<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-29625
HIGH SPEED NET SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0185306
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Two Hannover Square, Suite 2120,
434 Fayetteville Street Mall, Raleigh, NC 27601
(Address of Principal Executive Offices) (Zip Code)
(919) 645-2610
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), [x] Yes [ ] No; and (2) has been
subject to such filing requirements for the past 90 days. [x] Yes [ ] No
The number of shares outstanding of the registrant's common stock, par value
$0.001 per share, as of August 11, 2000 were 21,755,274.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
[ ] Yes [ ] No
1
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HIGH SPEED NET SOLUTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) 3
Balance Sheets as of December 31, 1999 and June 30, 2000
(Unaudited) 3
Statements of Operations for the three months ended June 30,
1999 and 2000 (Unaudited) 4
Statements of Operations for the six months ended June 30,
1999 and 2000 and the period from January 2, 1998
(Inception) through June 30, 2000 (Unaudited) 5
Statement of Shareholders' Equity (Deficit) (Unaudited) 6
Statements of Cash Flows for the six months ended June 30,
1999 and 2000 and the period from January 2, 1998
(Inception) through June 30, 2000 (Unaudited) 7
Notes to Condensed Financial Statements (Unaudited) 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative And Qualitative Disclosures About Market Risk 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 44
Item 2. Changes in Securities 44
Item 3. Defaults Upon Senior Securities 47
Item 4. Submission of Matters to a Vote of Securities Holders 47
Item 5. Other Information 47
Item 6. Exhibits and Reports on Form 8-K 47
Signatures 48
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
High Speed Net Solutions, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 380,475 $ 248,740
Other current assets 66,001 --
-------------------------------
Total current assets 446,476 248,740
Equipment and furniture, net 74,436 3,720
Investment in common stock of related party 1,894,127 1,894,127
Prepaid royalties, net 4,398,129 4,528,125
Licensing rights, net 35,106 43,060
-------------------------------
Total assets $ 6,848,274 $ 6,717,772
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Payables to related parties $ 489,593 $ 589,815
Accounts payable and accrued expenses 618,642 99,876
Loss contingency accrual 8,860,374 800,000
-------------------------------
Total current liabilities 9,968,609 1,489,691
Stockholders' equity (deficit):
Preferred stock, $.001 par value; authorized 5,000,000 shares, 2,000 shares
issued and outstanding (liquidation preference of
$1,000 per share) 2,000,000 --
Common stock, $.001 par value, authorized 50,000,000 shares;
21,294,649 shares issued and outstanding at June 30, 2000 and 21,112,149
shares issued and outstanding at December 31, 1999 21,295 21,112
Additional paid-in capital 18,563,104 17,272,770
Deficit accumulated during the development stage (23,477,115) (11,838,182)
Treasury stock, at cost (38,500 shares) (227,619) (227,619)
-------------------------------
Total stockholders' equity (deficit) (3,120,335) 5,228,081
-------------------------------
Total liabilities and stockholders' equity (deficit) $ 6,848,274 $ 6,717,772
===============================
</TABLE>
See accompanying notes.
3
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High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Operations (Unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30 JUNE 30
2000 1999
-----------------------------
Selling, general and administrative expenses $ 1,485,247 $ 1,932,795
Loss contingency 8,982,500 --
Interest expense (income), net (9,360) --
-----------------------------
Net loss $(10,458,387) $ (1,932,795)
=============================
Net loss applicable to common shareholders:
Net loss $(10,458,387) $ (1,932,795)
Preferred stock dividends (40,000) --
-----------------------------
Net loss applicable to common shareholders $(10,498,387) $ (1,932,795)
=============================
Loss per share (basic and diluted) $ (0.50) $ (0.11)
=============================
Weighted average shares outstanding 21,159,045 17,346,757
============ ============
See accompanying notes.
4
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High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS SIX MONTHS JANUARY 2, 1998
ENDED ENDED (INCEPTION) TO
JUNE 30 JUNE 30 JUNE 30
2000 1999 2000
----------------------------------------------------
<S> <C> <C> <C>
Selling, general and administrative expenses $ 2,140,777 $ 4,058,232 $ 9,257,230
Loss contingency 9,166,875 -- 9,966,875
Interest expense (income), net (16,952) -- 2,638,812
----------------------------------------------------
Loss from continuing operations $(11,290,700) $ (4,058,232) $(21,862,917)
Loss from discontinued operations -- -- (1,265,965)
----------------------------------------------------
Net loss $(11,290,700) $ (4,058,232) $(23,128,882)
====================================================
Net loss applicable to common shareholders:
Net loss $(11,290,700) $ (4,058,232) $(23,128,882)
Beneficial conversion feature of preferred stock (294,900) -- (294,900)
Preferred stock dividends (53,333) -- (53,333)
----------------------------------------------------
Net loss applicable to common shareholders $(11,638,933) $ (4,058,232) $(23,477,115)
====================================================
Per share amounts (basic and diluted):
Loss applicable to common shareholders from continuing
operations $ (0.55) $ (0.24) $ (1.35)
Loss applicable to common shareholders from discontinued
operations -- -- $ (0.08)
----------------------------------------------------
Net loss $ (0.55) $ (0.24) $ (1.43)
====================================================
Weighted average shares outstanding 21,135,597 17,011,596 16,372,995
====================================================
</TABLE>
See accompanying notes.
5
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High Speed Net Solutions, Inc.
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
DATE OF PREFERRED PREFERRED PREFERRED COMMON COMMON
TRANSACTION STOCK STOCK STOCK SUB. STOCK STOCK
SHARES AMOUNT REC. SHARES AMOUNT
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1999 -- -- -- 21,112,149 $21,112
Issuance of preferred stock at
$1,000 per share Feb-00 2,000 $2,000,000 -- -- --
Preferred stock subscription Feb-00 -- -- $(250,000) -- --
Preferred stock issuance costs Feb-00 -- -- -- -- --
Beneficial conversion feature
related to preferred stock Feb-00 -- -- -- -- --
Preferred stock dividend Mar-00 -- -- -- -- --
Preferred stock issuance costs Apr-00 -- -- -- -- --
Preferred stock subscription
collection Jun-00 -- -- 250,000 -- --
Preferred stock dividend Jun-00 -- -- -- -- --
Issuance of common stock for
services Jun-00 -- -- -- 7,500 8
Issuance of common stock in
partial settlement of loss
contingency Jun-00 -- -- -- 175,000 175
Net Loss -- -- -- -- --
-------------------------------------------------------------------
Balance June 30, 2000 (Unaudited) 2,000 $2,000,000 -- 21,294,649 $21,295
===================================================================
</TABLE>
See accompanying notes.
<TABLE>
<CAPTION>
ADDITIONAL DEFICIT TREASURY TOTAL
PAID-IN ACCUMULATED STOCK STOCKHOLDERS'
CAPITAL DURING THE EQUITY
DEVELOPMENT (DEFICIT)
STAGE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance December 31, 1999 $17,272,770 $(11,838,182) $(227,619) $ 5,228,081
Issuance of preferred stock at
$1,000 per share -- -- -- 2,000,000
Preferred stock subscription -- -- -- (250,000)
Preferred stock issuance costs (107,798) -- -- (107,798)
Beneficial conversion feature
related to preferred stock 294,900 (294,900) -- --
Preferred stock dividend -- (13,333) -- (13,333)
Preferred stock issuance costs (41,250) -- -- (41,250)
Preferred stock subscription
collection -- -- -- 250,000
Preferred stock dividend -- (40,000) -- (40,000)
Issuance of common stock for
services 51,082 -- -- 51,090
Issuance of common stock in
partial settlement of loss
contingency 1,093,400 -- -- 1,093,575
Net Loss -- (11,290,700) -- (11,290,700)
--------------------------------------------------------------
Balance June 30, 2000 (Unaudited) $18,563,104 $(23,477,115) $(227,619) $ (3,120,335)
==============================================================
</TABLE>
6
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High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS SIX MONTHS JANUARY 2, 1998
ENDED ENDED (INCEPTION) TO
JUNE 30 JUNE 30 JUNE 30
2000 1999 2000
---------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations $(11,290,700) $(4,058,232) $(21,862,917)
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 51,090 3,640,000 5,749,128
Depreciation and amortization 141,684 13,026 189,746
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) (60,000)
Accounts receivable and other current assets (66,001) 7,559 (66,001)
Accounts payable and accrued expenses 465,257 175,728 465,257
Loss contingency 9,154,125 -- 9,954,125
-------------------------------------------------
Net cash used in operating activities from continuing operations (1,544,545) (281,919) (2,821,991)
Net cash used in discontinued operations -- -- (1,265,965)
-------------------------------------------------
Total net cash used in operating activities (1,544,545) (281,919) (4,087,956)
INVESTING ACTIVITIES
Capital expenditures (74,450) -- (128,650)
Cash investment in related party -- (102,000) (102,000)
-------------------------------------------------
Net cash used in investing activities (74,450) (102,000) (230,650)
FINANCING ACTIVITIES
Net proceeds from sale of preferred stock 1,850,952 -- 1,850,952
Proceeds from sale of common stock -- 242,062 559,062
Shareholder capital contributions -- -- 1,091,648
Advances from stockholders -- -- 876,230
Increase (decrease) in amounts due related parties (100,222) 150,000 (9,832)
Proceeds from issuance of convertible debentures -- -- 558,640
Purchase of treasury stock -- -- (227,619)
-------------------------------------------------
Net cash provided by financing activities 1,750,730 392,062 4,699,081
-------------------------------------------------
Net increase in cash and cash equivalents 131,735 8,143 380,475
Cash and cash equivalents at beginning of period 248,740 18,609 --
=================================================
Cash and cash equivalents at end of period $ 380,475 $ 26,752 $ 380,475
=================================================
</TABLE>
7
<PAGE> 8
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Cash Flows (Unaudited) (continued)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS SIX MONTHS JANUARY 2, 1998
ENDED ENDED (INCEPTION) TO
JUNE 30 JUNE 30 JUNE 30
2000 1999 2000
-----------------------------------------------
<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
=============================================
Common stock issued for prepaid royalties -- -- $2,278,125
=============================================
Prepaid royalties paid by shareholder on behalf of Company -- $1,500,000 $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
=============================================
Common stock issued in partial settlement of loss contingency $ 1,093,575 -- $1,093,575
=============================================
Accrual of preferred stock dividends $ 53,333 -- $ 53,333
=============================================
</TABLE>
See accompanying notes.
8
<PAGE> 9
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 June 30, 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.
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 Rule 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 was 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 Company also incurred fees of $400,000 in connection with this
acquisition that were paid in cash and charged to expense upon consummation of
the merger.
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 June 30, 2000 and for all periods presented have been recorded.
9
<PAGE> 10
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
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, 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.
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
Prepaid royalties represent prepayments made to Summus Ltd., ("Summus"), a
related party, under various licensing agreements. Of the total balance,
$1,000,000 has been characterized as a one-time, up-front license fee. This
amount is being amortized on a straight-line basis over the six-year term of the
License Agreement. Furthermore, $180,000 of the total balance has been
characterized as an annual software maintenance fee. This amount is being
amortized on a straight-line basis over the twelve-month term. The remaining
balance represents prepaid royalties, which, as future revenues from services
subject to the provisions of these agreements are earned, will be charged to
royalty expense over the terms of the various agreements. Summus is currently in
need of additional financial resources. Should Summus not be able to raise
sufficient funding and consequently not be able to deliver technology to HSNS,
an impairment to these prepaid amounts and licensing rights would need to be
recognized.
10
<PAGE> 11
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
LICENSING RIGHTS
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 February 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.
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 and preferred
stock. 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 14.1%
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.
11
<PAGE> 12
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (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 the
operations or financial position of the Company.
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 debentures 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 issued 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 $149,048 were $1,850,952.
The subscription receivable for $250,000 was collected in June 2000.
The Preferred Stock holders are entitled to receive cumulative cash dividends at
a rate of 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 June 30 and September 30 of each year commencing on September 30,
2000. As of June 30, 2000 cumulative dividends accrued were $53,333.
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 six month period ended June 30, 2000, for purposes
of computing the net loss applicable to common shareholders.
12
<PAGE> 13
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. LITIGATION CONTINGENCY
In January 2000, William R. Dunavant ("Dunavant"), 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. Former management of HSNS had entered into
an agreement with Dunavant which obligated the Company to register the 350,000
shares of HSNS common stock under the Securities Act of 1933 (the "Act") within
a specified time period. The Company's alleged failure to register such shares
resulted in a lawsuit against the Company seeking damages of $13,300,000.
In June 2000, we entered into a settlement agreement with Dunavant to resolve
the lawsuit. 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 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, then from that date forward and until we
deliver 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 under these monthly allotments. Finally, we must also issue and
register an allotment 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 per share.
Based on the terms of the settlement agreement, the Company has accrued an
additional $8,982,500, representing management's best estimate of the ultimate
outcome. The most significant component of this additional accrual relates to
the estimation of the value of additional shares we must issue and register
based on the difference of the traded value of our common stock on the date the
registration statement becomes effective and $23 per share. The $8,982,500
additional accrual recorded as of June 30, 2000 was calculated using the closing
traded price of our common stock on June 30, 2000 as the estimated closing price
on the date the registration statement becomes effective. Prospectively, this
accrual could increase or decrease at the end of each accounting period based on
the closing price of our common stock through completion of this process.
13
<PAGE> 14
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. SUBSEQUENT EVENTS
Effective July 10, 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 a
registration and (ii) if the registration is not effective by January 1, 2001
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 a registration and (ii) if the registration is not effective by the
date 90 days after the closing date then Mr. May has the right to cause us to
repurchase these shares from him by releasing the funds the acquisition
agreement places into an escrow account, the funds being from certain accounts
receivable of Douglas May & Co., anticipated to be collected in the amount of
$300,000 during the next several months.
On July 19, 2000, the Company filed a registration statement on Form S-1 to
register for resale 1,874,717 shares of the Company's common stock held by early
investors in the Company. These shares are being registered for the selling
shareholders, and High Speed will not participate in any of the proceeds from
the potential sale of the registered shares.
On July 27, 2000, the Company sold 216,671 shares of its unregistered common
stock and issued warrants to purchase an additional 433,342 shares of common
stock for gross proceeds of $1,000,000. The Company committed to register the
216,671 shares before December 31, 2000. The warrants have an exercise price of
$4.625 per share, a term of five years and cannot be exercised before January
31, 2001. Also in connection with this transaction, the Company issued 10,884
shares of its unregistered common stock as a placement fee and committed to
also register these shares before December 31, 2000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the 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. Fees
of $400,000 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, which will require us to
acquire technology we do not currently have. Currently, Summus, Ltd., our
primary supplier of technology, has not delivered technology we expected to have
at the beginning of the third quarter. Financial and other problems of Summus
may prevent it from delivering technology we need to implement our business
plan. It is management's opinion that Summus will complete its obligations to
deliver the technology we need to implement our business plan, therefore we have
not recorded an impairment charge relating to the prepaid intangible assets with
Summus. We will continue to monitor this situation on an on-going basis. 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 from these services as of June 30,
2000 and, therefore, we are a development stage company as of June 30, 2000.
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Effective July 10, 2000, we acquired a marketing and advertising company,
Douglas May & Co., Inc. ("May"). This acquisition will be recorded as a purchase
and the results of operations of May will be included in the consolidated
operations of High Speed beginning July 10, 2000.
We anticipate that revenues from our Rich Media Direct service 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 early stage companies. Our future
success depends upon, 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. During the second quarter of year 2000, we
have accomplished the items described immediately below.
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 and there are no guaranteed minimal revenues terms in the contract.
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 and there are no guaranteed minimal revenue
terms in the contract,
We have entered into a letter of intent with Learnkey. It contemplates that we
will have a non-exclusive license to use Learnkey's compression technology and
we shall pay Learnkey a revenue share royalty for emails we deliver using their
compression technology. Also, the letter of intent gives us the option, for a
revenue share royalty, to deliver media advertisements through Learnkey's
e-commerce broadcast network. We have generated
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no revenue from this letter of intent to date and there are no guaranteed
minimal revenue terms in the letter of intent. There can be no assurances that
the letter of intent will result in a definitive agreement being signed.
We have entered into a letter of intent with Dial2Go. It contemplates that
Dial2Go will remarket our Rich Media Direct service in several countries in
Asia. Under the letter of intent, we have made a small equity investment into
Dial2Go. We have generated no revenue from this letter of intent to date and
there are no guaranteed minimal revenue terms in the letter of intent. There
can be no assurances that the letter of intent will result in a definitive
agreement being signed.
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
$1,850,952. 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.
Effective July 10, 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 a registration and (ii) if the
registration is not effective by January 1, 2001 then Mr. May has the right to
cause us to repurchase these shares from him by making six cash installment
payments to
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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 a registration and (ii) if the registration is
not effective by the date 90 days after the closing date then Mr. May has the
right to cause us to repurchase these shares from him by releasing the funds the
acquisition agreement places into an escrow account, the funds being from
certain accounts receivable of Douglas May & Co., anticipated to be collected in
the amount of $300,000 during the next several months.
On July 19, 2000, the Company filed a registration statement on Form S-1 to
register for resale 1,874,717 shares of the Company's common stock held by early
investors in the Company. These shares are being registered for the selling
shareholders, and High Speed will not participate in any of the proceeds from
the potential sale of the registered shares.
On July 27, 2000, the Company sold 216,671 shares of its unregistered common
stock and issued warrants to acquire an additional 433,342 shares of common
stock for gross proceeds of $1,000,000. The Company committed to register the
216,671 shares before December 31, 2000. The warrants have an exercise price of
$4.625 per share, have a term of five years, and cannot be exercised before
January 31, 2001. Also in connection with this transaction, the Company issued
10,884 shares of its unregistered common stock as a placement fee and committed
to also register these shares before December 31, 2000.
THREE MONTHS ENDED JUNE 30, 2000
REVENUE
We had no revenue during the three months ended June 30, 2000. During the
quarter we have been working with potential customers to sign contracts for
services.
INTEREST INCOME
Interest income of $9,360 for the three months ended June 30, 2000 represents
interest earnings on cash balances in demand deposit accounts.
NET LOSS
Our net loss during the three months ended June 30, 2000 was $10,458,387, or
$0.50 per share. The net loss was primarily attributable to the loss contingency
expense of $8,982,500 resulting from the Dunavant settlement and general and
administrative expenses.
LOSS CONTINGENCY
In June 2000, we entered into a settlement agreement with Mr. William R.
Dunavant ("Dunavant") to resolve a lawsuit against the Company. The settlement
agreement provides, among other things, that we register 350,000 shares of HSNS
common stock owned by Dunavant with the Securities and Exchange Commission.
Under the settlement agreement, we issued 175,000 new shares of our common stock
to 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
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shares of common stock per month until the registration of all shares is
effective. If our registration statement is not effective on or before January
1, 2001, from that date forward and until we deliver an effective registration
statement, we will pay Dunavant $12,750 and issue 50,000 share 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 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 at the time the registration
statement becomes effective and $23 per share.
Based on the terms of the settlement agreement, the Company has accrued an
additional $8,982,500 representing management's best estimate of the ultimate
outcome. The most significant component of this additional accrual relates to
the estimation of the value of the additional shares we must issue and register
based on the difference between the traded value of our common stock on the date
the registration statement becomes effective and $23 per share. The $8,982,500
additional accrual recorded as of June 30, 2000 was calculated using the closing
traded price of our common stock on June 30, 2000 as the estimated closing price
on the date the registration statement will become effective. Prospectively,
this accrual will increase or decrease at the end of each accounting period
based on the closing price of our common stock through completion of this
process.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1,485,247 for the three months ended
June 30, 2000. This amount includes approximately $704,000 of legal and
professional services, $400,000 of which was related to the merger with JSJ. The
remaining legal and professional fees primarily relate to SEC reporting matters
and other general legal and accounting activities. We expect professional
services fees will continue to be high for the third quarter of 2000 as we incur
costs related to SEC disclosure matters, financial reporting and other related
activities. The remaining balance of the general and administrative expenses
relates to salaries and other operating costs.
We anticipate the need to raise $5,000,000 to implement our business plan and
operate from November 2000 through November 2001.
THREE MONTHS ENDED JUNE 30, 1999
REVENUES
We had no revenues during the three months ended June 30, 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 June 30, 1999 was $1,932,795 and was
primarily attributable to general and administrative expenses. The net loss
included a non-cash compensation cost of $1,640,000 related to the granting of
825,000 stock options to employees for services rendered. These stock options
had no exercise prices. The remaining loss was attributable to salary and other
operating costs.
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SIX MONTHS ENDED JUNE 30, 2000
REVENUE
We had no revenue during the six months ended June 30, 2000. During this period
we launched Rich Media Direct 1.0 and have been working with potential customers
to sign contracts for services.
INTEREST INCOME
Interest income of $16,952 for the six months ended June 30, 2000 represents
interest earnings on cash balances in demand deposit accounts.
NET LOSS
Our net loss during the six months ended June 30, 2000 was $11,290,700 or $0.55
per share. The net loss was primarily related to the loss contingency expense
relating to the Dunavant lawsuit and settlement and general and administrative
expenses.
LOSS CONTINGENCY
The loss contingency expense for the six months ended June 30, 2000 was
$9,166,875. The discussion of this matter is explained in greater detail in
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Three Months Ended June 30, 2000, contained herein. Of this
amount, $8,982,500 was recorded in the three months ended June 30, 2000 and
$184,375 was recorded in the first quarter of 2000. The amount recorded in the
first quarter was based on the terms of the original agreement between the
Company and Dunavant. The second quarter adjustment to the accrual was based on
the terms of the settlement agreement that was executed in June 2000. The terms
of the settlement agreement included the obligation to the Company to register
additional shares based on the difference between the closing price of the
Company stock on the date the registration statement becomes effective and $23
per share. Such a provision was not a part of the initial agreement nor was it a
part of the lawsuit.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $2,140,777 for the six months ended
June 30, 2000. This amount includes $868,938 million of legal and accounting
services, of which $400,000 relates to the merger with JSJ and the remainder is
attributable to professional fees associated with SEC reporting matters and
other general corporate activity. The remaining balance of general and
administrative expense relates to salaries and other operating costs.
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SIX MONTHS ENDED JUNE 30, 1999
REVENUE
We had no revenue during the six months ended June 30, 1999, because we had no
products to sell nor the capacity to provides services.
NET LOSS
Our net loss during the six months ended June 30, 1999 of $4,058,232 or $0.24
per share was primarily attributable to general and administrative expenses. The
net loss included non-cash costs of $3,640,000 related to the granting of stock
options to employees for services rendered. The stock options had no exercise
prices. The remaining loss was attributable to salary and other operating costs.
PERIOD FROM JANUARY 2, 1998 (INCEPTION) TO JUNE 30, 2000
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read considering the brief history of High Speed
as summarized below.
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 have been presented as discontinued
operations from January 2, 1998 through December 1998.
REVENUE
We had not generated any revenue from our inception on January 2, 1998 through
June 30, 2000, because we had no products to sell nor any capacity to provide
services during this period.
NET LOSS
Our net loss from continuing operations from our inception on January 2, 1998
through June 30, 2000 was $21,862,917. This loss was primarily attributable to
general and administrative expenses, the loss contingency accrual related to the
Dunavant settlement, and non-cash interest expense.
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The net loss from discontinued operations of $1,265,965 reflects the operating
results of MWI for 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.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $9,257,230 for the period from January
2, 1998 to June 30, 2000. Of this amount, $5,698,038 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. The remaining
balance of the general and administrative expenses incurred during this period
of approximately $3,600,000 related to salary and other operating expenses.
LOSS CONTINGENCY
The total amount of loss contingency related to the Dunavant matter charged to
expense from inception is $9,966,875. $800,000 was charged to expense in the
fourth quarter of 1999 which reflects the time period in which the Company
allegedly failed to register the 350,000 shares owned by Dunavant. During the
first quarter of 2000, the initial contingency reserve was increased by $184,375
and charged to expense, reflecting management's best estimate of the loss
contingency at that time. During the second quarter of 2000, an additional
charge was recorded based on the terms of the settlement agreement executed in
June 2000. A further discussion of this matter is explained in greater detail in
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Three and Six Month periods Ended June 30, 2000, contained
herein.
INTEREST EXPENSE (INCOME), NET
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
that 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 that
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. Interest income of $16,937 for the period from January 2, 1998 to
June 30, 2000 represents earnings on cash balances in demand deposit accounts.
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 June
30, 2000, we had cash and cash equivalents of $380,475, and other current assets
of $66,001 and current liabilities of
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$9,968,609 resulting in a working capital deficiency of $9,522,133. Excluding
the loss contingency reserve, which will be primarily settled by the issuance of
additional shares of stock rather than cash, our negative working capital at
June 30, 2000, was $661,759.
Net cash used in operating activities of $1,544,545 during the six months ended
June 30, 2000 reflects cash paid for salaries and our other operating expenses.
Net cash used in investing activities of $74,450 during the six months ended
June 30, 2000 represents capital expenditures for office furniture and computer
equipment.
Net cash provided by financing activities of $1,850,952 during the six months
ended June 30, 2000 resulted from the net proceeds of the sale of our preferred
stock of $1,850,952, net of a decrease in the amounts due to related parties of
$100,222.
Net cash used in operating activities from continuing operations during the six
months ended June 30, 1999 of $281,919, resulted from the payment of salaries
and other operating costs. Net investing activities for the six months ended
June 30, 1999 included $102,000 paid in connection with the acquisition of our
ownership interest in Summus. Net cash provided by financing activities for the
six months ended June 30, 2000 represents proceeds from the sale of our common
stock and advances from related parties.
Net cash used in operating activities from continuing operations from January 2,
1998 through June 30, 2000 was $2,821,991 reflects cash paid for salaries and
our other operating expenses plus $60,000 paid to Summus as a prepaid royalty.
Net cash used in discontinued operations of $1,265,965 represents the net cash
used to operate MWI during 1998.
Net cash used in investing activities from January 2, 1998 to June 30, 2000 was
$230,650 and reflects capital expenditures for office furniture and computer
equipment, plus $102,000 paid in connection with the acquisition of our
ownership interest in Summus.
Net cash provided by financing activities from January 2, 1998 to June 30, 2000
was $4,699,081 and resulted from the net proceeds of the sale of our preferred
stock of $1,850,952, net proceeds from the sale of our common stock of $559,062,
shareholder capital contributions of $1,091,648 and net advances from
shareholders of $866,398. Additionally, during 1999 we received $558,640 from
the issuance of convertible debentures and during 1998 we purchased 38,500
shares of our stock for $227,619.
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 $1,850,952, which is inclusive of a stock subscription
receivable of $250,000, which was collected in June 2000. On July 27, 2000 we
sold 216,671 share of unregistered common stock for $4.6153 per share resulting
in gross proceeds of $1,000,000 with placement costs valued at $50,000 based on
the issuance of 10,884 shares of our unregistered common stock as a placement
fee.
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The proceeds from these issuances will not be sufficient to fund operations for
the next 12 months. Currently we have enough cash to fund operations until
November 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 November 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. We
need to raise $5,000,000 to implement our business plan and operate from
November 2000 until November of 2001. 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 and we will not be able to fund
operations without additional capital. There can be no assurance that additional
equity or debt financing will be available on terms that will be favorable to
us.
As of September 30, 2000, if our registration statement filed on Form S-1 is not
declared effective by the Securities and Exchange Commission, Mr. May, the
former owner of Douglas May & Co., Inc. has the right to cause us to repurchase
45,572 shares of our common stock from him by releasing funds the acquisition
agreement places into an escrow account. The total value of these shares on the
date we acquired Douglas May & Co., Inc. was $300,000. The funds released from
the escrow account constitute the entire repurchase price.
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 our ability to generate
sufficient cash flow to meet our 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. However,
there can be no assurances that management's plans will be executed as
anticipated. Additionally, our ability to deliver services and generate revenue
is currently being impeded by the failure of Summus to deliver technology.
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 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 133 will have on our
consolidated financial statements.
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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.
RISK FACTORS
This Form 10-Q 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 10-Q, 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.
Summus has not delivered some software products when we expected and this is
limiting our ability to execute our business plan.
As of August 11, 2000, Summus has not delivered to us software in a form ready
for general release which we expected to receive by July 1, 2000. As a result
we have been limited in our ability to execute our business plan.
Summus is currently in need of additional financial resources and this could
limit its ability to deliver to us technology we expect.
Summus is currently in need of financial resources. If Summus is not able to
raise sufficient funding, and consequently not able to deliver technology
because of lack of funding or due to software development difficulties, then
our ability to execute our business plan would also be materially adversely
affected.
OUR CURRENT SYSTEM REQUIRES ENHANCEMENTS TO ALLOW US TO PROVIDE SERVICES THAT
WILL REMAIN ATTRACTIVE TO POTENTIAL CUSTOMERS.
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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 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
has failed to deliver 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.
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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. Both before and prior to July 1, 2000, Summus
may conduct its business and license its technology in such a way as to
decrease the demand for our services. Summus could license its technology to
end-users in such a way that allows these end-users to perform for themselves
the services we seek to perform for them.
CONFLICTS OF INTEREST BETWEEN SUMMUS AND US MAY LIMIT OUR OPPORTUNITIES AND
THEREFORE HARM OUR ABILITY TO GENERATE REVENUE.
As of August 11, 2000, Summus held 8,474,360 shares of our common stock (39.0%
of our outstanding common stock, and 34.7% 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 44.8% 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 President and Chief Executive Officer.
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 August 11, 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.
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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
Summus and us could prevent the formation of beneficial relationships between
other companies and us.
SALES OF OUR SHARES BY SUMMUS MAY HAVE AN ADVERSE EFFECT ON THE MARKET PRICE OF
OUR COMMON STOCK.
As of August 11, 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 44.8% OF OUR COMMON STOCK.
As of August 11, 2000 our largest shareholder and important software supplier,
Summus, owns 8,474,360 shares of our common stock (39.0% of our outstanding
common stock, and 34.7% on a fully diluted basis). Dr. Bjorn Jawerth, the
founder and chairman of the board of Summus, beneficially owns approximately
39.0% of our outstanding common stock and 34.7% 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 44.8% of our outstanding common stock and 40.0% 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;
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- 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.
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.
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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.
For the foreseeable future our stock could at any time be prohibited from being
quoted on the OTCBB.
We have requested that the SEC extend the emergency order described above and
the SEC is currently considering our request. Although the emergency order does
not state that it will expire on a specific date, at any time the SEC could
deny our request for an extension and rescind the emergency order. Our common
stock will cease trading on the OTCBB if the SEC does not advise the NASD that
we are current in our reporting obligations before the emergency order expires.
We will not be current in our reporting obligations until we respond
satisfactorily to all comments that the SEC may have on the Form 8-K that we
filed on May 8, 2000. On May 17, 2000, the NASD determined that High Speed was
not current in its reporting obligations. This occurred because the SEC had
advised the NASD that the SEC intended to review the Form 8-K that High Speed
filed on May 8, 2000. This Form 8-K was filed pursuant to High Speed's merger
with J S J Capital, Inc., a reporting company. The NASD's position is that the
Form 8-K had not cleared SEC comments. While our stock has continued to trade on
the OTCBB under the protection of an emergency order, our trading symbol still
includes a warning noted by an "E" appended to our trading symbol. The "E" is a
warning indicating that we are not current in our reporting obligations. The
warning on our trading symbol will continue until the issue of whether we are
current in our reporting obligations is resolved.
To date, the SEC has not given us comments on the 8-K that we filed on May 8,
2000. The SEC may treat this 8-K as a registration statement on Form 10. If
this occurs, the SEC may have a substantial number of additional comments on
the 8-K. This could result in substantial additional delay in determining
whether we are current in our reporting obligations and in determining when the
"E" will be removed from our OTCBB trading symbol. If these delays extend
beyond the time period we are protected by the emergency order, then our common
stock will cease trading 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 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.
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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
$4.968 at the close of business on August 8, 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 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;
- 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;
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- 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 August 8, 2000, we had approximately $811,000 of cash. Several occurrences
have allowed us to pay our expenses over the last several 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 $1,850,952. Second, on July 27, 2000 we sold 216,671 shares
of our unregistered common stock and issued warrants to purchase 433,342
additional shares of common stock for gross proceeds of $1,000,000, with
placement costs valued at $50,000 based on the issuance of 10,884 shares of our
unregistered common stock as a placement fee. Third, Summus has given us credit
up to $250,000 for additional resource support and ancillary services beginning
from February 18, 2000. 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 need to raise $5,000,000 to implement our business plan and operate
from November 2000 until November 2001. There can be no assurance that we will
be able to raise capital on terms that are favorable to us. We need 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 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 November of 2000 unless we receive additional funds through
either 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
June 30, 2000, we had an accumulated deficit of approximately $23,500,000. In
1999, we lost $10,200,000 and in 1998, we lost $1,600,000.
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 $1,000,000 between now and
November 2001.
OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.
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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;
- 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.
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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).
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.
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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 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.
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
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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 more than $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.
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
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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.
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.
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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
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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 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 DirectSM. 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 DirectSM 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
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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.
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;
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- 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 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 10-Q could materially and
adversely affect our business, financial condition and operating results.
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ITEM 3. 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 a private company can be subject to market risk despite not
being publicly traded.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In January 2000, Mr. William R. Dunavant filed a lawsuit against us in the
circuit court of the eleventh judicial circuit of Dade county, Florida. The
lawsuit seeks damages of $13,330,000 resulting from our alleged failure to
register 350,000 shares of our common stock that Mr. Dunavant owns under the
Securities Act of 1933, as amended, and from our alleged failure to deliver to
Mr. Dunavant two allotments of 25,000 shares of stock as an alleged penalty for
our failure to register Mr. Dunavant's shares.
In June 2000, we entered into a settlement agreement with William R. Dunavant
and Michael Cimino to resolve the 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 is
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 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
per share.
ITEM 2. CHANGES IN SECURITIES.
(a) Not applicable.
(b) Not applicable
(c) During the three month period ended June 30, 2000, we have issued the
following securities as described below.
(1) 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 exchange 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
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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 50,000 shares issued by the Company in this transaction
are considered a nominal issuance to effect the acquisition.
All share and per share data have been restated to reflect the
issuance of these shares.
(2) 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.
(3) 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 a 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.
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(4) Effective July 10, 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 a registration and (ii)
if the registration is not effective by January 1, 2001 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 a registration and (ii) if the registration is not
effective by the date 90 days after the closing date then Mr.
May has the right to cause us to repurchase these shares from
him by releasing the funds the acquisition agreement places
into an escrow account, the funds being from certain accounts
receivable of Douglas May & Co., anticipated to be collected
in the amount of $300,000 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 $1,376,000.
(5) In July 2000, we sold 216,671 shares of Rule 144 restricted
common stock and issued warrants to purchase an additional
433,342 shares of common stock to an investor for an aggregate
consideration of $1.0 million. The Company committed to
register the 216,671 shares before December 31, 2000. The
warrants have an exercise price of $4.625 per share, a term of
five years and cannot be exercised before January 31, 2001.
Also in connection with this transaction, the Company issued
10,884 shares of its unregistered common stock as a placement
fee and committed to also register these shares before
December 31, 2000.
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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 the restricted securities described above 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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Furnish the exhibits required by Item 601 of Regulation S-K.
(1) On May 8, 2000, we filed a report on Form 8-K reporting the
merger of J S J Capital Corp. with and into High Speed Net
Solutions, Inc. We included with this report on Form 8-K
audited financial statements since inception for the time
period of January 2, 1998 through December 31, 1999, and
unaudited, proforma financial statements for the year ended
December 31, 1999.
(2) On July 25, 2000, we filed a report on Form 8-K reporting the
acquisition of Douglas May & Co., Inc.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
High Speed Net Solutions, Inc.
By: /s/ Andrew L. Fox
-------------------------------------
Date: August 14, 2000 Andrew L. Fox
---------------------- President and Chief Executive Officer
By: /s/ Robert S. Lowrey
-------------------------------------
Date: August 14, 2000 Robert S. Lowrey
---------------------- Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Exhibit Description
-------------- -------------------
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
10.06** Amendment to Equity Compensation Plan, effective May 1, 2000
10.12** Stock Option Award Agreement with Robert S. Lowrey, dated
June 1, 2000
10.23** Amended and Restated Settlement Agreement by and among
William R. Dunavant, High Speed Net Solutions, Inc. and
Michael Cimino
10.40*** Share Acquisition Agreement between High Speed Net Solutions,
Inc. and Douglas May (excluding schedules, which will be
supplied to the Commission upon request), effective July 10,
2000
10.41*** Employment Agreement between High Speed Net Solutions, Inc. and
Douglas May, effective July 10, 2000
10.42*** Form of License Agreement among Douglas May & Co., Inc., High
Speed Net Solutions, Inc. and Douglas May, effective July 10,
2000
10.43*** Form of Escrow Agreement among Douglas May & Co., Inc., High
Speed Net Solutions, Inc. and Douglas May, effective July 10,
2000
10.50 Form of Subscription Agreement between High Speed Net Solutions,
Inc. and AAA Trust and van Ernst Jakobs, dated July 27, 2000
10.51 Form of Selling Shareholder Agreement, dated July 27, 2000
10.52 Form of Warrant to Purchase Shares of Common Stock between High
Speed Net Solutions, Inc. and AAA Trust and van Ernst Jakobs,
dated July 27, 2000
27 Financial Data Schedule
* 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 S-1 filed with the Securities and Exchange
Commission on July 19, 2000.
*** Included as an Exhibit to Form 8-K filed with the Securities and Exchange
Commission on July 25, 2000.
49
