLA gives the Company the right to license Summus' current and future
products for digital content management solutions for rich media distribution.
Additionally, the SLA gives the Company non-exclusive rights to distribute
wavelet encoded content over the Internet or over private network environments
for the purposes of advertising or content delivery. The Company will be
credited for the $1.0 million upfront license fee due under the SLA from the
prepayments made under the MLA. Upon the commencement of the SLA, this $1.0
million will be amortized on a straight-line basis over the six-year term of the
SLA. The remaining amount of the Prepaid Royalties will be charged to royalty
expense on a systematic basis, as revenues are earned, over the term of the
agreement. The Company is also required to make ongoing payments equal to 10% of
revenues generated from the use of the Summus' products, as defined in the
agreement. The Company was granted a $1.0 million credit, from the prepayments
made under the MLA, for such payments. The Company has been granted other rights
under the SLA which are defined in the agreement. The SLA has a term of six
years.
The RSA entitles the Company to receive 20% of all revenues that Summus receives
from third party licenses of its products for rich media distribution. For all
customers that the Company refers to Summus for technology licensing, consulting
or other product or services sales, the Company will receive 15% of the first
year revenue earned by Summus. The RSA also provides for revenue sharing with
respect to sales to a potential customer by either the Company or Summus.
Revenue earned from this customer in the first two years by either the Company
or Summus will be shared equally between both parties. Beginning in the third
year, 40% of revenue earned by the Company will be remitted to Summus decreasing
to 20% in the final two years. Conversely, 40% of revenue earned by Summus in
the third year and 20% of revenue earned by Summus in years four, five and six
will be shared with the Company.
Under the new agreements discussed above, the Company is required to make annual
payments to Summus for approximately $180,000 in return for software maintenance
and upgrades. The payment for the first year beginning February 2000 has been
waived. The Company will recognize the aggregate amount of the annual fees on a
straight-line basis over the entire six-year term of the agreements.
F-23
<PAGE> 106
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
5. LICENSING RIGHTS
In September 1998, the Company issued 775,000 shares of its common stock, valued
at $77,500 for all of the issued and outstanding common stock of Brad Richdale
Direct, Inc. ("BRD"). The primary purpose of this transaction was to obtain
certain licensing and marketing rights held by BRD for certain products to be
developed by Summus. Since BRD had nominal assets and operations, this
transaction was accounted for as an acquisition of licensing rights, rather than
as a business combination. The value of this transaction was based on recent
transactions in the Company's common stock on the date of the transaction, and
has been recorded as an intangible asset in the accompanying balance sheet.
Subsequent to this transaction, the Company has negotiated new terms and
agreements with Summus relating to the licensing and marketing of certain
products developed by Summus (see Note 4).
6. CONVERTIBLE DEBENTURES
During 1999, the Company issued $2,655,749 in convertible debentures (the
"debentures") to officers, stockholders and third parties. These debentures were
issued in exchange for both cash of $558,640 and in partial satisfaction of
advances of $2,097,109 from a stockholder of the Company. The debentures were
convertible into the Company's common stock at conversion prices ranging from
$0.25 to $1.33 per share (all of which were substantially "in-the-money" at date
of issuance).
Shortly after the issuance of the debentures, the debenture holders exercised
the conversion feature and converted all outstanding debentures into 4,852,860
shares of the Company's common stock. The debentures were convertible at the
date of issuance. Since the conversion price of the debentures was below the
fair market value of the common stock, the Company recorded a $2,655,749
beneficial conversion feature as debt discount and additional paid-in-capital on
the date the debentures were issued. The resulting interest expense was
immediately recognized because the debentures were convertible upon issuance.
As of December 31, 1999, all debentures had been converted.
F-24
<PAGE> 107
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. RELATED PARTY TRANSACTIONS
As of December 31, 1999 Summus holds a 40.7% ownership interest in the Company.
The Company's operating and business strategy is dependent on the development of
Summus' technology and products under the New Agreements. Summus is developing
media compression and delivery software that the Company has rights to use to
deliver services to its customers under its various agreements with Summus.
During 1999, Summus funded certain expenses of the Company. For the year ended
December 31, 1999, Summus paid $154,000 of operating expenses on behalf of the
Company. This amount is owed to Summus and is included in Payables to Related
Parties in the accompanying balance sheet at December 31, 1999.
Payables to related parties, also includes advances made to the Company from a
former majority shareholder during 1998 and 1999. These amounts are unsecured
and are payable on demand.
8. STOCKHOLDERS' EQUITY
On June 20, 1998, the Company amended its articles of incorporation to increase
the number of authorized shares of its $.001 par value common stock to
50,000,000 and to effect a 200 for one stock split thereby increasing its issued
and outstanding shares to 1,000,000. The Company has 5,000,000 authorized shares
of $.001 par value preferred stock. No preferred shares have ever been issued
and outstanding as of December 31, 1999.
During the year ended December 31, 1998 the Company issued 765,000 shares of its
stock to employees for services rendered. These shares were valued at $76,500
based on the estimated fair value of the common stock, as determined by a recent
sale of the Company's common stock. At that time, the Company's common stock was
not publicly traded. During the year ended December 31, 1999, the Company issued
85,500 shares of common stock to employees for services rendered. These shares
were valued at $130,814 based on the traded value of the common stock.
F-25
<PAGE> 108
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
During 1998, the Company acquired 38,500 shares of its common stock for $227,619
in cash and currently holds these shares as treasury stock.
In August 1999, the Company issued 795,001 shares of its common stock valued at
$1,792,127, along with a cash payment of $102,000, to acquire 1,000,182 shares
of common stock, or 19%, of Summus Technologies Inc. The value assigned to these
shares was based on the traded value of the Company's common stock.
Subsequently, Summus Technologies, Inc. and Summus Ltd. merged. Summus Ltd. was
the surviving entity. The Company's ownership in Summus Ltd. after the merger
was 16.7% and as of December 31, 1999 was 14.0%. The Company's shares of Summus
Ltd. are subject to a shareholder agreement which restricts the Company's
ability to transfer or sell its shares without first granting Summus Ltd. the
opportunity to purchase them.
In August 1999, former management of the Company entered into a stock
subscription agreement with a related party. The agreement provided for the
Company to sell 250,000 shares of its common stock for $1.00 per share. Since
the subscription price was below the fair market value of the underlying stock
on the date of the agreement, $845,000 of expense related to this transaction
has been charged to the statement of operations in 1999.
F-26
<PAGE> 109
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCKHOLDER' EQUITY (CONTINUED)
Stock Options
During 1999, the Company granted to certain employees and directors 2,520,000
stock options that had exercise prices below the fair value of the underlying
common stock. Compensation expense of $4,717,600 has been recognized based upon
the difference between the exercise price and the traded value of the common
stock on the date of grant. These options vested immediately upon issuance and
1,825,000 of these options were exercised during 1999. Unexercised options
expire between 5 and 10 years from date of grant.
In connection with a 200,000 stock option grant, the optionee received
protection from potential dilution resulting from future issuances of the
Company's securities, as defined. The maximum number of common shares issuable
under this agreement is 400,000.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123; "Accounting for Stock-Based
Compensation." As permitted by the provisions of SFAS No. 123, the Company
continues to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations for its stock-based
awards.
A summary of the Company's stock option activity is as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- --------------
Outstanding - December 31, 1998 -- $ --
Granted 2,520,000 1.21
Exercised (1,825,000) 0.06
---------- -----
Outstanding - December 31, 1999 695,000 2.29
========== =====
F-27
<PAGE> 110
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------------------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
-------------------------- ------------ ------------------------- ----------------------
<S> <C> <C> <C>
$ .01 240,000 5 years $ .01
2.00 - 4.38 295,000 6.9 years 3.45
10.00 - 13.00 160,000 7 years 13.00
------------
695,000 6.4 years 5.70
============
OPTIONS EXERCISABLE
------------------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
-------------------------- ------------- ----------------------------
$ .01 240,000 $ .01
2.00 - 4.38 165,000 4.00
10.00 - 13.00 - -
-------------
405,000 1.18
=============
</TABLE>
In accordance with SFAS 123, the fair value of each option grant was determined
by using the Black-Scholes option pricing model with the following weighted
average assumptions for the twelve month period ended December 31, 1999:
dividend yield of 0%; volatility of 2.054; risk free interest rate of 4.25% and
expected option lives of 5 years. The weighted average fair value at the date of
grant was $2.29 per option. Had compensation expense for the Company's stock
options been determined based on the fair value at the date of grant consistent
with the provisions of SFAS 123, the Company's net loss and net loss per share
would have been $13.5 million and $.71 for the twelve months ended December 31,
1999.
F-28
<PAGE> 111
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
During August 1999, the Company negotiated and the Board of Directors approved
the cancellation of 5,161,100 shares of its common stock which were originally
issued in connection with the merger between the Company and MWI. This
cancellation was a result of MWI ceasing its operations in 1998. Both the
majority holder of these shares and the Company agreed that the initial purchase
price was over valued and accordingly, the shares were voluntarily returned to
the Company and the Company then canceled the shares. Since no value was
ascribed to the initial shares issued in connection with the MWI merger, no
value was ascribed to the subsequent cancellation. Also during 1999, the Company
executed the cancellation of 555,000 shares of its common stock, 530,000 of
which were originally issued in 1998 and 25,000 issued in 1999 for services
rendered by an employee for a total value of $91,250. During 1999, it was
determined that these services had not been performed satisfactorily and
therefore the common stock was voluntarily returned to the Company and canceled.
9. LEASES
During 1999, the Company established it headquarters in Raleigh, North Carolina
and entered into a noncancelable lease for office space and certain office
equipment. Rent expense incurred during the twelve months ended December 31,
1999 was approximately $11,375.
The following is a schedule of future minimum lease payments for operating
leases :
2000 $ 32,973
2001 32,973
2002 32,973
2003 32,973
2004 32,973
----------------
$ 164,865
================
During 1998, MWI leased its office facility and certain office equipment under
noncancelable operating leases, all which were terminated in 1998. Total rent
expense incurred in 1998 by MWI was approximately $40,000.
F-29
<PAGE> 112
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
10. INCOME TAXES
No provision for income taxes has been recorded during the current year due to
the Company's significant losses.
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 are as follows:
DECEMBER 31 DECEMBER 31
1998 1999
--------- ---------
Deferred tax assets:
Net operating loss carryforwards $ 29,300 $ 206,000
Start-up expenses 134,000 100,500
Related party expenses 178,000 234,000
Other deductible temporary differences 79,000 79,000
--------- ---------
Total deferred tax assets 420,000 619,500
Deferred tax asset valuation allowance (420,000) (619,500)
--------- ---------
Net deferred taxes $ -- $ --
========= =========
Management has determined that a 100% valuation allowance for existing deferred
tax assets is appropriate given the uncertainty regarding the ultimate
realization of any such assets.
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $515,000 for income tax purposes. The tax benefit
of these carryforwards are reflected in the above table of deferred tax assets.
If not used, these carryforwards begin to expire in 2018 for federal tax
purposes and in 2003 for state tax purposes. U. S. tax rules impose limitations
on the use of net operating losses following certain changes in ownership. If
such a change occurs, the limitation could reduce the amount of these benefits
that would be available to offset future taxable income each year, starting with
the year of ownership change.
F-30
<PAGE> 113
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
11. COMMITMENTS
In December 1999, the Company entered into a consulting agreement whereby the
consulting firm received option rights to purchase up to 200,000 shares of the
Company's common stock at an exercise price of $10.00 per share. The options
vest and become exercisable in increments of 50,000 shares based on the
achievement of certain levels of revenue earned by the Company. As of December
31, 1999, no options were vested under this agreement. These options will be
accounted for under the provisions of FAS 123.
In October 1999, the Company entered into a consulting agreement whereby the
consultant will receive the rights to purchase 2,000 shares of the Company's
common stock based on the achievement of revenue, as defined, from a potential
customer of the Company and Summus. The Company is also obligated to pay the
consultant 4% of all revenue the Company earns from this potential customer. As
revenues earned from this potential customer increase, the consultant has the
right to proportionally receive more shares based on the higher levels of
revenues earned. As of December 31, 1999, no amounts have been earned under this
agreement. As the options are granted, they will be accounted for under the
provisions of FAS 123.
12. SUBSEQUENT EVENT
In January 2000, a former shareholder of Summus Technologies, Inc. who received
350,000 shares of HSNS common stock and $100,000 in cash in exchange for his
shares of Summus Technologies, Inc. stock (see Note 8) has filed a lawsuit
against the Company, seeking damages of $13.3 million resulting from the
Company's alleged failure to register such shares under the Securities Act of
1933 (the "Act"). Under an agreement between the former shareholder and the
Company, the Company is required to issue and include in a registration
statement under the Act an additional 25,000 shares of the Company's common
stock for each additional month that passes subsequent to the Company's initial
deadline date to register the 350,000 shares. Management is attempting to settle
this matter out-of-court. The Company as accrued $800,000 for settlement of this
matter, representing management's best estimate of the ultimate outcome.
However, the ultimate exposure could be more or less, depending on the outcome
of settlement discussions, the length of time that passes prior to the
effectiveness of a registration statement covering shares of the Company held by
the plaintiff and the ultimate value of the Company's shares on the date of
settlement. Because the matter is expected to be resolved by issuing additional
shares, the ultimate outcome is not expected to have an adverse impact on the
Company's liquidity or cash flow.
On April 24, 2000, the Company acquired 100% of the issued and outstanding
shares of common stock of JSJ Capital Corp., a Nevada Corporation ("JSJ"), in
exchange for 50,000 shares of 144 restricted common stock of the Company. As a
result of HSNS's 100% ownership of JSJ, the Board of Directors of HSNS approved
the merger of JSJ into HSNS whereby HSNS will be the surviving corporation. The
acquisition was accounted for as an issuance of HSNS common stock in exchange
for the net monetary assets of JSJ, accompanied by a recapitalization.
The 50,000 shares issued by the Company in connection with the acquisition of
JSJ are considered a nominal issuance to effect the acquisition. All share and
per share data presented herein have been restated to reflect the issuance of
these shares. The pro forma impact of the JSJ acquisition is a $400,000 charge
to retained earnings on the Company's balance sheet, representing cash legal
fees paid in excess of net assets acquired. This charge was recognized in
earnings upon consummation of the acquisition.
Subsequent to year-end, the Company entered into a settlement agreement with
William Dunavant and Michael Cimino to resolve a litigation suit filed in
Florida. The settlement agreement provides, among other things, that the Company
register 350,000 shares of common stock with the Securities and Exchange
Commission.
F-31
<PAGE> 114
PART II
ITEM 13. EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses, payable by us in
connection with the issuance and distribution of the securities being
registered hereunder, all of which are being paid by us. Except for the SEC
registration fee, all amounts are estimates.
SEC registration fee.......................................... $ 3,155.15
Other fees.................................................... $ 20,000.00
Printing and filing expenses.................................. $ 30,000.00
Legal fees and expenses....................................... $ 60,000.00
Accounting fees and expenses.................................. $ 15,000.00
Blue sky fees and expenses.................................... $ 5,000.00
Transfer agent fees .......................................... $ 5,000.00
Total......................................................... $138,155.15
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following summary description of indemnification and limitation of
liability for our officers is not intended to be complete and is qualified by
reference to our amended and restated certificate of incorporation and our
amended and restated bylaws, filed as exhibits to this registration statement,
and is qualified by the applicable provisions of the Florida Business
Corporation Act (the "FBCA").
Our Articles of Incorporation and Bylaws provide for indemnification
of officers and directors to the fullest extent permitted by Florida law and,
to the extent permitted by such law, eliminate, or limit the personal liability
of directors to High Speed and its shareholders for monetary damages for
certain breaches of fiduciary duties. The liability of a director is not
eliminated or limited (i) for any breach of the director's duty of loyalty to
High Speed or its shareholders; (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law; (iii) for
any improper distribution under the FBCA; or (iv) for any transaction from
which the director derived an improper personal benefit. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
directors, officers, or persons controlling High Speed pursuant to the
foregoing provisions, we have been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
We intend to obtain liability insurance for our directors and
officers. At present, there is no pending litigation or proceeding involving
any director, officer, employee or agent as to which indemnification will be
required or permitted under the amended and restated certificate of
incorporation. We are not aware of any threatened litigation or proceeding that
may result in a claim for this type of indemnification.
II-1
<PAGE> 115
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
As of January 1, 1997, 5,000 shares of our common stock were issued and
outstanding. Of this 5,000 shares, High Speed's sole director and corporate
officer at this time owned beneficially 4,875 shares of common stock and 25
non-affiliates of High Speed each owned 5 shares of our common stock. From our
inception until corporate action taken on July 20, 1998, our articles of
incorporation authorized the issuance of up to 5,000 shares of common stock. On
this same date we increased our authorized common stock to 50,000,000 shares.
Since January 1, 1997, we have issued the following securities as
described below. In the summary below, all references to "High Speed," "us,"
"we," or "our" refer to High Speed Net Solutions, Inc. under any of its prior
corporate names (ZZAP.NET Inc., and EMN Enterprises, Inc.).
(1) During the period commencing on January 1, 1997, and ending on June
20, 1998, no common stock was issued.
(2) On July 20, 1998, we took the following corporate actions: (i) our
authorized common stock was increased to 50,000,000 shares; and (ii)
the outstanding 5,000 shares of common stock were split 200:1, creating
an issued and outstanding capitalization of 1,000,000 shares of our
common stock.
(3) In August 1998, we issued 1,550,000 shares of common stock to Mr.
Bradford Richdale as forgiveness of a debt valued at $149,820 that we
owed to him. Mr. Richdale loaned us these funds to enable us to
finance our operations. Mr. Richdale paid an effective price per share
of $0.097 for these shares.
(4) In August of 1998, we issued 3,766,600 shares of common stock for an
aggregate consideration of $317,000. Included in these issuances were:
(i) issuance of 1,100,000 shares to StoneLeigh Ltd., an entity
established by Mr. Richdale; (ii) issuance of 2,330,000 shares to Mr.
Rene Hamouth, the sole director and sole corporate officer of High
Speed; (iii) issuance of 116,600 shares to 24 investors; and (iv)
issuance of 220,000 shares to five investors. All of these issuances
were at $0.084 per share. The proceeds from these transactions were
used to finance operations.
The 116,600 shares issued to 24 investors and the 220,000 shares
issued to five investors are listed below with the number of shares
issued to each of the individuals or entities listed:
<TABLE>
<CAPTION>
Individual Number of Shares
---------- ----------------
<S> <C>
J. Danny Hodge 1,500
Frank D. Brigio 10,000
Joseph W. Veight 10,000
Corsica Marketing Services International 4,000
Forest C. Troutner/Janet L. Troutner 3,000
Todd Surgill 1,000
Robert P. Atwood 2,500
</TABLE>
II-2
<PAGE> 116
<TABLE>
<S> <C>
Jim Estep 10,000
Paul Vernon, MD 4,000
Malone Enterprises, Inc. 1,000
Fairwind Investments Limited 10,000
Ira Butler 2,000
Dawkins Concrete Products, Inc. 6,000
Randy Sells 3,300
Jerry Wilhite 11,100
John Allen 5,000
Mike/Judy Johnson 1,500
Tim/Linda Johnson 10,000
Joe Morgan 1,100
Prosper International Trust 9206 7,000
David Crescenzo 1,100
David Arnold 500
Richard Allen 1,000
Frick Enterprises, Inc. 10,000
Mike Pruit 125,000
Virtual Realty Mall, Inc. 20,000
Clair Calvert 30,000
Jule Berar 35,000
Catherine Cox 10,000
</TABLE>
II-3
<PAGE> 117
(5) In August 1998, we acquired the business and assets of, and assumed
the liabilities of, Marketers World, Inc. The planned principal
operations of Marketers World were to lease computer systems to
businesses and to distribute Internet oriented products and perform
related services. Its assets were $495,259, and its liabilities were
$75,000. To pay Marketers World, we issued 9,275,000 shares of common
stock to Marketers World, Inc. Mr. Bradford Richdale was the sole
shareholder of Marketers World. In addition, the president and then
sole director and sole corporate officer of High Speed, Mr. Hamouth,
transferred 725,000 shares of his personal common stock to Marketers
World to effect the transaction. No independent valuation was made of
the amount of assets we acquired and the liabilities we assumed.
The book value of assets obtained from Marketers World was $420,259.
Prior to and at the time of the merger, High Speed was a non-operating
public shell that had no assets or liabilities. Marketers World was a
private operating company. Accordingly, this transaction was accounted
for as a recapitalization of High Speed. Since this merger was
accounted for as a recapitalization of High Speed, the common shares
issued to acquire Marketers World were not valued and consequently, no
goodwill was recorded. The Marketers World officer executing the asset
purchase agreement was Mr. Michael Cimino, who subsequently was
elected the sole director and officer of High Speed. Subsequently, the
10,000,000 shares that Marketers World received in the transaction
were assigned by Mr. Richdale as follows: (i) 6,835,000 shares to
Ormond Trust, an entity established by Mr. Richdale; (ii) 140,000
shares to Mr. Cimino; and (iii) the remaining 3,025,000 shares to 24
other persons.
(6) In September of 1998 we acquired the business, assets and liabilities
of Brad Richdale Direct, Inc. The planned principal operation of Brad
Richdale Direct was to acquire product-licensing rights and sell the
products through direct marketing channels. Brad Richdale Direct's
assets were its rights to license and market Summus technology. Its
liabilities were nominal. In exchange for all of the outstanding and
issued stock of Brad Richdale Direct we issued: (i) 775,000 shares of
common stock to Ormond Trust, Brad Richdale Direct's major
shareholder, and an entity established by Mr. Bradford Richdale; and
(ii) 225,000 shares of common stock to Mr. Michael Cimino, who at the
execution of the transaction was President of Brad Richdale Direct and
President of High Speed.
The primary purpose of this transaction was to obtain certain
licensing and marketing rights held by Brad Richdale Direct for
certain products to be developed by Summus. Since Brad Richdale Direct
had nominal assets and operations, this transaction was accounted for
as an acquisition of licensing rights, rather than as a business
combination. The value of this transaction was based on recent
transactions in our common stock on the date of the transaction, and
has been recorded as an intangible asset in High Speed's balance
sheet. The 225,000 shares issued to Mr. Cimino were valued based on
recent transactions in our common stock on the date of the transaction
and has been recorded as compensation expense.
II-4
<PAGE> 118
In connection with this transaction, in February of 1999 we issued an
immediately vested option for 1,000,000 shares of common stock to Mr.
Bradford Richdale, exercisable at a price of $0.01 per share. As
discussed below, this option was later exercised in August of 1999.
Also, in connection with this transaction, in September of 1999, we
issued 140,000 shares of common stock to Mike Cimino. Finally, we
issued 100,000 shares to Mr. Cimino as consideration for his services
in effecting this transaction. The value of these transactions was
recorded as compensation expense based on the traded value of our
common stock on the date each transaction occurred.
(7) In September of 1998, we issued 300,000 shares of common stock for the
purpose of acquiring HealthTec, Inc., and National Direct Corporation.
We issued 100,000 of these shares to Mr. Bradford Richdale and we
issued 100,000 of these shares to Mr. Michael Cimino. This transaction
was rescinded in November of 1998 and in August of 1999 we implemented
the cancellation of the 300,000 shares issued for this acquisition. In
September of 1998, under a stock purchase agreement, we agreed to
issue 200,000 shares of common stock to Mr. Bradford Richdale for the
purpose of acquiring all of the stock of VR Mall, Inc.
In September of 1998, under a stock purchase agreement, we agreed to
issue 600,000 shares of common stock to Mr. Bradford Richdale for the
purpose of acquiring all of the stock of Golf Vacations Resort. These
two transactions were rescinded in November of 1998. The common stock
issuances contemplated by these transactions were never implemented.
(8) In February of 1999 we issued 157,323 shares of common stock to GEM
Singapore for an agreement that GEM Singapore pay us $471,987. On July
16, 1999, we canceled these shares for lack of consideration because
the transaction did not close.
(9) From February to April of 1999 we issued 338,188 shares of our common
stock to 15 individuals or entities for a price per share ranging from
$1.00 to $2.50 per share and we received an aggregate investment of
$347,500 for these shares, net of stock issuance costs of $109,168.
The proceeds from these investments were used to finance operations.
The 16 investors purchasing 338,188 shares are listed below with
details concerning the price paid and number of shares issued to each
of the individuals listed:
<TABLE>
<CAPTION>
Individual Price Paid Number of Shares
---------- ---------- ----------------
<S> <C> <C>
Joel Holt $100,000 49,286
Joe Pacifico $ 11,668 4,667
Tom Godfrey $ 25,000 10,000
D. Mark White $ 50,000 24,268
First Southwest $ 50,000 29,967
C. Dawkins $ 30,000 30,000
Greg Thompson $ 15,000 15,000
OL Thompson $ 15,000 15,000
N. Maero $ 15,000 15,000
</TABLE>
II-5
<PAGE> 119
<TABLE>
<S> <C> <C>
John D. Allen $ 15,000 15,000
Jerry Wilhite $ 45,000 45,000
Rene Hansen $ 20,000 20,000
D.L. and J.P. Smith $ 30,000 30,000
J. Walsh $ 25,000 25,000
J & L Nadelman $ 10,000 10,000
</TABLE>
(10) In May of 1999, we issued 795,001 shares of common stock in exchange
for a 16.7% investment in Summus Technologies, Inc. Subsequent to this
transaction, Summus Technologies merged with Summus Ltd. giving us a
16.7% ownership in Summus Ltd. We issued the 795,001 shares to 5
individuals for their shares of Summus Technologies. Except for one
individual, we gave no other consideration for the Summus Technologies
shares beyond the issuance of our common stock. Of the 795,001 shares
issued, 350,000 shares were issued to Mr. William R. Dunavant under a
stock purchase agreement. In addition to the issuance of the 350,000
shares, we also paid Mr. Dunavant $100,000 in cash. In return we
received 250,000 shares of the common stock of Summus Technologies.
The 5 investors receiving 795,001 shares are listed below with details
concerning the consideration and number of shares issued to each of
the individuals listed:
<TABLE>
<CAPTION>
Individual Consideration Number of Shares
---------- ------------- ----------------
(in shares of Summus (and other consideration, as
Technologies) applicable)
<S> <C> <C>
William R. Dunavant 250,000 350,000
(and $100,000 cash)
Wallace Permenter 5,000 18,334
Rick Turbin 27,000 30,000
Robert Chalnick 20,000 25,000
Cale Yarborough 100,000 366,667
</TABLE>
(11) In May of 1999, we issued 200,000 shares of our common stock when
Myung K. Kim exercised his common stock options for an exercise price
of $0.01 per share. Mr. Kim received these stock options under his
employment agreement as our President.
(12) In May of 1999, we issued 200,000 shares of our common stock when
Richard F. Seifert exercised his common stock options for an exercise
price of $0.01 per share. Mr. Seifert received these stock options
under his verbal employment agreement as our Vice President.
(13) In May of 1999, we issued 425,000 shares of our common stock when Mike
Cimino exercised his common stock options for an exercise price of
$0.01 per share. Mr. Cimino received these stock options under his
verbal employment agreement as our President.
II-6
<PAGE> 120
(14) During the four-month period between February 1, 1999 and May 24,
1999, we issued 17 convertible debentures at 8% per annum at a $0.50
per share conversion rate. The aggregate consideration we received by
issuing these debentures was $1,986,858. Except for one debenture in
the amount of $350,000, issued to Williston UBOT, all of these
debentures were issued to Mr. Bradford Richdale or to entities
established by Mr. Richdale: Ormond Trust and StoneLeigh Ltd. On May
24, 1999, all holders converted these debentures into shares of our
common stock and we issued 3,973,720 shares of our common stock upon
conversion of these debentures.
The debenture to Williston UBOT was issued on February 1, 1999. The
market value of our common stock on this date was $2.00 per share.
Upon conversion of the debenture to our common stock on May 24, 1999,
Williston UBOT paid an effective price of $0.50 per share.
The debentures to Mr. Richdale or entities established by Mr. Richdale
were issued between March 3, 1999, and May 24, 1999. The market value,
as represented by the close price, of our common Stock, between these
dates ranges from a low of $1.25 per share to a high of $4.88 per
share. Upon conversion of the debentures to our common stock Mr.
Richdale and the entities established by him paid an effective price
of $0.50 per share.
From July 1, 1999 through July 15, 1999 we issued 6 convertible
debentures at 8% per annum at $0.50 per share conversion rate. The
aggregate consideration we received by issuing these debentures was
$47,750. On July 15, 1999, all holders converted these debentures into
shares of our common stock and we issued 95,500 shares of our common
stock upon conversion of these debentures. The effective price paid by
all holders was $0.50 per share.
The individuals to whom we issued the 6 convertible debentures and the
number of shares into which each was converted are listed below:
<TABLE>
<CAPTION>
Individual Market Price Number of Shares
---------- ------------ ----------------
<S> <C> <C>
Darlene Beck $1.94 on 7/1/99 25,000
John Minton $1.94 on 7/1/99 25,000
Mike Bissell $1.94 on 7/1/99 2,000
Joseph Pacifico $1.94 on 7/1/99 13,500
Tom Godfrey $1.94 on 7/1/99 25,000
Joseph Repko $1.94 on 7/1/99 5,000
</TABLE>
(16) On July 15, 1999 we issued 1 convertible debentures to Mr. Bradford
Richdale at 8% per annum at a $0.25 per share conversion rate. The
consideration we received for this debenture was $62,500. On July 15,
1999, the holder converted this debenture into shares of our common
stock and we issued 250,000 shares of our common stock upon conversion
of this debenture.
The market value of our common stock on July 15, 1999, was $1.63 per
share. The effective price paid by Mr. Richdale was $0.25 per share.
II-7
<PAGE> 121
(17) On August 12, 1999 we issued 1 convertible debenture to Mr. Bradford
Richdale and on August 5, 1999, and August 18, 1999, we issued 2
convertible debentures to Ormond Trust, an entity established by Mr.
Richdale, all at 8% per annum at a $1.00 per share conversion rate.
The consideration we received for these three debentures was $458,640.
On the date they were issued, the holder converted these debentures
into shares of our common stock and we issued 458,640 shares of our
Common upon conversion of these debentures.
The market value, as represented by the close price, of our common
stock between August 5, 1999, and August 18, 1999, ranged from a low
of $3.50 per share to a high of $3.44 per share. The effective price
paid by Mr. Richdale and the entity he established, Ormond Trust, was
$1.00 per share.
(18) On August 5, 1999 we issued 1 convertible debenture at 8% per annum at
a $1.50 per share conversion rate to Mr. William D. Glycenfer. The
consideration for this debenture was $100,000. On the date it was
issued, the holder converted this debenture into shares of our common
stock and we issued 75,000 shares of our common stock upon debenture
conversion.
The market value, as represented by the close price, of our common
stock on August 5, 1999, was $3.50 per share. The effective price paid
by Mr. Glycenfer was $1.50 per share.
To summarize the debenture issuances, the total aggregate
consideration for all 28 convertible debentures issued was $2,655,748.
Of the amounts given above for issuance of the convertible debentures,
$2,190,000 was directly paid by Mr. Bradford Richdale to Summus to
cover a portion of the first three payments that we were obligated to
make to Summus under the Marketing License Agreement. Under the
Marketing License Agreement, we were obligated to make four payments
of $750,000 each for our rights under the agreement. The remaining
$558,640 was used to finance operations. As discussed in the items
above, all of these debentures were converted shortly after their
issuance by the respective holders to an aggregate of 4,852,856 shares
of common stock.
(19) In July of 1999, we issued 500 shares of our common stock to Mr. Jason
Parsons in exchange for Mr. Parson's services in developing our
company logo. The value of this transaction was based on the traded
value of our common stock and was recorded as compensation expense.
(20) In July of 1999, we issued 50,000 shares of our common stock to Mr.
Ron De Jong as payment for his services as a consultant to us. The
value of this transaction was based on the traded value of our common
stock and was recorded as compensation expense.
(21) In July of 1999, we issued 25,000 shares of our common stock to Mr.
Bradford Richdale beneficially in exchange for Mr. Richdale's
assistance in the William R. Dunavant Summus Technology stock
acquisition. The value of this transaction was based on the traded
value of our common stock and was recorded as compensation expense.
(22) In July of 1999, we issued 10,000 shares of our common stock to Mr.
Greg Catinella in exchange for Mr. Catinella's fundraising services.
The value of this transaction was based on the traded value of our
common stock and was recorded as compensation expense.
II-8
<PAGE> 122
(23) In August of 1999, we issued 1,000,000 shares of our common stock when
Mr. Bradford Richdale exercised his common stock options. We issued
these shares with an exercise price of $0.01 per share. We waived
payment of the exercise price in exchange for Mr. Richdale
transferring to us certain marketing rights to Summus technology. Mr.
Richdale received these stock options in connection with the purchase
by High Speed of all of the stock of Brad Richdale Direct, Inc.
(24) In August of 1999, we implemented the cancellation of 5,873,423 shares
of common stock due to lack of consideration for the following
acquisitions and investments. We canceled 300,000 shares of common
stock because we rescinded the acquisitions of National Direct
Corporation and Healthtec. We canceled 5,161,100 shares of common
stock as part of a voluntary rollback of the Marketers World
acquisition subsequent to Marketers World ceasing operations. We
canceled the 25,000 shares issued to Mr. Bradford Richdale for his
assistance with the William R. Dunavant transaction. We canceled the
230,000 shares issued to Mr. Michael Cimino for his services. Finally,
we canceled 157,323 shares due to lack of consideration for a
transaction involving GEM Singapore.
(25) In August of 1999, we issued 1,500,000 shares of our common stock to
Summus Ltd. as part of the payment for our rights under a Marketing
License Agreement. These shares were issued in lieu of paying Summus
the final of four $750,000 payments due to Summus under the Marketing
License Agreement. The value assigned to the 1,500,000 common shares
was based on the traded value of our common stock on the date of the
transaction. This amount, along with the cash payments made for the
first three installments are recorded as a non-current asset on our
balance sheet.
(26) In August of 1999, we issued 250,000 shares of our common stock at
$1.00 per share to two investors under a subscription agreement. These
investors are the parents of Mr. Richard F. Seifert, a member of our
board of directors. The value of this transaction was based on the
traded value of our common stock and was compensatory in nature.
(27) On February 28, 2000, we sold 2,000 shares of Series A Convertible
Preferred Stock to an investor at a price of $1,000 per share, for an
aggregate consideration of $2,000,000. The investors were F. van
Lanschot Bankiers (350 shares), Insinger de Bearfort (250 shares) and
AAA Trust (1,400 shares). The sale and issuance of the Series A
Convertible Preferred Stock was made in reliance on Rule 506 of
Regulation D.
II-9
<PAGE> 123
(28) In May of 2000, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") dated as of April 18, 2000 between High Speed, and
J.S.J Capital Corp. ("JSJ"), a Nevada corporation, we acquired all the
outstanding shares of common stock of JSJ from the sole stockholder
thereof in exchange for issuing 50,000 shares of our restricted common
stock in a transaction in which HSNS was the successor corporation.
The consideration exchanged pursuant to the Merger Agreement was
negotiated between High Speed and JSJ. In evaluating the Merger, JSJ
used criteria such as the value of assets of High Speed, High Speed's
ability to compete in the marketplace, High Speed's current and
anticipated business operations, and High Speed management's
experience and business plan. In evaluating JSJ, High Speed placed a
primary emphasis on JSJ's status as a reporting company under Section
12(g) of the Securities Exchange Act of 1934, as amended, and JSJ's
potential to facilitate High Speed becoming a reporting company under
the Securities Exchange Act.
The value of this transaction as recorded for financial purposes was
based on the traded value of our common stock, which produced a
valuation of $356,250.
(29) In June of 2000, we issued 7,500 shares of our common stock to Mr.
Gregory Gush in association with Mr. Gush's acceptance of our offer of
employment as an Executive Vice President at High Speed. The value of
this transaction was based on the traded value of our common stock,
which produced a valuation of $51,094, and for financial purposes was
treated as compensation expense.
II-10
<PAGE> 124
(30) In June 2000, we issued 175,000 shares to Mr. William R. Dunavant
pursuant to a settlement agreement with Mr. Dunavant, which resolved a
litigation suit filed in Florida. The settlement agreement provided,
among other things, that we register 350,000 shares of common stock
owned by Mr. Dunavant with the Securities and Exchange Commission.
Under the settlement agreement, we issued 175,000 new shares of our
common stock to Mr. Dunavant on the execution date of the settlement
agreement. In addition, the settlement calls for the payment of
$12,750 per month and 25,000 shares of common stock per month until
the registration of all shares are effective. As of July 10, 2000, we
have issued 200,000 shares of our common stock to Mr. Dunavant under
the settlement agreement.
If our registration statement for Mr. Dunavant, which is being
implemented by this Form S-1, is not effective on or before January 1,
2001, from that date forward and until we have delivered an effective
registration statement, we pay Mr. Dunavant $12,750 and issue 50,000
shares of common stock each month. We must also register all shares
delivered under these monthly allotments. Finally, we must also issue
and register an allotment of shares of our common stock, which is
determined by a calculation that depends on the date upon which the
registration statement becomes effective and the difference between
the price of our common stock as traded on the OTCBB and $23.00 per
share.
This registration statement assumes that we will have to issue
approximately 650,000 additional shares to Mr. Dunavant on or before
the date this registration statement goes effective according to the
terms of our settlement agreement with Mr. Dunavant. This estimate
assumes that it will take approximately four months for this
registration statement to become effective and that the price of our
common stock will be at a particular price per share at that time that
is significantly below the $23.00 threshold value specified by the
calculation in the settlement agreement with Mr. Dunavant.
The value of this transaction as recorded for financial purposes was
based on the traded value of our common stock, which produced a
valuation of $1,246,875.
II-11
<PAGE> 125
(31) On June 30, 2000 we acquired a marketing and advertising company,
Douglas May & Co., Inc., a Texas corporation, for approximately
$1,376,000 in fair market value consideration granted in the form of
new issuances of our common stock. We plan to hold and operate Douglas
May & Co. as a wholly-owned subsidiary. The sole shareholder of
Douglas May & Co. has joined us as an employee with the position of
Executive Vice President and Chief Creative Officer. Prior to the
acquisition, Mr. May was not a stockholder in High Speed and had no
relations with us. Under the terms of the acquisition, we issued three
allotments of our common stock to Mr. Douglas May based on a
negotiated partition of the $1,376,000 valuation assigned to Douglas
May & Co. during our negotiations. The three allotments comprise and
guarantee Mr. May approximately $1,376,000 in consideration for his
conveyance to us of all of the outstanding capital stock of Douglas
May & Co. The common stock we issued was assigned a value based on its
OTCBB trading price around the date of the closing of the transaction
by compiling the ten-day average of the closing price. The terms of
each allotment of common stock vary based on the partitioning of the
$1,376,000. The first allotment corresponded to $500,000 of value and
we issued 50,000 shares of our common stock coupled with a guarantee
that if the OTCBB trading price of our common stock one year from the
close of the transaction is less than $10.00 per share then we will
issue additional shares of our common stock to make up the difference
in value. The second allotment corresponded to $576,000 of value and
we issued 87,498 shares of our common stock coupled with contractual
obligations that (i) we would register these shares in this
registration and (ii) if the registration is not effective by a
certain date then Mr. May has the right to cause us to repurchase
these shares from him by making six cash installment payments to Mr.
May. The third allotment corresponded to $300,000 of value and we
issued 45,572 shares of our common stock coupled with contractual
obligations that (i) we would register these shares in this
registration and (ii) if the registration is not effective by a
certain date then Mr. May has the right to cause us to repurchase
these shares from him by releasing funds the acquisition agreement
places into an escrow account, the funds being from certain accounts
receivable of Douglas May & Co. valued at $300,000 and anticipated to
be collected during the next several months.
The value of this transaction as recorded for financial purposes was
based on the traded value of our common stock, which produced a
valuation of $1,258,606.
The sales and issuances of securities in the above transactions were
made in reliance on the exemptions from registration under the Securities Act
of 1933, as amended (the "Securities Act"), provided by Section 4(2) thereof,
and/or Regulation D and/or Rule 701 thereunder.
The purchasers of restricted securities represented their intention to
acquire the securities for investment only and not with a view to the
distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. We believe that all recipients of
restricted securities had adequate access, through employment or other
relationships, to information about High Speed to make an informed investment
decision.
Sales of shares of our common stock and Preferred Stock were made as
listed below:
This listing recounts by category the securities issuances described
in paragraphs 3 through 31 above. The issuances described below are not
additional issuances.
II-12
<PAGE> 126
(i) 1,397,500 shares of our common stock were issued to persons who were
officers, directors or employees of High Speed in exchange for
services valued at $1,738,645 in transactions that were exempt under
Rule 701.
These recipients are listed below with details concerning the
consideration and number of shares issued to each of the recipients
listed:
<TABLE>
<CAPTION>
Individual or Entity Consideration Number of Shares
-------------------- ------------- ----------------
<S> <C> <C>
Michael Cimino services 990,000
Myung Kim services 200,000
Richard F. Seifert services 200,000
Gregory S. Gush services 7,500
</TABLE>
(ii) 1,285,500 shares of our common stock were issued to persons who were
consultants and advisors in exchange for services valued at $2,147,646
in transactions that were exempt under Rule 701.
These recipients are listed below with details concerning the
consideration and number of shares issued to each of the recipients
listed of the shares recorded below as issued to Mr. Richdale, 225,000
of the shares issued were canceled as part of the share cancellation
discussed in paragraph 24 above in this "Item 15 - Recent Sales of
Unregistered Securities."
<TABLE>
<CAPTION>
Individual or Entity Consideration Number of Shares
-------------------- ------------- ----------------
<S> <C> <C>
Bradford Richdale services 1,225,000
Ron De Jong services 50,000
Greg Catinella services 10,000
Jason Parsons services 500
</TABLE>
(iii) 1,320,500 shares of our common stock were sold for $1,994,325 to 11
persons not in the foregoing categories in transactions that were
exempt under Section 4(2).
These recipients are listed below with details concerning the price
paid and/or valuation and the number of shares issued to each of the
recipients listed:
<TABLE>
<CAPTION>
Individual or Entity Price Paid or Effective Number of Shares
-------------------- ----------------------- ----------------
Valuation
---------
<S> <C> <C>
Williston UBOT $ 350,000 700,000
Darlene Beck $ 12,500 25,000
John Minton $ 12,500 25,000
Mike Bissell $ 1,000 2,000
Joseph Pacifico $ 6,750 13,500
Tom Godfrey $ 12,500 25,000
Joseph Repko $ 2,500 5,000
William D. Glycenfer $ 100,000 75,000
</TABLE>
II-13
<PAGE> 127
<TABLE>
<S> <C> <C>
Richard J. Seifert $ 125,000 125,000
Rita M. Seifert $ 125,000 125,000
William R. Dunavant $1,246,875 200,000
</TABLE>
(iv) 11,550,000 shares of our common stock were issued to acquire the
assets of two companies owned by Mr. Bradford Richdale and to acquire
rights under agreements with Summus in transactions that were exempt
under Section 4(2). These transactions are discussed in paragraphs 5,
6, and 25 above in this "Item 15 - Recent Sales of Unregistered
Securities."
(v) 3,982,356 shares of our common stock were sold for $2,158,299 to Mr.
Bradford Richdale and to entities established by Mr. Richdale through
issuance and conversion of the convertible debentures discussed in
paragraphs 14, 16, and 17 above of this "Item 15 - Recent Sales of
Unregistered Securities." Mr. Richdale is the founder of High Speed.
The issuances in these transactions were exempt under Section 4(2).
(vi) 795,001 shares of our common stock were issued in exchange for Summus
shares valued at $1,792,127 in transactions that were exempt under
Section 4(2).
These recipients are listed below with details concerning the price
paid and number of shares issued to each of the recipients listed:
<TABLE>
<CAPTION>
Individual or Entity Consideration (in shares of Number of Shares (and other
-------------------- ------------- ----------------
Summus Technologies) consideration, as applicable)
<S> <C> <C>
William R. Dunavant 250,000 350,000
(and $100,000 in cash)
Wallace Permenter 5,000 18,334
Rick Turbin 27,000 30,000
Robert Chalnick 20,000 25,000
Cale Yarborough 100,000 366,667
</TABLE>
(vii) 5,654,788 shares of our common stock were sold for $814,320 to 46
persons in transactions that were exempt under Rule 504. These
recipients are listed above in this "Item 15 - Recent Sales of
Unregistered Securities," in the entries and tables associated with
paragraph numbers four and nine.
(viii) 2,000 shares of our Series A Convertible Preferred Stock were sold for
$2,000,000 to one investor in a transaction that was exempt under Rule
506 of Regulation D. This investors were F. van Lanschot Bankiers (350
shares), Insinger de Beaufort (250 shares) and AAA Trust (1,400
shares).
(ix) 233,070 shares of our common stock were issued to acquire the assets
of two companies in transactions that were exempt under Section 4(2).
These transactions are discussed in paragraphs 28 and 31 above in this
"Item 15 Recent Sales of Unregistered Securities."
II-14
<PAGE> 128
ITEM 16. EXHIBITS.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
2.01* Agreement and Plan of Merger between High Speed Net Solutions, Inc. and J S J
Capital Corp., dated as of April 19, 2000
2.02* Certificate of Merger between High Speed Net Solutions, Inc. and J S J Capital
Corp., dated April 21 2000
3.01 Articles of Incorporation, dated April 30, 1984 (as formerly in effect, as
amended in Exhibits 3.02, 3.03, 3.04)
3.02 Amendment to Articles of Incorporation, dated July 20, 1998
3.03 Amendment to Articles of Incorporation, dated August 24, 1998
3.04 Amendment to Articles of Incorporation, dated December 10, 1998
3.05** Restated Articles of Incorporation, filed February 28, 2000 (as currently in
effect)
3.06 Bylaws
3.07** Amended and Restated Bylaws
3.08** Articles of Amendment and Statement of Rights and Preferences of the 8%
Series A Convertible Preferred Stock filed March 3, 2000
3.09 Articles of Correction filed June 23, 2000 to Articles of Amendment filed
March 2, 2000
4.01 Specimen common stock certificate
4.02 Specimen Series A preferred stock certificate
5.01 Opinion of Kilpatrick Stockton LLP (to be filed by amendment)
10.01** Master Agreement ("MA") with Summus, Ltd. ("Summus"), dated February 18, 2000
10.02** Software License Agreement ("SLA") with Summus, dated February 18, 2000
10.03** Software Maintenance Agreement ("SMA") with Summus, dated February 18, 2000
10.04** Revenue Sharing Agreement ("RSA") with Summus, dated February 18, 2000
</TABLE>
II-15
<PAGE> 129
<TABLE>
<S> <C>
10.05** Equity Compensation Plan, effective January 31, 2000
10.06 Amendment to Equity Compensation Plan, effective May 1, 2000
10.07** Employment Offer Letter with Andrew L. Fox, dated January 20, 2000.
10.08** Stock Option Award Agreement with Andrew L. Fox, dated August 25, 1999.
10.09** Employment Offer Letter with Alan R. Kleinmaier, dated February 7, 2000.
10.10** Stock Option Award Agreement with Alan R. Kleinmaier , dated August 25, 1999.
10.11 Employment Offer Letter with Robert S. Lowrey, dated March 29, 2000
10.12 Stock Option Award Agreement with Robert S. Lowrey, dated June 1, 2000
10.13 Marketing License Agreement ("MLA") with Summus, including
Exhibit A and Exhibit E, dated as of February 1999
10.14 First Amendment to MLA, dated August 16, 1999
10.15 Letter Agreement among Bradford J. Richdale, Michael M. Cimino, President of
Zzap.net, Inc., predecessor in interest to High Speed Net Solutions, Inc.
("HSNS"), and Dr. Bjorn Jawerth, President of Summus, Ltd., and Summus
Technologies, Inc., dated January 14, 1999
10.16 First Amendment to Letter Agreement, dated August 16, 1999
10.17 Letter to Samsung Electronics, dated March 25, 1999
10.18 Samsung Non-Circumvention Agreement with Summus, dated April 15, 1999
10.19 Letter to Samsung Electronics, dated August 9, 1999
10.20 Letter concerning Agency Agreement for Samsung negotiations, dated March 25, 1999
10.21 Capital Associates Lease Agreement between High Speed and Phoenix Limited
Partnership of Raleigh, dated October 15, 1999
10.22 Stock Purchase Agreement with William R. Dunavant, dated August 13, 1999.
10.23 Amended and Restated Settlement Agreement by and among William R. Dunavant,
the Registrant and Michael Cimino
</TABLE>
II-16
<PAGE> 130
<TABLE>
<S> <C>
10.24 Supplement to Agreement by and Between High Speed and William R. Dunavant,
dated August 13, 1999.
10.25 Advisory Agreement with R J Seifert Enterprises, dated February 6, 1999
10.26 Non-Circumvention and Non-Disclosure Agreement with R J Seifert Enterprises,
dated February 6, 1999
10.27 Settlement Agreement by and between the Registrant and Peter R. Rogina,
dated September 22, 1999
10.28 Employment and Stock Option Agreement with Peter R. Rogina, dated March 1, 1999
10.29 Consulting Agreement with Kyoung Park, Summus and the
Registrant dated September 24, 1999
10.30 Confidentiality and Non-Competition Agreement with Robert S. Lowrey
10.31 Shareholders' Agreement with Summus, Sharon Stairs, Ahmad Moradi, Antonio
Bianco, Joseph Peretta, Rich, Bahman & Berger, David Anderson, Stephen
Purkiss, Kerstin Jawerth, Ron Compton, dated August 16, 1999
10.32** Letter of Intent among High Speed, Samsung Electronics of America, Inc. and
Summus, dated February 15, 2000.
10.33** Software Escrow Agreement with Summus and Fort Knox Escrow Services, Inc.,
dated February 18, 2000
10.34** Letter Agreement with Summus, dated March 13, 2000
10.35 Lease Modification Agreement #1, dated March 23, 2000, to that certain Lease
dated October 15, 1999 (included as Exhibit 10.21)
10.36 Lease Modification Agreement #2, dated June 9, 2000, to that certain Lease
dated October 15, 1999 (included as Exhibit 10.21)
10.38 Form of Agreement to Terminate Registration Rights
10.39 Form of Selling Shareholder Agreement
10.40 Share Acquisition Agreement with Douglas May, dated June 30, 2000
10.41 Employment Agreement with Douglas D. May dated June 30, 2000
</TABLE>
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<PAGE> 131
<TABLE>
<S> <C>
16.01 Letter from Barry L. Friedman, P.C. regarding change in Certifying Accountant
dated June 20, 2000
23.1 Consent of Kilpatrick Stockton LLP (to be filed by amendment)
23.2 Consent of Ernst & Young LLP
24.1 Power of Attorney (included following signature page)
27 Financial Data Schedule
</TABLE>
* Included as an Exhibit to Form 8-K filed with the Securities and
Exchange Commission on May 8, 2000.
** Included as an Exhibit to Form 10-Q filed with the Securities and
Exchange Commission on May 15, 2000.
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<PAGE> 132
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of 1933.
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the change in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do
not apply if the registration statement is on Form S-3, Form S-8 or Form F-3,
and the information required to be included in a post-effective amendment by
those paragraphs is contained in the periodic reports filed with or furnished
to the Commission by the registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a post-
effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered
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<PAGE> 133
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes that:
(1) For the purpose of determining any liability under
the Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of act action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by its is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Raleigh,
State of North Carolina, on July 18, 2000.
High Speed Net Solutions, Inc.
By: /s/ Andrew L. Fox
---------------------------------------------
Andrew L. Fox
Acting President and Chief Executive Officer,
and Executive Vice President
Date: July 18, 2000
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<PAGE> 135
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Andrew L. Fox and Robert S.
Lowrey his true and lawful attorneys-in-fact, each acting alone, with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any or all amendments, including any
post-effective amendments, to this registration statement, and any subsequent
registration statement filed pursuant to Rule 462(b) under the Securities Act
of 1933, and to file the same, with exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorneys-in-fact or their substitutes,
each acting alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, the
following persons in the capacities and on the dates indicated have signed this
Registration Statement below.
<TABLE>
<S> <C>
/s/ Andrew L. Fox Acting President and Chief Executive Officer,
--------------------------- Executive Vice President and Director (principal
Andrew L. Fox executive officer)
/s/ Alan R. Kleinmaier Executive Vice President, Secretary and Treasurer
---------------------------
Alan R. Kleinmaier
/s/ Robert S. Lowrey Chief Financial Officer and Vice President of
--------------------------- Finance(principal financial officer)
Robert S. Lowrey
/s/ Bjorn Jawerth Director
---------------------------
Dr. Bjorn Jawerth
/s/ Richard F. Seifert Director
---------------------------
Richard F. Seifert
/s/ C. Cristine Wittress Director
---------------------------
C. Cristine Wittress
</TABLE>
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