<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 18, 2000
REGISTRATION NO. 333-41730
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
HIGH SPEED NET SOLUTIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
FLORIDA 7389 65-0185306
(State or other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code) Identification Number)
</TABLE>
--------------------------
TWO HANNOVER SQUARE, SUITE 2120
434 FAYETTEVILLE STREET MALL, RALEIGH, NORTH CAROLINA 27601
(919) 645-2610
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices)
--------------------------
ANDREW L. FOX
PRESIDENT, CHIEF EXECUTIVE OFFICER
HIGH SPEED NETWORK SOLUTIONS, INC.
TWO HANNOVER SQUARE, SUITE 2120,
434 FAYETTEVILLE STREET MALL
RALEIGH, NORTH CAROLINA 27601
(919) 645-2610
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code of Agent for Service)
--------------------------
Copies to:
JAMES F. VERDONIK, ESQ.
KILPATRICK STOCKTON LLP
3737 GLENWOOD AVENUE - SUITE 400
RALEIGH, NORTH CAROLINA 27612
(919) 420-1700
--------------------------
Approximate Commencement Of Proposed Sale To The Public: From time to
time after the effective date of this Registration Statement.
If any securities being registered on this form are to be offered on a delayed
or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following
box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
===================================================================================================================================
TITLE OF SHARES TO BE REGISTERED AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE(2)
SHARE(1) PRICE
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value $ .001 per share.... 1,728,477 $5.10 $ 8,815,232.70 $2,327.22
-----------------------------------------------------------------------------------------------------------------------------------
Common stock underlying options and other
rights to receive shares(3).................. 715,000 $5.10 3,646,500.00 962.68
-----------------------------------------------------------------------------------------------------------------------------------
Total........................................ 2,443,477 N/A $12,461,732.70 $3,289.90
===================================================================================================================================
</TABLE>
(1) Estimated pursuant to Rule 457(c) solely for the purpose of
calculating the registration fee; based on the average of the "bid"
($4.94) and "asked" ($5.25) price as reported by the OTC Bulletin
Board(R) on October 12, 2000.
(2) The registrant previously paid a registration fee of $3,155.15 with
its initial filing on July 19, 2000, and is submitting an additional
$134.75 with this filing.
(3) Includes shares of Common Stock underlying options granted to two
Selling Shareholders and an estimate of the additional shares of
Common Stock we must issue to Mr. William R. Dunavant, a Selling
Shareholder, when this Registration Statement becomes effective.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
===============================================================================
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED OCTOBER 18, 2000
[High Speed Logo]
2,443,477 SHARES
HIGH SPEED NET SOLUTIONS, INC.
COMMON STOCK
--------------------
This Prospectus relates to 2,443,477 shares of common stock of High
Speed Net Solutions, Inc., $.001 par value (the "Common Stock") which the
individuals described in the section entitled "Selling Shareholders" beginning
on page 60 are offering for sale. We will not receive any of the proceeds from
sales of these shares.
The distribution of our Common Stock by the Selling Shareholders may
be effected from time to time, through various means including:
- Ordinary brokerage transactions on securities exchanges;
- To or through brokers or dealers who may act as principal or
agent; or
- In one or more negotiated transactions.
The brokers or dealers through or to whom these shares of Common Stock
may be sold may be deemed "underwriters" of the shares within the meaning of
the Securities Act of 1933, as amended, in which event all brokerage
commissions or discounts and other compensation received by those brokers or
dealers may be deemed to be "underwriting compensation." To the extent
required, the Selling Shareholders will disclose the names of any
underwriter(s) and applicable commissions or discounts and any other required
information with respect to any particular sale in an accompanying prospectus
supplement. See the section entitled "Plan of Distribution" beginning on page
56 for a further description of how the Selling Shareholders may dispose of the
shares covered by this Prospectus.
Our Common Stock is quoted on the OTC Bulletin Board(R) under the
symbol "HSNSE." On April 17, 2000, the National Association of Securities
Dealers, Inc., added the "E" to the end of our symbol. This fifth character is
a warning indicating that we are not current in our reporting obligations to
the Securities and Exchange Commission, and consequently, that the OTC Bulletin
Board(R) may cease quoting our Common Stock at any time.
On October 12, 2000, the last sale price of our shares as reported on
the OTC Bulletin Board(R) was $5.00 per share.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 8 OF THIS PROSPECTUS.
-----------------------
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities, or
determined if this Prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
-----------------------
The date of this Prospectus is October __, 2000.
<PAGE> 3
YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO GIVE YOU INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. THE SELLING SHAREHOLDERS ARE OFFERING TO SELL,
AND SEEKING OFFERS TO BUY, SHARES OF HIGH SPEED NET SOLUTIONS, INC.'S COMMON
STOCK ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF
THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR
OF ANY SALE OF THE SHARES.
TABLE OF CONTENTS
<TABLE>
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Page No.
--------
<S> <C>
Summary....................................................................................................... 1
Risk Factors.................................................................................................. 8
Use of Proceeds............................................................................................... 18
Price Range of our Common Stock............................................................................... 18
Dividend Policy............................................................................................... 19
Selected Financial Data....................................................................................... 20
Statement Regarding Forward-Looking Statements................................................................ 21
Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 22
Business...................................................................................................... 31
Management.................................................................................................... 45
Security Ownership of Certain Beneficial Owners............................................................... 55
Security Ownership of Management.............................................................................. 55
Plan of Distribution.......................................................................................... 58
Selling Shareholders.......................................................................................... 59
Certain Relationships and Related Party Transactions.......................................................... 61
Description of Capital Stock.................................................................................. 68
Indemnification of Officers and Directors..................................................................... 70
Legal Matters................................................................................................. 71
Experts....................................................................................................... 71
Change in Registrant's Certifying Accountant.................................................................. 71
Where You Can Find More Information........................................................................... 73
</TABLE>
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<PAGE> 4
SUMMARY
This summary highlights selected information contained in this
Prospectus and may not include all of the information that is important to you.
You should carefully read this entire Prospectus and the other documents to
which we refer, including the section entitled "Risk Factors" that begins on
page 8 and our Financial Statements and related notes included elsewhere in
this Prospectus. In addition, we incorporate by reference important business
and financial information about our company into this Prospectus. You may
obtain this information without charge by following the instructions in the
section entitled "Where You Can Find More Information" that begins on page 73
of this Prospectus.
OUR COMPANY
HIGH SPEED NET SOLUTIONS, INC.
Two Hannover Square, Suite 2120
424 Fayetteville Street Mall
Raleigh, North Carolina
(919) 645-2610
http://www.hsns.com
Founded in 1984, we are an Internet services company, incorporated in
Florida and headquartered in Raleigh, North Carolina. We are focused on
creating and transmitting advertising and other video commercial content over
the Internet. We specialize in handling "rich media," which is content
containing one or more of the following types of data: audio, video, images, or
animation.
We were a development stage company during 1998, 1999, and for the
first six months of 2000. Our accumulated deficit as a development stage
company through June 30, 2000 was $23.5 million. We ceased being a development
stage company in the third quarter of 2000 in connection with our acquisition
of Douglas May & Co., Inc. Our accumulated deficit as of September 30, 2000 is
$25.5 million. Our auditors have included in their audit opinion a
qualification that our financial condition raises substantial doubt about our
ability to continue as a going concern.
Our continuation as a going concern depends 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 to ultimately attain
profitability. We expect that we will increase the number of customer orders
for our services, which will produce revenues to reduce our operating losses.
We also expect to be able to raise additional capital to further fund our
operations. However, we cannot be certain that we will be able to execute our
business plan as we have anticipated.
We currently have enough cash on hand to fund our operations until
December 2000. However, we anticipate that our existing cash resources,
together with capital from private sales of our securities and the cash revenue
that we expect to generate from our customers, will be sufficient to fund our
capital requirements for the 12 months commencing December 2000.
Our business plan assumes that the demand for e-mail advertising and
campaign distribution services will continue to increase, and that the demand
for sophisticated services designed to entice targeted audiences to view
e-mails geared towards their preferences and collect information about those
viewers will also continue to increase.
We are now an early stage company, offering two major categories of
services, Media Creation and Media Distribution, as described below:
<PAGE> 5
- MEDIA CREATION
We are already providing Media Creation services to our customers
through our wholly-owned and fully operational subsidiary, Douglas May & Co.
Inc., which we acquired on July 10, 2000. These services include creative
design assistance and commercial content development, including audio and video
images and animation, as well as website design and construction.
- MEDIA DISTRIBUTION
We plan to provide media distribution, embedded inside e-mail
services, as well as customer targeting and tracking services (which identify
potential e-mail recipients based upon demographic information, keep track of
the number of times recipients view our e-mail messages, and record specific
information about those viewers) for applications such as permissive marketing
(whereby potential e-mail recipients agree in advance to receive
solicitations).
We intend to provide an integrated suite of Internet services,
collectively called Rich Media Direct(SM) to our customers. In January 2000, we
launched Rich Media Direct 1.0(TM). However, after feedback from potential
customers, we determined that we needed to upgrade our technology to improve
its functionality.
We have now licensed technology from All Video Network, Inc. that we
believe will allow us to deliver effectively the Media Distribution services
that we intend to provide. We have also licensed from E.piphany, Inc. e-mail
campaign management and customer response tracking software , and we have
engaged NexGenix, Inc., a professional systems integration firm, to customize
E.piphany's software for us. We recently received additional computers and
other hardware that we purchased from Hewlett-Packard, Inc., and we entered
into an agreement with Enflow, Inc., a commercial hosting services company (or
"server farm"), to store our content on their computers and deliver it to our
clients' designated recipients.
We do not foresee the need to purchase any additional products or
services from third parties in order to begin offering and delivering our
services, and we believe that we will be in a position to launch our next
generation of Rich Media Direct(SM) platform in the fourth quarter of 2000.
Currently, we have service contracts with four customers. These
contracts establish the commercial terms for our services, but do not require
customers to purchase any specific volume of our services. We intend to
continue to focus our marketing efforts on advertising agencies and dedicated
Internet companies with web properties, as well as traditional companies
seeking the commercial opportunities that Internet direct marketing provides.
We intend to use a range of activities to market our Media Creation and Media
Distribution services, including our own internal sales force, trade shows,
trade advertisements, selected media events, and our own website and services.
We also intend to publish printed marketing materials to support our sales
staff, including company brochures, feature descriptions, technology research
papers, and client case studies.
EVENTS IN THE YEAR 2000
- ELIGIBILITY OF OUR COMMON STOCK FOR QUOTATION ON THE OTC BULLETIN
BOARD(R)
Our Common Stock is currently quoted on the OTC Bulletin Board(R)
under the symbol "HSNSE." The OTC Bulletin Board(R) is a regulated quotation
service maintained by the National Association of Securities Dealers, Inc.,
which displays real-time quotes, last-sale prices, and trading volume
information about over-the-counter securities.
On January 4, 1999, the United States Securities and Exchange
Commission approved new eligibility rules limiting quotations on the OTC
Bulletin Board(R) to the securities of issuers that are current in their
reports filed with the Commission or other regulatory authorities. Because we
did not timely clear the Commission's comments on all of our required reports,
on May 17, 2000, the NASD removed our Common Stock from quotation on the OTC
-2-
<PAGE> 6
Bulletin Board(R). In response, we successfully obtained a temporary stay of
the NASD's delisting from the Commission, and the OTC Bulletin Board(R) has
continued to quote our Common Stock since the grant of the temporary stay.
The NASD has scheduled a hearing for October 19, 2000 to determine the
eligibility of our securities for quotation on the OTC Bulletin Board(R). We
had previously requested this hearing in May 2000, but the NASD denied our
request and terminated OTC Bulletin Board(R) quotation of our Common Stock
without a hearing on May 17, 2000. After the NASD scheduled the October 19,
2000 hearing as we had previously requested, the Commission remanded this
matter to the NASD for resolution.
We have now filed amendments to our Form 8-K previously filed on May
8, 2000, our Form 10-Q for the quarter ended June 30, 2000, and the
Registration Statement of which this Prospectus is a part with the Commission.
Although we cannot guarantee that the Commission's staff will not have
additional comments, we believe that our amendments substantially address all
of the Commission's prior comments about these documents.
Based on these filings, we will seek to convince the NASD that we are
close to clearing the Commission's comments, and we will ask the NASD hearing
panel to grant us additional time to clear those comments. In the event that
the NASD does not grant us additional time to clear those comments, we will
appeal the NASD's decision and seek a stay of the NASD's order from the
Commission. Failing that, we expect that our Common Stock would trade on the
"pink sheets," and we will seek reinstatement to the OTC Bulletin Board(R) as
quickly as possible after clearing all of the Commission's comments.
Until the NASD makes its decision, our Common Stock will continue to
trade on the OTC Bulletin Board(R) under the symbol "HSNSE."
- OUR ACQUISITION OF DOUGLAS MAY & CO., INC.
Effective July 10, 2000, we acquired a marketing and advertising
company, Douglas May & Co., Inc., a Texas corporation ("DMC") in exchange for
shares of our Common Stock. We are holding and operating DMC as a wholly-owned
subsidiary. Mr. Douglas May, DMC's sole shareholder, joined our company as an
employee and is currently our Executive Vice President and Chief Creative
Officer. Before this transaction, Mr. May was not one of our shareholders and
had no relations with us.
In exchange for his conveying to us of all of DMC's outstanding
capital stock, we issued a total of 183,070 shares of Common Stock to Mr. May
in three installments as follows:
- We issued 50,000 shares of Common Stock, coupled with a
guarantee that if the OTC Bulletin Board(R) trading price of
our Common Stock on July 10, 2001 is less than $10.00 per
share, we will issue additional shares of Common Stock to
make up the difference in value. The guaranteed value of
these shares is $500,000. Based upon the closing price of our
shares as quoted by the OTC Bulletin Board(R), the market
value of these shares was $318,750 on July 10, 2000 and
$250,000 on October 12, 2000;
- We issued 45,572 shares of Common Stock, coupled with
contractual obligations requiring us to register these shares
under the Securities Act of 1933. Since we did not register
these shares by October 10, 2000, we must, at Mr. May's
election, repurchase these shares from him by releasing funds
escrowed under our acquisition agreement. Based upon the
closing price of our shares as quoted by the OTC Bulletin
Board(R), the market value of these shares was $290,522 on
July 10, 2000 and $227,860 on October 12, 2000. As of the
date of this Prospectus, Mr. May has not elected to have us
repurchase his shares; and
- We issued 87,498 shares of Common Stock, coupled with
contractual obligations requiring us to register these shares
under the Securities Act of 1933. If we do not register these
shares by January 1, 2001, we must, at Mr. May's election,
repurchase these shares from him by making six equal
installment payments to him totaling
-3-
<PAGE> 7
$576,000. Based upon the closing price of our shares as
quoted by the OTC Bulletin Board(R), the market value of
these shares was $557,800 on July 10, 2000 and $437,490 on
October 12, 2000.
Until the contingencies noted above are settled, we will treat the
shares in each of these instances as outstanding for loss per share purposes.
We will present all shares issued that are subject to our repurchase on our
Balance Sheet as redeemable stock, outside of stockholders' equity.
The closing price of our Common Stock as quoted on the OTC Bulletin
Board(R) was $6.375 on July 10, 2000 and $5.00 on October 12, 2000.
- OUR RELATIONSHIP WITH SUMMUS LTD.
Summus Ltd. is a digital technology company, specializing in encoding,
managing, and distributing digital content. Summus develops business and
consumer applications using wavelet technology. Wavelet technology involves
compressing and decompressing files, which allows audio, video and other
multimedia files to travel over the Internet and other networks using
significantly less time than uncompressed files. Summus' brand name for its
wavelet technology is "Dynamic Wavelet(TM)."
In February 2000, we entered into agreements with Summus granting us a
license to use its MaxxSystem(TM) software. MaxxSystem(TM) is Summus' name for
its suite of software products that utilize wavelet technology to encode,
manage and distribute data. We originally planned to use this Summus software,
in addition to other third-party software, to implement our business plan.
However, due to delivery delays, we decided to move forward with alternate
vendors for the next generation of Rich Media Direct(SM) platform, including
All Video Network and E.piphany. We have recently received some of the products
we originally licensed from Summus. We are currently testing and evaluating
these products for possible incorporation into future versions of the broadband
and wireless applications.
On August 31, 2000, we signed a non-binding Letter of Intent to
purchase all of Summus' assets, including Summus' technology and intellectual
property rights. This agreement required both parties to use their best efforts
to consummate this transaction on or before September 15, 2000. In connection
with this Letter of Intent, we loaned Summus $500,000 on August 31, 2000.
Although the September 15, 2000 deadline has now passed, we are continuing to
negotiate with Summus, and we are continuing to evaluate whether to consummate
the transactions contemplated by the August 31, 2000, Letter of Intent at some
point in the future.
Summus is currently our largest shareholder. As of September 30, 2000,
Summus had the power to vote 9,669,027 shares, or 43.7%, of our Common Stock
(37.6% on a fully diluted basis). A Special Committee of our Board of
Directors, consisting of all of our Directors other than Dr. Bjorn Jawerth, who
is the founder and largest shareholder of Summus, is considering all of our
relationships with Summus.
- OUR SETTLEMENT AGREEMENT WITH WILLIAM R. DUNAVANT
In June 2000, we entered into a settlement agreement with William R.
Dunavant and Michael Cimino to resolve a lawsuit filed in Florida. Under this
agreement, we agreed to, among other things, register 350,000 shares of Common
Stock owned by Mr. Dunavant under the Securities Act of 1933, which we are
doing by filing the Registration Statement of which this Prospectus is a part.
We also issued 175,000 new shares of Common Stock to Mr. Dunavant on
June 6, 2000, which we agreed to register in the Registration Statement.
Additionally, until we have registered all of the shares of Common
Stock owned by Mr. Dunavant, including all of the new shares that we issue to
him under our settlement agreement as this section describes, each month we
must:
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<PAGE> 8
- Pay to Mr. Dunavant the sum of $12,750 in cash; and
- Issuance to Mr. Dunavant 25,000 additional shares of Common
Stock; however, if we have not registered the shares of
Common Stock owned by Mr. Dunavant on or before January 1,
2001, the number of shares of Common Stock that we must issue
to Mr. Dunavant each month will increase from 25,000 shares
to 50,000 shares beginning in January 2001.
Finally, we must also issue to, and register on behalf of Mr.
Dunavant, a number of additional new shares of Common Stock. The number of
shares that we must issue is based upon the date that our Registration
Statement covering his shares becomes effective, and the difference between the
price of our Common Stock as quoted on the OTC Bulletin Board(R) as of that
date and $23.00 per share. For additional information about this calculation,
please refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Results of Operation."
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<PAGE> 9
THE OFFERING
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<S> <C>
Common Stock Offered
by the Selling Shareholders......................... 2,443,477 shares(1)
Common Stock Outstanding
After this Offering................................. 22,836,479 shares(2)
Dividend Policy..................................... We do not expect to pay dividends on our Common
Stock in the foreseeable future. We anticipate that
we will retain all future earnings, if any,
generated from our operations to develop and expand
our business.
Use of Proceeds..................................... We will not receive any proceeds from the sale of
Common Stock by the Selling Shareholders.
OTC Bulletin Board(R) Symbol........................ HSNSE(3)
</TABLE>
For additional details about our securities, please read the section entitled
"Description of Capital Stock" beginning on page 68.
-----------------------------
(1) This figure represents the total of the 1,728,477 shares of our Common
Stock that are currently issued and outstanding, plus the 715,000
shares of Common Stock that we expect to issue. The latter number
consists of the 600,000 shares of Common Stock that we expect to issue
under the terms of our Settlement Agreement with Mr. Dunavant on or
before the date on which the Registration Statement becomes effective,
plus the 115,000 shares of Common Stock that underlie options held by
two Selling Shareholders.
(2) On September 30, 2000, we had 22,121,479 shares of Common Stock issued
and outstanding. This figure assumes that we will issue a total of
715,000 new shares of Common Stock on or before the date on which the
Registration Statement becomes effective, described in Footnote No. 1
above. This figure excludes:
- Any issuance of shares for stock options not included in the
115,000 figure described in Footnote No. 1 above; and
- Any issuance of shares from the conversion of our outstanding
Series A Convertible Preferred Stock.
(3) Our Common Stock is quoted on the OTC Bulletin Board(R) under the
symbol "HSNSE." On April 17, 2000, the National Association of
Securities Dealers, Inc. added the "E" to the end of our symbol. This
fifth character is a warning indicating that we are not current in our
reporting obligations to the Securities and Exchange Commission, and
consequently, the OTC Bulletin Board(R) may cease quoting our Common
Stock at any time. The NASD has scheduled a hearing for October 19,
2000 to determine whether our securities may continue to be quoted on
the OTC Bulletin Board(R). On October 12, 2000, the last sale price of
our shares as reported on the OTC Bulletin Board(R) was $5.00 per
share.
-6-
<PAGE> 10
SUMMARY FINANCIAL DATA
Below is a summary of the more complete financial information that our
Financial Statements appearing elsewhere in this Prospectus provide. You should
read this financial data together with the information contained in the section
titled "Management's Discussion and Analysis of Financial Conditions and
Results of Operations" beginning on page 22 and our historical Financial
Statements and related notes included elsewhere in this Prospectus.
We derived our Statement of Operations Data for the years ended 1998
and 1999 and the Balance Sheet Data as of December 31, 1998 and 1999 from our
audited Financial Statements included in this Prospectus. We derived our
Statement of Operations Data for the six months ended June 30, 1999 and June
30, 2000 and the Balance Sheet Data at June 30, 1999 and June 30, 2000 from our
unaudited Financial Statements included in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999 2000
-------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: (UNAUDITED)
<S> <C> <C> <C> <C>
Selling, general and administrative expenses $ 374,841 $ 7,515,797 $ 4,058,232 $ 2,132,823
Loss contingency -- -- -- 9,166,875
Interest expense (income), net -- 2,655,749 -- (16,952)
-------------------------------------------------------------------------
Loss from continuing operations (374,841) (10,171,546) (4,058,232) (11,282,746)
Loss from discontinued operations (1,334,855) -- -- --
-------------------------------------------------------------------------
Net loss $(1,709,696) $(10,171,546) $(4,058,232) $(11,282,746)
=========================================================================
Net loss applicable to common shareholders:
Net loss $(1,709,696) $(10,171,546) $(4,058,232) $(11,282,746)
=========================================================================
Beneficial conversion feature of preferred
stock -- -- -- (294,900)
Preferred stock dividends -- -- -- (53,333)
-------------------------------------------------------------------------
Net loss applicable to common shareholders $(1,709,696) $(10,171,546) $(4,058,232) $(11,630,979)
Per share amounts (basic and diluted):
Loss applicable to common shareholders
from continuing operations $ (0.03) $ (0.53) $ (0.24) $ (0.55)
Loss applicable to common shareholders
from discontinued operations (0.11) -- -- --
-------------------------------------------------------------------------
Net loss $ (0.14) $ (0.53) $ (0.24) $ (0.55)
=========================================================================
Weighted average shares outstanding 11,898,867 19,080,492 17,011,596 21,135,597
=========================================================================
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999 1999 2000
-------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash and Cash Equivalents $ 18,609 $ 248,740 $ 26,752 $ 380,475
Total Assets $ 26,168 $ 6,674,712 $ 4,110,295 $ 6,813,168
Total Shareholders' (Deficit) Equity $ (277,847) $ 5,185,021 $(4,336,079) $ (3,155,441)
</TABLE>
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<PAGE> 11
RISK FACTORS
In addition to the other information contained in or incorporated by
reference into this Prospectus, you should carefully consider the following
risk factors, together with all of the other information included in this
Prospectus, before deciding whether to purchase our Common Stock. The risks and
uncertainties described below are not the only ones we face. If any of the
events discussed in this Prospectus actually occur, our business, financial
condition, and results of operations could be materially adversely affected;
the trading price of our Common Stock could decline significantly, and you
could lose all or a part of your investment.
- WE MUST ENHANCE OUR ORIGINAL SOFTWARE AND TECHNOLOGY TO PROVIDE
COMPETITIVE MEDIA DISTRIBUTION SERVICES.
Our original Media Distribution service, Rich Media Direct 1.0(TM),
enables us to transmit multimedia files as e-mail attachments, which recipients
must first download before they can begin to view. While this waiting time
varies, it is sometimes so long that viewers become dissatisfied. To be
competitive, we must upgrade our technology so that e-mail recipients can begin
viewing our multimedia transmissions as soon as they open our e-mail messages -
a feature known as "streaming" - which we plan to include in our next
generation of Rich Media Direct(SM) platform in the fourth quarter of 2000. We
believe that the technology we have already licensed from All Video Network
Inc.(TM) will solve this problem; however, we may need to purchase additional
software and technology that we can transmit data even faster in the future.
- WE RELY ON OTHERS TO DEVELOP AND INTEGRATE THE SOFTWARE AND TECHNOLOGY
WE REQUIRE TO IMPLEMENT OUR BUSINESS PLAN.
We do not have software or other technology development capability,
and we rely on third parties to develop and integrate all of the enhancements
and new media compression and other technology that we require to implement our
business plan.
Because we have no software developers on our staff, we heavily depend
upon the professional services of our systems integrator, NexGenix, Inc., as
well as other third-party software developers.
Unfavorable events affecting our third-party software and technology
suppliers that delay or prevent development or delivery of their products will
likely have a similar adverse effect on us. Additionally, if our third-party
suppliers stop developing the software products and technology that we plan to
use, we may be unable to implement our business plan unless we are able to
acquire compatible software and technology products from another third-party
supplier.
- IF OUR SUPPLIERS CHANGE THEIR BUSINESS PLANS, WE MAY NOT RECEIVE IN THE
FUTURE THE SOFTWARE OR TECHNOLOGY WE NEED TO IMPLEMENT OUR BUSINESS
PLAN IN THE FUTURE.
Our third-party suppliers could decide to dedicate their development
resources to future applications that are not useful to us. In that case, the
improvements to the software and technology that we need to remain competitive
may not be developed.
- ONE OF OUR TECHNOLOGY SUPPLIERS HAS NO CONTRACTUAL OBLIGATION TO
DELIVER NEW OR ENHANCED TECHNOLOGY.
Our agreements with Summus grant us non-exclusive rights to specific
software and upgrades to the software (if and when Summus may choose to develop
upgrades); however, these agreements create no contractual obligation by Summus
to develop any technology for us other than MaxxSystem(TM).
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- WE HAVE LIMITED, NON-EXCLUSIVE RIGHTS TO SOME OF OUR THIRD-PARTY
SUPPLIERS' SOFTWARE AND TECHNOLOGY.
Our rights to our third-party suppliers' software and technology are
limited to the specific rights stated in our licensing and services agreements
with those third-parties. Additionally, with the exception of our two-year
exclusive license with All Video Network, our rights under these agreements are
mostly non-exclusive. Most of our third-party suppliers retain ownership of
their intellectual property rights related to the software products and
technology that we license. Typically, we license third-parties' products for
only finite periods of time, and we may not modify or sell their products, nor
may we sublicense them to other third parties.
- OUR RELATIONSHIPS WITH THIRD-PARTY SOFTWARE AND TECHNOLOGY SUPPLIERS
MAY PREVENT US FROM ENTERING INTO BUSINESS AGREEMENTS WITH OTHER
COMPANIES.
It may be in our interest to enter into relationships with companies
that compete with our third-party technology suppliers (All Video Network,
E.piphany, NexGenix, Enflow, and Summus) or that otherwise would not want to
have a relationship with us because of our relationship with these third-party
software and technology suppliers. Our close relationship with these
third-party software and technology suppliers and the overlap in our Board of
Directors with Summus' Board of Directors could therefore cause us to miss
opportunities to enter into alliances with other companies that would allow us
to generate revenue.
- CONFLICTS OF INTEREST WITH SUMMUS MAY LIMIT OUR OPPORTUNITIES AND HARM
OUR ABILITY TO GENERATE REVENUE.
As of September 30, 2000, Summus held 8,389,360 shares, or 37.9%, of
our Common Stock (32.7% 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, other holders of our Common Stock.
Conflicts of interest between Summus and us, and our respective
Directors and Officers, may limit our ability to implement our business plan.
The fiduciary duty Summus' officers have to Summus obligates them to act in
Summus' financial interests, which may be adverse to our financial interests in
some cases. If revenue-generating opportunities can be presented to either
Summus or us, but not to both companies, then Summus affiliates could possibly
have duties or incentives to act to our detriment. Currently, we have no formal
policy to resolve conflicts that may arise between Summus and us.
Our Board of Directors presently consists of five members, one of whom
is a Summus officer - Dr. Bjorn Jawerth. As of September 30, 2000, Dr. Jawerth,
the Chairman of our Board of Directors, beneficially owned 37.9% (32.7% on a
fully diluted basis) of Summus' outstanding shares. In addition, our Executive
Vice President and Secretary, Alan R. Kleinmaier, owns 5,000 shares of Summus
stock and received an additional 5,000 restricted shares, on which the
restrictions are expected to lapse in December 2000 if Summus meets scheduled
performance objectives.
Summus previously employed both Mr. Kleinmaier and Andrew L. Fox, our
President and Chief Executive Officer; however, these two individuals no longer
have any fiduciary duties to Summus.
- OUR SHAREHOLDERS WILL NOT BE ABLE TO EXERCISE CONTROL BECAUSE SUMMUS
CONTROLS 9,669,027 SHARES, OR 43.7%, OF OUR COMMON STOCK.
As of September 30, 2000, Summus, our largest shareholder and an
important third-party software and technology supplier, owned 8,389,360 shares,
(37.9%), of our Common Stock (32.7% on a fully diluted basis).
Dr. Bjorn Jawerth, Summus' founder and Chairman of the Board,
beneficially owns and exercises control over all of the shares of our Common
Stock owned by Summus - approximately 8,389,360 shares, (37.9%) of our
outstanding Common Stock (32.7% on a fully diluted basis).
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Summus can also vote an additional 1,279,667 shares of our Common Stock
under voting agreements with and/or proxies from other shareholders. Summus'
and Dr. Jawerth's total voting power is 9,669,027 shares (43.7%), of our
outstanding Common Stock (37.6% on a fully diluted basis). As a result, Summus
and Dr. Jawerth will have the power to:
- Elect, or defeat the election of, our Directors;
- Amend, or prevent amendment of, our Articles of Incorporation
or bylaws;
- Effect, or prevent, a merger, sale of assets or other
corporate transaction; and
- Control the outcome of any other matter submitted to the
shareholders for vote.
- SALES OF OUR COMMON STOCK MAY HAVE AN ADVERSE EFFECT ON THE MARKET
PRICE OF OUR SHARES.
As of September 30, 2000, Summus owns 8,389,360 shares, or 37.9%, of
our Common Stock. (32.7% on a fully diluted basis). Summus has sold 2,483,000
shares of our Common Stock since August 25, 1999 for prices ranging from $1.35
to $8.50 per share. Our shares are Summus' primary asset, and we expect that
Summus will sell more shares of our Common Stock in order to finance its own
operations. Future sales of our Common Stock by Summus, or others, could
adversely cause the market price of our Common Stock to decline by increasing
the supply of our shares available for public sale. The number of shares of our
Common Stock Summus has available for public sale is the number of shares
Summus may sell under Rule 144 or another exemption to the securities laws.
- THE OTC BULLETIN BOARD(R) MAY CEASE QUOTING OUR COMMON STOCK, WHICH
COULD RESULT IN A SEVERE LOSS OF LIQUIDITY AND VALUE.
Our Common Stock is quoted on the OTC Bulletin Board(R) under the
symbol "HSNSE." The OTC Bulletin Board(R) is a regulated quotation service
maintained by the National Association of Securities Dealers, Inc. (the NASD"),
which displays real-time quotes, last-sale prices, and trading volume
information about over-the-counter securities.
On January 4, 1999, the United States Securities and Exchange
Commission approved new eligibility rules limiting quotations on the OTC
Bulletin Board(R) to the securities of issuers that are current in their
reports filed with the Commission or other regulatory authorities. Because we
did not timely clear the Commission's comments on all of our required reports,
on May 17, 2000, the NASD removed our Common Stock from quotation on the OTC
Bulletin Board(R). In response, we successfully obtained a temporary stay of
the NASD's removal of our Common Stock from the Commission, and the OTC
Bulletin Board(R) has continued to quote our Common Stock since the grant of
the temporary stay.
The NASD has scheduled a hearing for October 19, 2000 to determine the
eligibility of our securities for quotation on the OTC Bulletin Board(R). We
had previously requested this hearing in May 2000, but the NASD denied our
request and terminated OTC Bulletin Board(R) quotation of our Common Stock
without a hearing on May 17, 2000. After the NASD scheduled the October 19,
2000 hearing as we had previously requested, the Commission remanded this
matter to the NASD for resolution.
We have now filed amendments to our Form 8-K previously filed on May
8, 2000, our Form 10-Q for the quarter ended June 30, 2000, and the
Registration Statement of which this Prospectus is a part with the Commission.
Although we cannot guarantee that the Commission's staff will not have
additional comments, we believe that our amendments substantially address all
of the Commission's prior comments about these documents.
Based on these filings, we will seek to convince the NASD that we are
close to clearing the Commission's comments, and we will ask the NASD hearing
panel to grant us additional time to clear those comments. In the event that
the NASD does not grant us additional time to clear those comments, we will
appeal the NASD's decision and seek a stay of the NASD's order from the
Commission. Failing that, we expect that our Common Stock would
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trade on the "pink sheets," and we will seek reinstatement to the OTC Bulletin
Board(R) as quickly as possible after clearing all of the Commission's
comments.
Until the NASD makes its decision, our Common Stock will continue to
trade on the OTC Bulletin Board(R) under the symbol "HSNSE."
- THE VALUE OF OUR STOCK MAY BE VOLATILE DUE TO MARKET AND INDUSTRY
RELATED FACTORS AND OUR PRESENCE ON THE OTC BULLETIN BOARD(R).
The stock market in general, the OTC Bulletin Board(R), and the market
for Internet and technology companies' Securities 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. Additionally, the trading prices of many
technology companies' securities, having reached historical "highs," have
experienced price fluctuations as a result of general market declines in these
sectors in recent months.
The OTC Bulletin Board(R), an electronic quotation service, quotes our
shares. The OTC Bulletin Board(R) does not impose listing standards or
requirements, does not provide automatic trade executions, and does not
maintain relationships with quoted issuers. Approximately 17 broker-dealer
firms are currently market makers for our Common Stock. Issuers whose
securities are quoted on the OTC Bulletin Board(R) may experience a loss of
market makers, lack of readily available "bid" and "asked" prices for their
securities, a greater spread between the "bid" and "asked" price of their
securities, and a general loss of liquidity in their securities. In addition,
many investors have policies against purchasing or holding OTC Bulletin
Board(R) securities. Both the trading volume and the market value of our Common
Stock have been, and will continue to be, affected by trading on the OTC
Bulletin Board(R).
Furthermore, as an OTC Bulletin Board(R) company, the market price of
our securities may 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 shareholders (including Summus and the Selling Shareholders who
may sell their shares using this Prospectus), trading by "short-sellers", and
other market factors may decrease the market price of our securities. With the
potential for substantially lower trading volumes that may occur because our
securities trade on the OTC Bulletin Board(R), these factors listed above could
have an even greater adverse impact on the market price of our securities.
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
October 12, 2000, the price of our Common Stock ranged from $2.625 to $31.875
per share, and traded at $5.00 at the close of business on October 12, 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;
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- Additions or departures of key personnel; and
- Sales of our capital stock.
- OUR BRIEF OPERATING HISTORY MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS.
Although we were incorporated in 1984, we have a limited operating
history because we had no significant operations until the third quarter of
1999, when we began preparing to enter the Media Creation and Media
Distribution services market. As a result, we have extremely limited financial
results on which you can base predictions about our future performance. Our
business strategy may be unsuccessful, and we may be unable to address the
risks that we face in a cost-effective manner, if at all. Our inability to
successfully address these risks will harm our business. We face numerous risks
and uncertainties, including:
- Market acceptance of our services is not established, and
there is no indication that even if our services are
established, that they could become profitable;
- 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; and
- There is no evidence that we can successfully compete with
any of our competitors.
- OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY.
As a result of our brief operating history and the rapidly changing
nature of the markets in which we compete, our quarterly and annual revenues
and operating results are likely to fluctuate from period to period. We expect
that we will increase the amount of revenues from the work that we do for our
customers. This work will be done on a project-by-project basis. Our ability to
succeed financially will depend on our ability to successfully complete these
projects using our Media Creation and Media Distribution services and our
prospective customers' willingness and ability to pay us in a timely manner.
In addition, because the market for our services is relatively new and
rapidly changing, it is difficult to predict our future financial results. We
are basing our sales and marketing efforts, and business expenditures
generally, on predictions about developments for media creation and media
distribution services. To the extent that these predictions prove inaccurate,
our revenues and operating expenses may fluctuate. For these reasons, you
should not rely on period-to-period comparisons of our financial results as
indications of our future results. Our future operating results could fall
below the expectations of 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.
Some of the many factors that may influence our operating results are
beyond our control, including:
- The demand for Internet e-mail advertising;
- The emergence and success of new and existing competitors;
and
- The cost of obtaining capital.
Other factors influencing our operating results may be within our
control, 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;
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- 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 new
businesses, software, and technology.
- WE ARE OPERATING AT A DEFICIT, AND OUR AUDITORS HAVE EXPRESSED
SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN.
We have generated only nominal revenue, and we may never become
profitable. As of September 30, 2000, we had an accumulated deficit of
approximately $25.5 million. In 1999 and 1998, we lost $10.2 million and $1.6
million, respectively. For the six months ended June 30, 2000, we lost $11.2
million.
We may continue to incur additional operating losses for an extended
period of time as we continue to develop services. See "Independent Auditors'
Report."
- WE LACK SUFFICIENT FINANCIAL RESOURCES TO IMPLEMENT OUR BUSINESS PLAN.
On September 30, 2000, we had approximately $500,000 of cash, and we
currently have only enough cash to continue our operations until December 2000.
Therefore, to implement our business plan, we will need to raise additional
capital in the near future. We plan to raise this capital through a private
placement of our capital stock to institutional investors; however, we cannot
guarantee that we will be able to raise capital on terms that are favorable to
us. We may be forced to sell shares of our Common Stock at prices below the
market price as quoted on the OTC Bulletin Board(R). Future sales of our
capital stock to finance our business plan will dilute our existing
shareholders' ownership.
- WE MAY BE UNABLE TO SUCCESSFULLY COMPETE IN THE MEDIA CREATION AND
MEDIA DISTRIBUTION MARKETS.
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 media creation and media distribution services that compete with
our services may be more attractive to advertisers due to price, quality,
technology and capacity, which would harm our ability to generate revenue.
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.
- WE MAY BE UNABLE TO SUCCESSFULLY COMPETE WITH OTHER COMPANIES THAT
OPERATE IN THE BROADER MEDIA CREATION AND DELIVERY MARKETS.
Our Media Creation and Media Distribution services will compete for
advertisers with other media such as television, radio and print. 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.
Because we only offer one kind of advertising medium - video
commercials through e-mail - we may not be able to compete with companies who
distribute advertisements through the multiple media outlets described above.
For example, a company that generates revenue from placing advertisements on
television, radio, magazines as well as the Internet may be able to spread its
risks better than we can because we are limited to one type of communication -
Internet-based media.
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- WE MAY NOT SUCCESSFULLY DEVELOP NEW SERVICES.
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 our 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 Media Creation and Media Distribution
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 TO IMPLEMENT OUR BUSINESS PLAN.
Our operations depend on our ability to attract, train and retain
qualified personnel -- specifically those with management and service provider
skills. In particular, we continue to hire skilled technology employees to
establish our service business. Competition for qualified personnel is intense,
particularly where we are located in Raleigh, North Carolina near the Research
Triangle Park, Durham, and Chapel Hill, North Carolina.
In the Internet and high-technology industries, candidates for
employment consider the value of stock options that they may receive. As a
result of potential volatility in our stock price because we are an OTC Bulletin
Board(R) company, we are at a disadvantage 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 ARE CURRENTLY ASSEMBLING AND TESTING THE EQUIPMENT AND SYSTEMS TO
IMPLEMENT OUR BUSINESS PLAN.
We are entering a new market with a new business plan. We are currently
in the process of assembling and testing the underlying infrastructure and
service network that we intend to use to implement our business plan. 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 maintenance and upgrade of our existing information software
systems will require us to spend a minimum of approximately $543,750 over the
next 36 months.
- WE ARE CURRENTLY ASSEMBLING AND TESTING OUR NEW WEB SITE AND NETWORK
INFRASTRUCTURE THAT OUR BUSINESS REQUIRES TO SUCCEED.
A reduction in the performance, reliability and availability of our
website and network infrastructure, once we have completed assembly and testing,
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 by the end of the fourth quarter of 2000, we
will have a working web site and sufficient infrastructure to generate revenue,
although we cannot be certain when this web site will be functional, or that we
will generate revenue from our media distribution activity. In addition, fire,
flood, power loss, telecommunications failure, Internet breakdown, earthquake,
other natural disasters, and similar events could damage or interrupt our
systems and operations.
We will manage our electronic commerce and digital content distribution
activities using the sophisticated software and computer systems that we have
acquired, including software developed by E.piphany (as modified by Nexgenix)
and our computer hardware and server services from Enflow. We may encounter
delays in developing or upgrading these systems, and they may contain undetected
errors that could cause system failures. Any system error or failure that causes
interruption in availability of our services or content, or an increase in
response time, could result in a loss of potential or existing business services
customers, users, advertisers or content providers. If we
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suffer sustained or repeated interruptions, our services and web sites could be
less attractive to entities or individuals, and our business could be harmed.
A sudden and significant increase in traffic on our planned websites
could strain the capacity of the software, hardware and telecommunications
systems that we plan to use. This could lead to slower response times or system
failures.
Our operations will also depend, in part, on timely receipt of content
feeds from third parties or content providers whom we may hire in the future,
and any failure or delay in the transmission or receipt of content feeds could
disrupt our planned operations. In addition, many different factors could
temporarily interrupt our planned website 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. We are presently in the process of
obtaining business interruption insurance.
- 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 this 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. Our own or licensed
encryption and authentication technology may be compromised, breached or
otherwise be insufficient to secure customer information. For example, a hacker
could break-in to our system and misappropriate the recipient lists our
customers entrust to us or a virus could similarly cause our system to
inadvertently lose or disclose confidential information. Our computer and
communications infrastructure, once acquired, will be located at a single leased
facility in Raleigh. 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 also makes our business vulnerable to site specific
disturbances such as fire, natural disasters, or power-outages. It would also be
possible for a third party to circumvent our security measures and interrupt our
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 these breaches.
- WE INTEND TO RELY, IN PART, ON THIRD-PARTY CONTENT TO INCREASE MARKET
ACCEPTANCE OF OUR SERVICES.
Even though our wholly-owned subsidiary Douglas May & Co., Inc. will be
developing rich media content (content containing audio, video, images and
animation) for our customers as part of our Media Creation Services, we will
also rely on third parties to create media content for our customers, which we
will then distribute using Rich Media DirectSM. We and our anticipated future
advertisers and anticipated future media content creators intend to rely, in
part, 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 we can deliver and viewers can view using our
services. However, we cannot guarantee that third-party content providers will
decide to develop content that is compatible with our system. If they do not do
so, then we may not be able to generate revenue in our media distribution
activities.
- THE GROWTH OF OUR BUSINESS DEPENDS ON CONSUMERS' INCREASED USE OF THE
INTERNET FOR COMMUNICATIONS AND ELECTRONIC COMMERCE.
The growth of our business will depend on the continued growth of the
Internet as a medium for communications, electronic commerce, and advertising.
Our business will be harmed if Internet usage does not continue to grow,
particularly as a source of information and entertainment and as a vehicle for
trade in goods and services. Our success will also depend on the efforts of
third parties to develop the infrastructure and complementary products and
services necessary to maintain and expand the Internet as a viable commercial
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medium. The Internet may not become an accepted commercial medium for
broadcasting the same type of content that consumers are used to receiving
through television.
In addition, we believe that other issuances, 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.
- CHANGES IN NETWORK INFRASTRUCTURE, TRANSMISSION METHODS AND BROADBAND
TECHNOLOGIES POSE RISKS TO OUR BUSINESS.
It is possible that increased Internet usage may depend on the
availability of greater capacity or faster data transmission speeds (also known
as "broadband" transmission). As broadband access becomes widely available, we
believe it could present a significant business challenge for us. Development of
video commercial services for a broadband transmission infrastructure involves a
number of additional risks as discussed in the next paragraph. We have not yet
begun to develop video commercial services for broadband transmissions.
We intend to 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 third parties experience delays or difficulties establishing a widespread
broadband transmission infrastructure, or if heavy usage limits the broadband
experience, the release of our Media Creation and Media Distribution 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.
- WE ARE SUBJECT TO RISKS ASSOCIATED WITH GOVERNMENTAL REGULATION AND LEGAL
UNCERTAINTIES.
Few existing laws or regulations specifically apply to the Internet,
other than laws and regulations generally applicable to businesses. 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 concerning 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 additional 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 Congress enacts or court precedents create
additional laws or regulations, they may harm our business.
On October 28, 1998, Congress enacted the Digital Millennium Copyright
Act (the "DMCA"). 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 Internet-based media
distribution 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.
In October 1998, Congress also enacted the Child Online Protection Act and
the Child Online Privacy Protection Act (the "COPA"). The COPA imposes civil and
criminal penalties on persons distributing material
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<PAGE> 20
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 or disclose personal information from these
minors; however, we cannot predict how courts may interpret and enforce the
COPA, and future legislation similar to the COPA could subject us to potential
liability, which in turn could harm our business. These types of laws could also
limit the growth of the Internet generally and decrease the demand for our
services.
- ADDITIONAL SALES AND OTHER TAXES MAY BE IMPOSED UPON THE SALE OF OUR
SERVICES.
We collect and remit applicable taxes in connection with our Media
Creation Services. Our Media Distribution Services have generated only nominal
revenue to date. In October 1998, Congress enacted the Internet Tax Freedom Act
(the "ITFA"). 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 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 rights in
the services mark Rich Media Direct(SM). Although we do not believe that we have
suffered any material harm from misappropriation to date, we may be unable to
detect the unauthorized use of, or take appropriate steps to enforce our
trademark rights. We have filed a registration application for one of our
service marks, "Rich Media Direct," in the United States. In the future we may
apply to register our marks in Europe and Canada and other countries. However,
effective trademark protection may not be available in every country in which we
offer or intend to offer our products and services. Failure to adequately
protect our trademark rights could damage or even destroy our Rich Media
Direct(SM) brand name 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.
-17-
<PAGE> 21
USE OF PROCEEDS
The Selling Shareholders will receive all of the proceeds from the sale of
the Common Stock that may be sold using this Prospectus. We will not receive any
of the proceeds from the sale of these shares, except for the exercise price of
the options that some of these shares underlie.
PRICE RANGE OF OUR COMMON STOCK
Our Common Stock, $.001 par value, trades in the over-the-counter
market and is quoted on the OTC Bulletin Board(R).
The OTC Bulletin Board(R) is a regulated quotation service that
displays real-time quotes and volume information in over-the-counter equity
securities. The National Association of Securities Dealers, Inc. maintains the
OTC Bulletin Board(R); however, the NASD and the OTC Bulletin Board(R) do not
impose listing standards or requirements, do not provide automatic trade
executions, and do not maintain relationships with quoted issuers. Issuers whose
securities are quoted on the OTC Bulletin Board(R) may experience a loss of
market makers, lack of readily available "bid" and "asked" prices for their
securities, a greater spread between the "bid" and "asked" price of their
securities, and a loss of liquidity in their securities. In addition, some
investors have policies against purchasing or holding over-the-counter
securities. Trading on the OTC Bulletin Board(R) has, and will continue to,
materially affect both the trading volume and the market value of our Common
Stock.
From September 1998 to January 24, 1999, the OTC Bulletin Board(R)
quoted our shares under the symbol "ZZNT." From January 25, 1999 to April 17,
2000, the OTC Bulletin Board(R) quoted our shares under the symbol "HSNS." On
April 17, 2000, the NASD added the "E" to the end of our symbol. This fifth
character is a warning indicating that we are not current in our reporting
obligations to the Commission, and consequently, the OTC Bulletin Board(R) may
cease quoting our shares at any time.
On January 4, 1999, the United States Securities and Exchange
Commission approved new eligibility rules limiting quotations on the OTC
Bulletin Board(R) to the securities of issuers that are current in their reports
filed with the Commission or other regulatory authorities. Because we did not
timely clear the Commission's comments on all of our required reports, on May
17, 2000, the NASD removed our Common Stock from quotation on the OTC Bulletin
Board(R). In response, we successfully obtained a temporary stay of the NASD's
removal of our Common Stock from the Commission, and the OTC Bulletin Board(R)
has continued to quote our Common Stock since the grant of the temporary stay.
The NASD has scheduled a hearing for October 19, 2000 to determine the
eligibility of our securities for quotation on the OTC Bulletin Board(R). We had
previously requested this hearing in May 2000, but the NASD denied our request
and terminated OTC Bulletin Board(R) quotation of our Common Stock without a
hearing on May 17, 2000. After the NASD scheduled the October 19, 2000 hearing
as we had previously requested, the SEC remanded this matter to the NASD for
resolution.
We have now filed amendments to our Form 8-K previously filed on May 8,
2000, our Form 10-Q for the quarter ended June 30, 2000, and the Registration
Statement of which this Prospectus is a part 8 with the Commission. Although we
cannot guarantee that the Commission's staff will not have additional comments,
we believe that our amendments substantially address all of the Commission's
prior comments about these documents.
Based on these filings, we will seek to convince the NASD that we are
close to clearing the Commission's comments, and we will ask the NASD hearing
panel to grant us additional time to clear those comments. In the event that the
NASD does not grant us additional time to clear those comments, we will appeal
the NASD's decision and seek a stay of the NASD's order from the Commission.
Failing that, we expect that our Common Stock would trade on the "pink sheets,"
and we will seek reinstatement to the OTC Bulletin Board(R) as quickly as
possible after clearing all of the Commission's comments.
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<PAGE> 22
Until the NASD makes its decision, our Common Stock will continue to
trade on the OTC Bulletin Board(R) under the symbol "HSNSE."
The following table provides information about the high and low daily
bid prices of our Common Stock for each quarter during its entire trading
history on the OTC Bulletin Board(R). These quotations reflect inter-dealer
prices without markup, markdown, or commissions, and may not necessarily
represent actual transactions.
TRADING HISTORY OF OUR COMMON STOCK
<TABLE>
<CAPTION>
2000 LOW HIGH
---- ---------- ----------
<S> <C> <C>
First Quarter $ 6.750 $ 31.875
Second Quarter $ 3.000 $ 13.250
Third Quarter $ 5.938 $ 7.375
Fourth Quarter $ 4.750 $ 6.000
(through October
12, 2000)
1999 LOW HIGH
---- ---------- ----------
<S> <C> <C>
First Quarter $ 1.000 $ 6.250
Second Quarter $ 1.125 $ 4.875
Third Quarter $ 1.500 $ 6.625
Fourth Quarter $ 2.625 $ 18.25
1998 LOW HIGH
---- ---------- ----------
<S> <C> <C>
First Quarter Not Traded Not Traded
Second Quarter Not Traded Not Traded
Third Quarter $ 3.000 $ 8.250
Fourth Quarter $ 2.125 $ 6.125
</TABLE>
As of September 30, 2000, we had 154 record holders of our Common
Stock; 22,121,479 shares of Common Stock issued and outstanding; and 1,733,000
shares of Common Stock subject to outstanding options.
DIVIDEND POLICY
We have never paid any cash dividends on our Common Stock. We
anticipate that we will retain earnings, if any, to finance the growth and
development of our business. Therefore, we do not expect to pay cash dividends
on our Common Stock for the foreseeable future. Any future determination to pay
cash dividends will be at the discretion of our Board of Directors and will
depend upon our financial condition, operating results, capital requirements,
and whatever other factors that our Board of Directors determines are relevant.
-19-
<PAGE> 23
SELECTED FINANCIAL DATA
You should read the selected financial data below together with the
information contained in the section titled "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" beginning on page 22
and our historical Financial Statements and related notes included elsewhere in
this Prospectus.
We derived the Statement of Operations data for the years ended
December 31, 1998 and 1999 and the Balance Sheet data as of December 31, 1998
and December 31, 1999 from our audited Financial Statements included in this
document. We derived the Statements of Operation data for the six months ended
June 30, 1999 and June 30, 2000 and the Balance Sheet data at June 30, 1999 and
June 30, 2000 from the unaudited Financial Statements included in this document.
We have presented all amounts, except "per share" amounts, in dollars.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
---------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30,
1998 1999 1999 2000
---------------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: (UNAUDITED)
-----------------------------
<S> <C> <C> <C> <C>
Selling, general and administrative expenses $ 374,841 $ 7,515,797 $ 4,058,232 $ 2,132,823
Loss contingency -- -- -- 9,166,875
Interest expense (income), net -- 2,655,749 -- (16,952)
---------------------------------------------------------------------
Loss from continuing operations (374,841) (10,171,546) (4,058,232) (11,282,746)
Loss from discontinued operations (1,334,855) -- -- --
---------------------------------------------------------------------
Net loss $ (1,709,696) $(10,171,546) $ (4,058,232) $(11,282,746)
=====================================================================
Net loss applicable to common shareholders:
Net loss $ (1,709,696) $(10,171,546) $ (4,058,232) $(11,282,746)
Beneficial conversion feature of preferred -- -- -- (294,900)
stock
Preferred stock dividends -- -- -- (53,333)
---------------------------------------------------------------------
Net loss applicable to common shareholders $ (1,709,696) $(10,171,546) $ (4,058,232) $(11,630,979)
=====================================================================
Per share amounts (basic and diluted):
Loss applicable to common shareholders $ (0.03) $ (0.53) $ (0.24) $ (0.55)
from continuing operations
Loss applicable to common shareholders (0.11) -- -- --
from discontinued operations
---------------------------------------------------------------------
Net loss $ (0.14) $ (0.53) $ (0.24) $ (0.55)
=====================================================================
Weighted average shares outstanding 11,898,867 19,080,492 17,011,596 21,135,597
=====================================================================
<CAPTION>
BALANCE SHEET DATA:
DECEMBER 31 JUNE 30
1998 1999 1999 2000
---------------------------------------------------------------------
(UNAUDITED)
Cash and Cash Equivalents $ 18,609 $ 248,740 $ 26,752 $ 380,475
Total Assets $ 26,168 $ 6,674,712 $ 4,110,295 $ 6,813,168
Total Shareholders' (Deficit) Equity $ (277,847) $ 5,185,021 $ (4,336,079) $ (3,155,441)
=====================================================================
</TABLE>
-20-
<PAGE> 24
STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements. We have based
these forward-looking statements on our current expectations and projections
about future events. These forward-looking statements include, among other
things:
- The future development and growth of, and opportunities for
video commercial e-mail advertising, media creation, and media
distribution services, the Internet, and the on-line media
delivery market;
- The adoption of our planned services and technologies;
- Future domestic and international revenue opportunities;
- The establishment and future growth of our customer base;
- Our ability to successfully develop and introduce future
services;
- Our future expense levels (including cost of revenues,
research and development, sales and marketing and general and
administrative expenses);
- Our future sales and marketing efforts;
- Our future capital needs;
- The future of our relationships with All Video Network,
E.piphany, NexGenix, Enflow, Summus, and other companies;
- The effect of past and future acquisitions;
- The future effectiveness of our intellectual property rights
if we acquire these types of rights;
- The effect of any future legislation to which our business may
become subject; and
- The effect of any litigation in which we could become
involved.
The forward-looking statements included in this Prospectus are subject
to risks, uncertainties and assumptions about our company. Our actual results of
operations may differ materially from the forward-looking statements as a result
of, among other things, development of our services, competition, growth in
Internet advertising, and the availability of funding, and the other risk
factors described in the section entitled "Risk Factors" beginning on page 8. We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
unless required by law. Because of these risks, uncertainties and assumptions,
the forward-looking events discussed in this Prospectus might not occur.
-21-
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
Financial Statements and the related notes, which appear elsewhere in this
Prospectus. This section contains "forward-looking statements" that involve
risks and uncertainties. Our actual results could differ materially from the
results these forward-looking statements anticipate as a result of various
factors, including those discussed below and elsewhere in this document,
particularly in the "Risk Factors" section beginning on page 8.
OVERVIEW
We were a development stage company during 1998, 1999, and for the
first six months of 2000. Our accumulated deficit as a development stage company
through June 30, 2000 was $23.5 million. We ceased being a development stage
company in the third quarter of 2000 in connection with our acquisition of
Douglas May & Co., Inc. Our accumulated deficit as of September 30, 2000 is
$25.5 million. Our auditors have included in their audit opinion a qualification
that our financial condition raises substantial doubt about our ability to
continue as a going concern.
We anticipate that our Media Creation and Media Distribution Services
will generate additional revenues from:
- Hourly fees;
- Fixed-rate pricing;
- Flat fees; and
- Revenue-sharing agreements (with our customers and our
third-party software and technology suppliers).
We will recognize revenues from our Media Creation Services when the
services are performed. We will recognize revenues for our Media Distribution
Services when we initiate an e-mail campaign, when we deliver advertising or
other programming containing "rich media," and when we report the results (such
as "revenue" or "reach") of e-mail campaigns. We anticipate having revenue
sharing agreements with resellers and we have two potential resellers.
You should consider our prospects 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 Media Creation and Media Distribution
services to e-commerce companies, companies with websites, and
other entities interested in direct marketing activities using
the Internet;
- Generate sales of our complementary service offerings such as
content hosting, streaming media (immediately and steadily
delivering media through the Internet) from the hosted storage
location to the listener or viewer, voice-over-the-Internet
services and call center services;
- Add personnel to and begin operating our sales and marketing
programs in connection with our Rich Media DirectSM media
distribution service; and
- Establish our ability to resell our services through
third-party reseller channels.
-22-
<PAGE> 26
SIGNIFICANT CONTRACTUAL RELATIONSHIPS
Since January 2000, we have achieved the following key milestones that
are important to our business and our ability to generate revenue:
In February 2000, we entered into a Master Agreement with Summus, The
Master Agreement includes a Software License Agreement , a Software Maintenance
Agreement and a Revenue Sharing Agreement (collectively with the Master
Agreement and a letter agreement between Summus and us, dated March 13, 2000,
the "New Agreements"). The New Agreements entirely replace the Marketing License
Agreement and the related agreements incorporated by it or referenced by it, and
replace the various letter agreements between Summus and us concerning one
potential customer, Samsung Electronics of America, Inc. (collectively, the
"Terminated Agreements"). See "Business - Summus, Ltd. Overview."
On February 15, 2000, we signed a Letter of Intent with Samsung
Electronics of America, Inc. and Summus, Ltd. This agreement is for the purposes
of integrating and optimizing Summus Dynamic Wavelet(TM) compression methodology
onto Samsung's digital signal processor ("DSP") platform for sale as a
semiconductor component. We have not reached a definitive agreement as a result
of this Letter of Intent yet, and to date we have not derived any revenue from
this relationship.
With regards to the Samsung relationship, we acted as a marketing agent
for Summus. We were responsible for marketing Summus technology to Samsung and
developing the proposed business venture. As part of the Revenue Sharing
Agreement, we will receive the following revenue streams from any revenue
derived if Summus and Samsung sign an agreement:
- Year 1 - 50% of all revenue;
- Year 2 - 50% of all revenue;
- Year 3 - 40% of all revenue; and
- Years 4 through 6 - 20% of all revenue.
We entered into an agreement with Buy-It-Now.com, an online e-commerce
company. This contract required us to deliver media advertisements through Rich
Media Direct 1.0(TM) for Buy-It-Now e-commerce campaigns. We ran a trial
campaign for Buy-It-Now using our Rich Media Direct 1.0(TM) service, but to date
we have generated no revenue from this contract.
We have entered into a contract with WorldQuest Networks which
obligates us to deliver media advertisements through Rich Media Direct 1.0(TM)
for WorldQuest Networks' e-commerce campaigns. To date, we have generated no
revenue from this agreement.
We have entered into a contract with New Millennium Health Services
which obligates us to deliver media advertisements through Rich Media Direct
1.0(TM) for New Millennium Health Services' e-commerce campaigns. To date, we
have generated no revenue from this agreement.
We have entered into a contract with Learnkey which obligates us to
deliver media advertisements through Rich Media Direct 1.0(TM) for Learnkey's
e-commerce campaigns. To date, we have generated no revenue from this agreement.
We have entered into an agreement with Continental Airlines, Inc., to
run an internal corporate communications campaign to over 500 of its employees
using Rich Media Direct 1.0(TM). To date, we have generated $4,000 in revenue
from this campaign.
We have now licensed technology from All Video Network, Inc. which we
believe will allow us to deliver effectively the Media Distribution services
that we intend to provide. We have also licensed from E.piphany, Inc. e-mail
campaign management and customer response tracking software, and we have engaged
NexGenix, Inc., a
-23-
<PAGE> 27
professional systems integration firm, to customize E.piphany's software for us.
We recently received additional computers and other hardware that we purchased
from Hewlett-Packard, Inc., and we entered into an agreement with Enflow, Inc.,
a commercial hosting services company (or "server farm"), to store our content
on their computers and deliver it to our clients' designated recipients.
SIGNIFICANT SHARE TRANSACTIONS
- SALES OF OUR SERIES A CONVERTIBLE PREFERRED STOCK
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 gross
proceeds of $2,000,000 and net proceeds of $1,850,952. The investors who
purchased these shares were: F. van Lanschot Bankiers (100 shares); S.K. van Os
(250 shares); Insinger de Beaufort (250 shares); and AAA Trust (1,400 shares).
- ACQUISITION OF DOUGLAS MAY & CO.
In connection with this financing, we entered into a subscription
agreement in the amount of $250,000, which we collected in June 2000. The
holders of our Preferred Stock are unrelated and not affiliated with Summus
Ltd., us, or counterparties to any of our agreements. The rights of the Series A
Convertible Preferred Stock include the following rights:
- 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;
- The right to convert the Series A Convertible Preferred Stock
into shares of Common Stock at a conversion price of $14.24,
subject to antidilution adjustment in the case of Common Stock
dividends, splits and reorganizations; and
- 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 our company.
After March 1, 2002, we will 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. We have authorized a total of 10,000 shares of Series A
Convertible Preferred Stock. As of September 30, 2000, the 2,000 issued shares
of Series A Convertible Preferred Stock were convertible into 147,066 common
shares of our Common Stock.
- ADDITIONAL SECURITIES ISSUANCES
On July 25 and July 31, 2000, we sold 541,677 unregistered shares of
our Common Stock and issued warrants to purchase an additional 1,083,353 shares
of Common Stock for gross proceeds of $2,500,000. We committed to register the
541,677 shares under the Securities Act of 1933. 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, we issued 27,084
unregistered shares of our Common Stock as a placement fee and committed to also
register these shares under the Securities Act of 1933.
-24-
<PAGE> 28
ACQUISITIONS
- ACQUISITION OF J.S.J. CAPITAL CORP.
Under an Agreement and Plan of Merger dated April 18, 2000, with J.S.J.
Capital Corp., a Nevada corporation, we acquired all of J.S.J. Capital's
outstanding shares of common stock from its sole stockholder in exchange for
50,000 restricted shares of our Common Stock in a transaction in which we were
the successor corporation.
- ACQUISITION OF DOUGLAS MAY & CO., INC.
Effective July 10, 2000, we acquired a marketing and advertising
company, Douglas May & Co., Inc., a Texas corporation ("DMC"), in exchange for
shares of our Common Stock. We are holding and operating DMC as a wholly-owned
subsidiary. Mr. Douglas May, DMC's sole shareholder, joined our company as an
employee and is currently our Executive Vice President and Chief Creative
Officer. Before this transaction, Mr. May was not one of our shareholders and
had no relations with us.
In exchange for his conveying to us of all of DMC's outstanding capital
stock, we issued a total of 183,070 shares of Common Stock to Mr. May in three
installments as follows:
- We issued 50,000 shares of Common Stock, coupled with a
guarantee that if the OTC Bulletin Board(R) trading price of
our Common Stock on July 10, 2001 is less than $10.00 per
share, we will issue additional shares of Common Stock to make
up the difference in value. The guaranteed value of these
shares is $500,000. Based upon the closing price of our shares
as quoted by the OTC Bulletin Board(R), the market value of
these shares was $318,750 on July 10, 2000 and $250,000 on
October 12, 2000;
- We issued 45,572 shares of Common Stock, coupled with
contractual obligations requiring us to register these shares.
Since we did not register these shares by October 10, 2000, we
must, at Mr. May's election, repurchase these shares from him
by releasing funds escrowed under our acquisition agreement.
Based upon the closing price of our shares as quoted by the
OTC Bulletin Board(R), the market value of these shares was
$290,522 on July 10, 2000 and $227,860 on October 12, 2000. As
of the date of this Prospectus, Mr. May has not elected to
have us repurchase his shares; and
- We issued 87,498 shares of Common Stock, coupled with
contractual obligations requiring us to register these shares
under the Securities Act of 1933. If we do not register these
shares by January 1, 2001, we must, at Mr. May's election,
repurchase these shares from him by making six equal
installment payments to him in cash totaling $576,000. Based
upon the closing price of our shares as quoted by the OTC
Bulletin Board(R), the market value of these shares was
$557,800 on July 10, 2000 and $437,490 on October 12, 2000.
- NON-BINDING LETTER OF INTENT WITH SUMMUS, LTD.
On August 31, 2000, we signed a non-binding Letter of Intent to
purchase all of Summus' assets, including Summus' technology and intellectual
property rights. This agreement required both parties to use their best efforts
to consummate this transaction on or before September 15, 2000. In connection
with this Letter of Intent, we loaned Summus $500,000 on August 31, 2000.
Although the September 15, 2000 deadline has now passed, we are continuing to
negotiate with Summus, and we are continuing to evaluate whether to consummate
the transactions contemplated by the August 31, 2000, Letter of Intent at some
point in the future.
-25-
<PAGE> 29
- RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO THE SIX MONTHS ENDED JUNE
30, 1999.
REVENUE
We had no revenue during the six month periods ended June 30, 2000 or
June 30, 1999. During the six month period ended June 30, 2000, we launched Rich
Media Direct 1.0TM, and we have been working with potential customers to sign
our contracts for services. During the six month period ended June 30, 1999 we
had neither products to sell, nor the capacity to provide services.
INTEREST INCOME
Interest income for the six months ended June 30, 2000 of $16,952
represents interest earnings on cash balances in demand deposit accounts. During
the six months ended June 30, 1999, we did not earn any interest income.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the six months ended June 30,
2000 were $2,132,823 compared to $4,058,232 for the six months ended June 30,
1999. General and administrative expenses for the six months ended June 30, 2000
includes $868,938 of legal and accounting services. Of this amount, $400,000
relates to our merger with JSJ Capital, and the remaining portion is
attributable to professional fees associated with Securities and Exchange
Commission reporting matters and other general corporate activity. The remaining
balance of the general and administrative expenses in 2000 is comprised of
salaries and other operating costs. General and administrative expenses for the
six months ended June 30, 1999 included non-cash costs of $3,640,000 related to
the granting of stock options to acquire 1,825,000 shares of common stock for
services rendered. These options were vested upon issuance and had nominal
exercise prices. The remaining balance of the general and administrative
expenses in 1999 is comprised of salaries and other operating costs.
LOSS CONTINGENCY
In June 2000, we entered into settlement agreement with William R.
Dunavant and Michael Cimino to resolve a lawsuit filed in Florida. Under this
agreement, we agreed to, among other things, register 350,000 shares of Common
Stock owned by Mr. Dunavant under the Securities Act of 1933, which we are doing
by filing the Registration Statement of which this Prospectus is a part.
We also issued 175,000 new shares of Common Stock to Mr. Dunavant on
June 6, 2000, which we agreed to register in the Registration Statement.
Additionally, until we have registered all of the shares of Common
Stock owned by Mr. Dunavant, including all of the new shares that we issue to
him under our settlement agreement as this section describes, each month we
must:
- Pay to Mr. Dunavant the sum of $12,750 in cash; and
- Issuance to Mr. Dunavant 25,000 additional shares of Common
Stock; however, if we have not registered the shares of Common
Stock owned by Mr. Dunavant on or before January 1, 2001, the
number of shares of Common Stock that we must issue to Mr.
Dunavant each month will increase from 25,000 shares to 50,000
shares beginning in January 2001.
Finally, we must also issue to, and register on behalf of Mr. Dunavant,
a number of additional new shares of Common Stock. The number of shares that we
must issue is equal to the difference between:
(a) the product obtained by multiplying $23.00 by the sum of:
-26-
<PAGE> 30
(i) 400,000, plus
(ii) 25,000 shares per month from June 6, 2000 until the
Registration Statement of which this Prospectus is
declared effective, plus
(iii) 50,000 shares a month for each month after January 1,
2001 until the Registration Statement is declared
effective, if necessary; and
(b) the product obtained by multiplying the ten-day average
closing price of High Speed's Common Stock as of the effective
date of the Registration Statement, by the sum of:
(i) 450,000, plus
(ii) any additional shares received by Mr. Dunavant
pursuant to items (a) (i), (ii) and (iii) above.
Based on the terms of this settlement agreement, we accrued a loss of
$9,166,875 during the six months ended June 30, 2000. This amount represents
management's best estimate of the ultimate outcome of this matter. The most
significant component of this amount relates to the estimate of the value of the
additional shares we must issue to Mr. Dunavant based on the difference between
the traded value of our Common Stock on the date the registration statement
becomes effective and $23 per share. We calculate this loss accrual using the
closing price of our Common Stock on June 30, 2000 as the estimated closing
price on the date the registration statement covering Mr. Dunavant's shares will
become effective. Prospectively, this accrual will increase or decrease at the
end of each accounting period through completion of this process based on the
closing price of our Common Stock.
NET LOSS
As a result of the factors discussed above, our net loss was
$11,282,746 and $4,058,232 for the six month periods ended June 30, 2000 and
June 30, 1999, respectively.
YEAR ENDED DECEMBER 31, 1999 AS COMPARED TO THE YEAR ENDED DECEMBER 31,
1998.
REVENUE
We had no revenue during the years ended 1999 or 1998 because we had
neither products to sell, nor the capacity to provide services.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the year ended December 31,
1999 were $7,515,797 compared to $374,841 for the year ended December 31, 1998.
General and administrative expenses for 1999 include $5,905,164 related to
non-cash compensation and consulting costs related to the granting of stock
options and stock awards to acquire 2,040,000 shares of common stock to
employees and stockholders for services rendered and the execution of stock
subscription agreements to acquire 250,000 shares of Common Stock with per share
selling prices set below the traded value of the common stock. The stock options
and stock awards were vested upon issuance and had nominal exercise prices. Of
the 1999 general and administrative expenses, $800,000 relates to the initial
accrual associated to the Dunavant lawsuit and settlement. The remaining balance
of the 1999 general and administrative expenses relates to salary and other
operating costs. General and administrative expenses for 1998 totaled $374,841,
representing salary and other operating costs.
INTEREST EXPENSE
Non-cash interest expense of $2,655,749 was incurred relating to the
issuance of convertible debentures during 1999 that included common stock
conversion prices, which were below the fair market value of the common stock on
the date the debentures were issued. Since all of the convertible debentures
were convertible into common stock upon issuance, the beneficial conversion
feature of $2,655,749, which reflects the difference between the
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debentures' conversion prices and the fair market value of the traded common
stock, has been recorded as non-cash interest expense during 1999. There were
debentures issued during 1998.
LOSS FROM DISCONTINUED OPERATIONS
The loss for the year ended December 31, 1998 reflects discontinuing
the operations of Marketers World. Due to our inability to acquire in a timely
the products and software necessary to commence its planned principle
operations, coupled with our limited financial resources at that time, our
management made the decision to make no further investments in Marketers World
and to terminate all operations of Marketers World by the end of 1998. The loss
on discontinued operations recorded in 1998 totaled $1,334,855. We incurred no
costs after 1998 relating to the operations of Marketers World.
NET LOSS
As a result of the factors discussed above, our net loss for the year
ended December 31, 1999 was $10,717,546 and our net loss for the year ended
December 31, 1998 was $1,709,696.
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 $9,968,609 resulting in a working
capital deficiency of $9,522,133.
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 and services.
Net cash provided by financing activities of $1,750,730 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 reduction in the amounts due to related
parties of $100,222.
Net cash used in operating activities from operations during the six
months ended June 30, 1999 of $281,919, resulted from the payment of salaries
and other operating expenses. Net cash provided by financing activities for the
six months ended June 30, 1999 resulted from the sale of Common Stock and
advances from related parties.
Net cash used in operating activities of $885,885 during the year ended
December 31, 1999 reflects cash paid for salaries and our other operating
expenses plus $60,000 paid to Summus as a prepaid royalty. In connection with
the Marketing License Agreement we executed with Summus in February 1999, we
committed to pay Summus $3.0 million in the form of prepaid royalties in various
cash installments. We made the final installment to Summus by issuing 1.5
million shares of our Common Stock. Based on the traded value of our Common
Stock on the date these 1.5 million shares were issued, these 1.5 million shares
were valued at $2,278,125. Therefore, the total value of the royalties we
pre-paid to Summus as of December 31, 1999 is $4,528,125, which consists of:
- The issuance of 1,500,000 shares of our Common Stock, valued
at $2,278,125;
- The $60,000 cash payment we made to Summus; and
- Various cash payments, totalling $2,190,000, were paid by a
shareholder, Mr. Bradford Richdale, to Summus on our behalf
and for which we issued debentures that were converted into
3,968,640 shares of Common Stock.
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At the time Mr. Richdale made these payments to Summus, he was our
primary shareholder; however he did not have any ownership interest in Summus.
During the time period in which prepaid royalties were made, there was no
cross-ownership between Summus and us.
Net cash used in investing activities of $106,052 during the year ended
December 31, 1999 include $4,052 paid for office furniture, and $102,000 paid in
connection with the acquisition of our ownership interest in Summus. Our total
investment in Summus is $1,894,127, which consists of a cash payment of $102,000
and the issuance of 795,001 shares of Common Stock valued at $1,792,127.
Net cash provided by financing activities of $1,222,068 during the year
ended December 31, 1999 resulted from the proceeds of the sale of Common Stock
of $242,062, proceeds from the issuance of convertible debentures of $558,640
and net advances from shareholders totaling $421,366. During 1999, $2,097,109 of
convertible debentures were issued to a shareholder as partial settlement for
cash advances made by the shareholder to Summus, on our behalf, for the payment
of royalties.
Net cash used in operating activities from continuing operations during
the year ended December 31, 1998 of $291,685, resulted from the payment of
salaries and other operating costs. Net cash used in discontinued operations of
$1,334,855 represents the net cash used to operate Marketers World during 1998.
Net investing activities for the year ended December 31, 1998 included the
purchase of equipment. Net financing activities during the year ended December
31, 1998 of $1,626,407 included proceeds from the sale of Common Stock of
$317,000, shareholder capital contributions of $1,091,648 and shareholder
advances of $445,378, less $227,619 used to acquire 38,500 shares of our stock.
On February 28, 2000, we sold, 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. This amount included a stock subscription
receivable of $250,000, which was collected in June 2000.
Also, on July 25 and July 31, 2000, we sold 541,677 shares of our
unregistered Common Stock and issued warrants to purchase an additional
1,083,353 shares of Common Stock for gross proceeds of $2,500,000. The proceeds
from these issuances will not be sufficient to fund operations for the next 12
months.
We currently have enough cash to fund our operations until December
2000. However, we anticipate that our existing cash resources, plus the proceeds
from an anticipated private placement, plus expected internally generated cash
from customers will be sufficient to fund our capital requirements for the 12
months commencing from December 2000. We believe we will generate cash from
operations over the next 12 months from our Rich Media Direct(SM) service. While
we do expect to generate cash from customers in the next 12 months, we still
expect net cash flow from operations to be negative for that period. As
discussed previously, we are also engaged in discussions to raise additional
capital through a private placement of our capital stock. We cannot be certain
that we will be able to obtain additional equity or debt financing.
Cash generated from operations as well as future sales of debt or
equity securities should provide liquidity for the time period subsequent to
December 31, 2001. We anticipate that our operations will increase during the
fourth quarter of 2000 and beyond. Cash from these operations is estimated to
generate positive cash flow for periods subsequent to December 31, 2001.
Management would consider the sale of debt or equity securities in order to
expand our current infrastructure or to expand into other lines of business. We
will not receive any of the proceeds from the sale of the shares of our Common
Stock covered by the Registration Statement of which this prospectus is a part.
Our continuation as a going concern depends on 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 we will obtain an increase in customer orders for our
services, which will produce increased revenues to reduce our operating losses.
Management also expects we can raise additional capital to further fund
operations. However, we cannot guarantee that we will be able to execute
management's plans as anticipated.
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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 will have
on our consolidated financial statements.
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. Summus is a private company and is not traded on any
public market. Our investment in Summus is subject to changes in market
conditions since the value of a private company can change according to
perceptions of general market risk, industry-specific market risk, or company
performance, although the private company is not being publicly traded.
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BUSINESS
GENERAL
We are an early stage company launching a new business offering Media
Creation and Media Distribution services that will enable our current and
prospective clients to deliver audio, video, graphic, and animated content and
advertising over the Internet.
- MEDIA CREATION
We are already providing Media Creation services to our customers
through our wholly-owned and fully operational subsidiary, Douglas May & Co.
Inc., which we acquired on July 10, 2000. These services include creative design
assistance and commercial content development, including audio and video images
and animation, as well as website design and construction.
- MEDIA DISTRIBUTION
We plan to provide media distribution, embedded inside e-mail
services, as well as customer targeting and tracking services (which identify
potential e-mail recipients based upon demographic information, keep track of
the number of times recipients view our e-mail messages, and record specific
information about those viewers) for applications such as permissive marketing
(whereby potential e-mail recipients agree in advance to receive solicitations).
We intend to provide an integrated suite of Internet services,
collectively called "Rich Media DirectSM" to our customers, utilizing software
and technology that we have licensed from third-party providers, particularly
vendors specializing in compression and decompression technology.
- RICH MEDIA DIRECT(SM)
Rich Media Direct(SM) is our brand name for the suite of Internet
services we are offering in connection with the creation and distribution of
"rich media" (media that contains one or more of the following: audio, video,
graphics, and animation). Rich Media Direct(SM) is an Internet direct marketing
service designed to deliver content through applications such as e-mail where
recipients grant their permission in advance to receiving this media content.
Our Rich Media Direct(SM) service will provide customers with dedicated
bandwidth and a distribution infrastructure to efficiently distribute media
content to targeted audiences. Our service will require our customers to provide
to us the list of e-mail recipients to whom we will then deliver the media
content, such as advertising or programming. Alternatively, we can identify a
targeted group and purchase distribution lists from third parties, provided that
these lists contain individuals who have requested that advertisements or
programming be sent to them.
Our business plan assumes that our Rich Media Direct(SM) services will
enable our clients to achieve a higher response rate in the market than
traditional Internet advertisements on a webpage that connects to or links to
the advertiser's website known as banner advertisements. Our Rich Media
Direct(SM) advertisements will initially be in the form of a rich media
commercial (a commercial using audio, video, graphics, or animation) attached to
an e-mail message that recipients have previously agreed to receive. This will
offer advertisers, publishers and media buyers an advertising distribution
medium through e-mail with the ability to target a selected audience based on
specified demographic information. Our initial and current offering is Rich
Media Direct 1.0(TM). Our long-term goal is to build a highly scalable media
distribution service that can reach in excess of 3 million targeted users per
day for each media transaction executed, and also collect, analyze, and store
the results of that transaction.
We originally attempted to launch Rich Media Direct 1.0(TM) in January
2000. However, after feedback from potential customers, we determined that we
needed to upgrade our technology to improve its functionality. We have now
licensed technology from All Video Network, Inc. which we believe will allow us
to deliver effectively the
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Media Distribution services that we intend to provide. We have also licensed
from E.piphany, Inc. e-mail campaign management and customer response tracking
software , and we have engaged NexGenix, Inc., a professional systems
integration firm, to customize E.piphany's software for us. We recently received
additional computers and other hardware that we purchased from Hewlett-Packard,
Inc., and we have entered an agreement with Enflow, Inc., a commercial hosting
services company (or "server farm"), to store our content on their computers and
deliver it to our clients' designated recipients.
We do not foresee the need to purchase any additional products or
services from third parties in order to begin offering and delivering our
services, and we believe that we will be in a position to launch our next
generation of Rich Media Direct(SM) platform in the fourth quarter of 2000.
Currently, we have service contracts with four customers using Rich
Media Direct 1.0(TM). These contracts establish the commercial terms for our
services, but do not require customers to purchase any specific volume of our
services.
We intend to continue to focus our marketing efforts on advertising
agencies and dedicated Internet companies with web properties, as well as
traditional companies seeking the commercial opportunities that Internet direct
marketing provides. We intend to use a range of activities to market our Media
Creation and Media Distribution services, including our own internal sales
force, trade shows, trade advertisements, selected media events, and our own
website and services. We also intend to publish printed marketing materials to
support our sales staff, including company brochures, feature descriptions,
technology research papers, and client case studies.
Once our infrastructure is in place (hopefully, by the end of year
2000), we will not need to maintain a significant amount of working capital in
order to deliver our services. Beyond the payment of the fixed costs associated
with the development of our infrastructure, we will incur variable costs upon
the delivery of our services. We expect to be able to pay these costs from our
cash flows from operations; however, we cannot be certain that we will be able
to do so. We will need customary working capital in order to provide any
necessary funding during the interval between the collection of receivables and
the payment of payables; however, we do not anticipate that this amount will be
significant.
HISTORY OF HIGH SPEED NET SOLUTIONS, INC.
We were originally incorporated in Florida in 1984, under the name of
"EMN Enterprises, Inc." We remained a non-operating public shell company until
August 1998, when we acquired all of the assets of Marketers World, Inc.
("Marketers World").
- ACQUISITION OF MARKETERS WORLD'S ASSETS
On August 24, 1998, we acquired all of the net assets of Marketers
World, Inc., a private operating company incorporated in Florida in January
1988. Marketers World's planned principal operations were leasing computer
systems to businesses, distributing Internet-oriented products, and performing
related services.
We effected this merger by issuing 9,275,000 shares of our Common Stock
to Marketers World in exchange for its net assets, which consisted primarily of
computer hardware and office furniture. At the time of this merger, we had no
assets or liabilities; accordingly, we accounted for this transaction as a
recapitalization of our company.
In connection with this transaction, in September 1988, we changed our
name from "EMN Enterprises, Inc." to "ZZAP.NET, Inc."
During the remainder of 1998, we operated our business based on
Marketers World's net assets. Due to our inability to acquire in a timely manner
the products and software necessary to commence Marketers World's planned
principle operations as described above (other than the sale of pilot products
and services), coupled with our limited financial resources at that time, we
decided not to make any further investments in Marketers World and to terminate
all operations by the end of 1998. At that time, the net book value of Marketers
World's assets was
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$105,748. We wrote off this amount at the end of 1998 and presented Marketers
World's operating results as discontinued operations. In 1998, we incurred a net
loss of $1,709,696.
In connection with the discontinuance of Marketers World's operations,
we canceled 5,161,100 shares of the initial 9,275,000 shares of our Common Stock
that we had issued to acquire Marketers World's net assets. The shareholders who
owned these shares agreed with us that Marketers World's assets were initially
over-valued, and they voluntary returned the 5,161,100 shares of our Common
Stock to us for cancellation. Since we did not ascribe any value to the initial
shares that we issued in connection with the Marketers World acquisition, we did
not ascribe any value to their subsequent cancellation.
During 1999, our operations were limited to obtaining financing and
changing our business plan. In 1999, we incurred a net loss of $10,171,546.
While we were operating under the name of ZZAP.NET, our Common Stock
began trading on the National Association of Securities Dealers' OTC Bulletin
Board(R). On December 29, 1998, we changed our name from "ZZAP.Net" to "High
Speed Net Solutions, Inc.," and on January 25, 1999, we changed our OTC Bulletin
Board(R) security symbol from "ZZNT" to "HSNS" to reflect our new name.
- ACQUISITION OF J.S.J. CAPITAL CORP.
Under an Agreement and Plan of Merger dated April 18, 2000, with J.S.J
Capital Corp., a Nevada corporation, we acquired all of J.S.J. Capital's
outstanding Shares of common stock from its sole stockholder in exchange for
50,000 restricted shares of our Common Stock in a transaction in which we were
the successor corporation.
- CROSS-OWNERSHIP WITH SUMMUS, LTD.
In August 1999, Summus acquired 9,542,360 restricted shares, which at
that time, represented approximately 51% of our outstanding Common Stock
(approximately 49% on a fully diluted basis), from the shareholders who
previously obtained our Common Stock in connection with our acquisition of
Marketers World. Summus issued 132,888 shares of its own common stock to
acquire, and in exchange for, these shares of our Common Stock. All of the
shares of our Common Stock that Summus acquired had full voting rights.
As of September 30, 2000, Summus held 8,389,360 shares, or 37.9%, of
our outstanding Common Stock (32.7% on a fully diluted basis). Summus also has
the power to vote an additional 1,279,667 shares of our Common Stock through
voting agreements with and/or proxies from 14 persons. In total, as of September
30, 2000, Summus had the power to vote 9,669,027 shares, or 43.7%, of our
outstanding Common Stock (37.6% on a fully diluted basis).
- AGREEMENTS WITH SUMMUS
In February 1999, we entered into the Marketing License Agreement with
Summus, Ltd., in which we obtained the right to distribute specific Summus
products and technology. The term of the Marketing License Agreement was three
years. In exchange for these rights, we agreed to make an upfront payment of
$3,000,000 dollars in several installments during the first year of the
Marketing License Agreement. We made payments of $2,250,000 in cash toward
payment of the $3,000,000. We satisfied the final installment due under the
Marketing License Agreement by issuing 1,500,000 shares of Common Stock to
Summus. We terminated the Marketing License Agreement on February 18, 2000 and
on that same date entered into new agreements with Summus to support the
requirements of our new business plan. The new agreements are for a six-year
term and give us rights to use specific Summus products and rights to
maintenance and support for these products. For a description of these new
agreements, see "- Summus Ltd. Overview."
On September 1, 2000, Summus delivered to us some components of its
MaxxSystem(TM) software suite. This software suite came with the following
products:
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- MaxxShow(TM) : A client-server tool for displaying media
presentations through an Internet browser;
- MaxxLayout(TM) : A content creation tool for combining
video, audio, images, text hyperlinks
and flash animation into compelling
media presentations;
- MaxxCI(TM) : An image compression editor; and
- Measurements(TM) : A tracking and reporting tool.
Summus did not deliver its MaxxServer(TM) component committed in the
License Agreement, dated February 18, 2000, for streaming wavelet video as part
of the September 1, 2000 delivery.
- MANAGEMENT
Andrew L. Fox became our acting President and Chief Executive Officer
in August 1999, and our full-time President and Chief Executive Officer in July
2000 to develop and start-up our business operations. In September 1999, we
moved our operations from Florida to Raleigh, North Carolina, into office space
located at Two Hannover Square, 434 Fayetteville Street Mall, Suite 2120.
Currently, we are building our team by hiring additional employees, and
we are creating an information system infrastructure with which we plan to
deliver our Internet e-mail advertising and media delivery services. We have not
yet generated any revenue from Media Distribution services. Our energies are
currently devoted to implementing our business plan, both from a sales and
marketing perspective to gain new customers, and from a development and
operational perspective to serve the customers we do acquire.
DEVELOPMENTS IN THE YEAR 2000
On July 27, 2000 we engaged NexGenix, Inc., an e-business systems
integrator, to integrate E.piphany's software with our next generation Rich
Media Direct(SM) platform. We had previously hired NexGenix in March 2000 to do
a comparative study on Rich Media Management software. Based on this study and
Summus' inability to deliver its MaxxSystem software suite on time, our
management developed a new strategy for bringing its Rich Media Direct(SM)
platform to market.
In August 2000, we licensed E.piphany's campaign management and e-mail
distribution software to serve as the foundation for its next generation Rich
Media Direct(SM) media distribution service. The E.piphany software provides us
with the ability to send up to 3 million e-mails per day to targeted demographic
groups. With the help of NexGenix, we will have the ability to utilize the
E.piphany software to run multiple campaigns, collect and analyze campaign
results and deliver video advertisements and programming.
In early August, we began looking at alternative media compression
technologies to offer with its next generation Rich Media Direct(SM) offering.
In August 2000, we entered into a Letter of Intent with Learnkey to utilize
its streaming technology, based on RealNetworks technology, as one of the media
compression offerings for our next generation Rich Media Direct(SM) platform.
Learnkey has media compression technology that can stream screen-captures of
animated graphics and images for very low bandwidth connections. This Letter of
Intent called for us to license Learnkey's toolset for creating streaming
screen-captures, a product known as "RealCBT(TM)."
In September 2000, we signed a contract with All Video Network to
utilize their MPEG4 streaming technology as one of the alternative media
compression offerings for our next generation Rich Media Direct(SM) platform.
We received an exclusive license to use this technology for streaming media
through electronic mail. All Video Network has developed proprietary technology
to improve the quality and delivery of its MPEG4 streaming video. All Video
Network would digitize, compress and host all MPEG4 streaming video for High
Speed's next generation of Rich Media Direct(SM) platform offering. In
addition, All Video Network would help integrate MPEG4 streaming video into the
E.piphany software.
On September 1, 2000, we signed a non-binding Letter Of Intent to
acquire Summus Ltd. and its Dynamic Wavelet(TM) technology. We believe that the
value of this acquisition would be the ability to leverage Dynamic
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Wavelet(TM) technology for positioning the Rich Media Direct(SM) offerings into
the wireless and broadband marketplaces. This Letter of Intent called for us to
acquire all of Summus' assets in exchange for 8,000,000 shares of our Common
Stock. In addition, we made a $500,000 loan to Summus to help keep Summus
solvent until a contract could be negotiated. This Letter of Intent called for a
contract to be signed 30 days from the date of the agreement. As of October 13,
2000 we have not signed a contract with Summus.
In September 2000, we signed an agreement with Enflow Systems. Enflow
Systems is an Internet Service Provider who will host our next generation Rich
Media Direct(SM) server and data storage systems.
- BUSINESS STRATEGY
In September of 1999, we began investigating Internet opportunities to
generate revenue as a service bureau business. To become a service bureau
business, we plan to license the use of various software products to distribute
media over the Internet. This research and subsequent discussions with potential
customers led us to launch our media distribution service business called Rich
Media Direct(SM) on January 24, 2000.
Our initial strategy was heavily dependent on Summus' software products
and technology. However, due to delivery delays, we decided to move forward with
alternate vendors for our current generation of Rich Media Direct(SM) 2.0
platform, including All Video Network and E.piphany. We have recently received
some of the products we originally licensed from Summus. We are currently
testing and evaluating these products for possible incorporation into the Rich
Media Direct(SM) suite and other products and services in the future, including
broadband and wireless applications. In July 2000, we made a number of changes
to our initial strategy to reduce the dependence of our next generation Rich
Media Direct(SM) platform on media compression technology from Summus Ltd.
To help reach this objective, we have partnered with NexGenix, Inc., a
systems integrator and e-business consultant. Following NexGenix's
recommendation, we partnered with E.piphany, a leading provider of e-mail
distribution and campaign management software. We have also contracted with
NexGenix to customize the E.piphany system for our Rich Media Direct(SM)
services. Our strategy is to base our next generation Rich Media Direct(SM)
platform on E.piphany's software, because it gives us the ability to target end
users through e-mail and can scale in excess of 3 million users per transaction.
The Rich Media Direct(SM) platform also requires media compression
technology to reduce the size of large media files that it will routinely
deliver over its network. We have signed license agreements with a number of
media compression suppliers for compressing and delivering media content over
the Internet.
In February 2000, we signed a license agreement with Summus Ltd. for
the licensing of its Dynamic Wavelet(TM) media compression technology. We
believe that Dynamic Wavelet(TM) technology is ideally suited for wireless and
broadband networks and we intend to work with Summus to build a Rich Media
Direct(SM) solution for those markets.
In August 2000, we signed a Letter of Intent with Learnkey. Learnkey
will provide us with media compression technology that compresses screen
captures of animated images and graphics and delivers them over low speed
modems.
In September 2000, we signed a license agreement with All Video Network
that gives us exclusive rights to All Video Network's "MPEG4 media compression
technology" for delivery of streaming media through electronic mail.
Both All Video Network and Learnkey provide a key product function that
allows users to view the delivered video files immediately upon receiving them.
This capability will be a key product feature of our next generation Rich Media
Direct(SM) platform.
We are continuing to evaluate Summus' technology in connection with
acquisition discussions. On August 31, 2000, we signed a non-binding Letter of
Intent to purchase all of Summus' assets, including Summus' technology and
intellectual property rights. This agreement required both parties to use their
best efforts to consummate this transaction on or before September 15, 2000. In
connection with this Letter of Intent, we loaned Summus $500,000 an August 31,
2000. Although the September 15, 2000 deadline has now passed, we are continuing
to negotiate
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with Summus and we continue to evaluate whether to consummate the
transactions contemplated by the August 31, 2000, Letter of Intent at some point
in the future.
- COMPETITION
We believe that the primary competitive factors in the rich media
content and advertising delivery services market will include:
- Pricing and licensing terms;
- Compatibility with new and existing media formats;
- Compatibility with the user's existing network components and
software systems;
- Scalability of rich media content and advertising delivery
technology and cost per user;
- Quality and reliability of the overall rich media
advertisement or content;
- Access to distribution channels necessary to achieve broad
distribution and use of our services;
- Availability of content for delivery over the Internet and
access to necessary intellectual property rights;
- Capability to license or develop and support secure formats
for digital media delivery, particularly video;
- Ability to license and support popular and emerging media
formats for digital media delivery, particularly video, in a
market where competitors may control the intellectual property
rights for these formats;
- Size of the active audience for rich media advertisements and
its appeal to content providers and advertisers;
- Features for creating, editing and adapting content for the
Internet;
- Ease of use and interactive user features in products;
- Ease of finding and accessing content over the Internet; and
- Challenges caused by bandwidth constraints and other
limitations of the Internet infrastructure.
Our failure to adequately address any of the factors listed above could
harm our business strategy and our operating results.
Our business plan calls for us to use Learnkey's RealCBT(TM) and All
Video Network's Omnisuite(TM) software products for compressing and
decompressing commercial e-mail messages for delivery over the Internet. If
Learnkey's and All Video Network's technique has better compression performance
than other compression methods then recipients of e-mail advertisements sent by
us will have a more satisfactory viewing experience because they will receive
and begin viewing the content attached or associated with the e-mail more
quickly. In the case of All Video Network, we have signed an exclusive agreement
to use its technology for streaming media through e-mail.
The marketplace for rich media advertisement delivery is extremely
competitive. Traditional Internet advertisement network companies such as CMGI
Inc., 24/7 Media, Inc., and DoubleClick, Inc. have included rich media
advertisements, through banner ads, as part of their product mix.
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We believe that direct response marketing rather than pure advertising
will be a key application for Rich Media Direct(SM), and we will not initially
compete directly with these companies, although we recognize that these
companies may change their products and services and compete with us in the
future.
We will compete with many companies in the Internet direct marketing
space, including companies that currently utilize e-mail (specifically "opt-in"
e-mail) as a way to target specific demographic groups. These companies include
Message Media, Inc., Digital Impact, Inc., yesmail.com, Inc., Juno Mail
Services, Inc., and Mind Arrow, Inc. (formerly known as E-commercial.com, Inc.)
and others. Several companies, such as Mind Arrow, Inc. and RadicalMail, Inc.
are focusing more specifically on rich media delivery than on traditional banner
advertisements.
We may experience additional competition from Internet service
providers, advertising and direct marketing agencies and other large established
businesses such as America Online, Inc., DoubleClick, Inc., Microsoft, Inc.,
IBM, Inc., AT&T, Inc., Yahoo!, Inc. and RealNetworks, Inc. Each of these
companies possesses large, existing customer bases, substantial financial
resources and established distribution channels and could develop, market or
resell a Rich Media Direct(SM) marketing service that could target customer
demographic groups through applications like e-mail. These potential competitors
may also choose to enter this marketplace by acquiring one of our existing
competitors or by forming strategic alliances with these competitors or others,
including alliances with Summus.
- MARKET OPPORTUNITY
According to Jupiter Communications, a leading consultant on online
advertising, use of e-mail is the number one activity on the web (95.7% of all
users) followed by searching (87.5%) and research products (71.7%). Our business
plan assumes that advertisers are aware of the role that the Internet could play
in influencing purchases and creating awareness, and will increase their
spending for Internet advertising.
- ADVERTISING ON THE WEB
Our business plan anticipates that Internet advertising budgets in the
United States and elsewhere will grow as companies' demand for media exposure
continues to increase. Although Internet advertising was only 1.25% of the total
amount spent by advertisers in 1998, by 2003, Jupiter Communications expects
Internet advertising to be 5.3% of the total amount spent by advertisers in all
media. Jupiter Communications believes that online advertising will grow from
$2.1 billion in 1998 to $11.5 billion in 2003, fueled by increases in the online
population, time spent online, and Internet commerce adoption. Our business plan
anticipates that as the general online advertising market grows, our opportunity
within this larger market will expand.
- DIRECT RESPONSE MARKETING ON THE WEB
Our business plan assumes that Internet direct response marketing will
play an important role in helping web sites produce revenue. Forester Research
expects direct response marketing on the web (mainly through e-mail) to make up
60% of all Internet advertising by 2003, compared to 15% in 1998.
Our business plan anticipates that direct response marketing will
migrate to the Internet, and that rich media will play an increasingly
significant role in that migration.
- SALES AND MARKETING
Currently, we have service contracts with four customers. These
contracts establish commercial terms for our services, but do not require
customers to purchase any specific volume of services. We intend to continue to
focus our marketing efforts on advertising agencies and dedicated Internet
companies with web properties, as well as traditional companies seeking the
commercial opportunities that Internet direct marketing provides. We intend to
use a range of activities to market our Media Creation and Media Distribution,
including our own internal sales force, trade shows, trade advertisements,
selected media events and our own website and services. We also intend to
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publish printed marketing materials to support our sales staff, including
company brochures, feature descriptions, technology research papers, and client
case studies.
We have been actively marketing our services since January 2000, and
have two dozen customer prospects in development or negotiation stage. We
currently have five full time sales personnel. We intend to sell our Rich Media
Direct(SM) marketing services through a combination of both inside and outside
sales forces, as well as resellers. We have two potential resellers, Williams
Communications Group, Inc. and Dial2GO, Inc.
We intend to focus our marketing efforts on advertising agencies,
dedicated Internet companies with web properties, as well as traditional
companies seeking to take advantage of the commercial opportunities afforded by
Internet direct marketing. We intend to use a range of marketing activities to
pursue our objectives, including trade shows, trade advertisements, selected
media events and our own web site and service. Of these methods, to date we have
only used our own web site to market our services. We intend to publish
additional marketing materials to support the sales process, including company
brochures, feature descriptions, technology research papers and client case
studies.
Currently, we lack funding for such activities and will need to raise
approximately $5,000,000 to implement our business plan and fund these marketing
activities from December 2000 to December of 2001. We plan to raise these funds
in a private offering of our capital stock sometime during the remainder of the
year 2000.
- RESEARCH & DEVELOPMENT
We do not conduct our own research and development of software products
or technology. Instead, we rely on third parties to produce generally available
software products with which we can build our service bureau business. One
important example of these suppliers is Summus. We believe that our ability to
build out its Rich Media Direct(SM) service for wireless and broadband networks
will be dependent on Summus. We believe our ability to develop new markets and
features for our product will be necessary to ensure our long term success.
Our business plan anticipates that we will use third-party software
products, including Summus' MaxxSystem(TM) and All Video Network Omnisuite
software's product to implement and differentiate our services. Because of the
central role that compression and decompression plays in the delivery of video
e-mail advertisements, our plans are somewhat dependent on Summus' and All Video
Network' research and development efforts toward improving their products.
Summus has a limited track record in supplying generally available
commercial software products; however, it has applied its Dynamic WaveletTM
compression methodology in defense-related and contract research projects with
success. In the last two years, Summus has focused on commercial applications.
In doing so, it has not completed commercial products as quickly as we
anticipated in 1999 when we first entered into agreements with Summus.
Summus is currently working to complete a group or suite of software
products designed to work together labeled MaxxSystem(TM). Summus has 45
full-time employees. Limited financial resources may limit Summus' ability to
complete its products on a timely basis. Summus has disclosed to us that without
additional financing (which could include additional sales of our Common Stock)
or an increase in sales of its commercial software products it may not be able
to continue its operations.
All Video Network has developed a number of commercially available
products and services to customers, such as CBSSportsLine.com, the Golf Video
Network.com and TravelVideoNetwork.com. It has also developed a number of
proprietary functions to increase the quality of its video.
- DEVELOPMENTS IN THE YEAR 2000
Summus and us signed a letter of intent with Samsung on February 15,
2000. Our agreement with Summus provides for revenue sharing between us and
Summus. To date no definitive agreement has been signed with Samsung. The
Samsung revenue sharing provisions do not split equally any revenue we may
receive from
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Samsung. The revenue split changes over time according to the schedule described
in the remainder of this paragraph. To date, we have not generated any revenue
from Samsung and neither Summus nor we have signed a definitive agreement with
Samsung. Under the Samsung provisions, Summus will pay us 50% of the revenue it
receives from Samsung during the first and second years of an agreement between
Summus and Samsung; Summus will pay us 40% of the revenue it receives during the
third year; and Summus will pay us 20% of the revenue it receives during the
fourth, fifth, and sixth years. Similarly, we must pay Summus 50% of the revenue
we receive from Samsung during the first and second years of an agreement
between Samsung and us; we must pay Summus 40% of the revenue we receive during
the third year; and we must pay Summus 20% of the revenue we receive during the
fourth, fifth, and sixth years. We cannot guarantee that either Summus or we
will enter into any agreement with Samsung.
- TERMINATION OF THE MARKETING LICENSE AGREEMENT
The New Agreements replace entirely the Terminated Agreements. The
Terminated Agreements gave us specific exclusive and non-exclusive rights to
market and distribute Summus products and technology. We no longer have these
rights. Our former rights included:
- Exclusive rights to license a streaming demonstration product
utilizing Summus wavelet technology;
- Nonexclusive rights to license MaxxNote 1.0 and 2.0 (a
videomail product);
- Nonexclusive rights to license "4U2C" (an image compression
tool); and
- Nonexclusive rights to license version 1.0 of a video
conferencing product.
To date, we have not used these rights to generate revenue in the
marketplace.
- INTELLECTUAL PROPERTY
We do not hold any patents, nor do we hold any trademark or service
mark registrations. We do not have any U.S. patent applications pending. We
recently filed a United States service mark application for Rich Media
Direct(SM), and we intend to file applications for the same mark in some foreign
countries. There is no assurance, however, that our service mark application
will result in our service mark being approved.
Our success and ability to compete are substantially dependent upon
technology and intellectual property. We intend to rely on copyright, trade
secret and trademark law to protect our technology and intellectual property. We
have no knowledge of any intellectual property infringement claims or suits
against us of any kind, nor do we believe that any intellectual property claims
have been filed against Summus. We also believe that factors such as the
technological and creative skills of our personnel, new service developments and
frequent service enhancements are essential to establishing and maintaining an
intellectual property leadership position.
We are currently entering into confidentiality agreements with all
employees and consultants. We intend to implement confidentiality agreements,
which require our employees and consultants to hold in confidence and not
disclose any of our proprietary information. Despite our efforts to protect our
proprietary information, unauthorized parties may attempt to obtain and use our
proprietary information. Policing unauthorized use of our proprietary
information is difficult, and the steps we intend to take might not prevent
misappropriation, particularly in foreign countries where the laws may not
protect our proprietary rights as fully as do the laws of the United States.
We intend to collect and use data derived from our clients. This
creates the potential for claims to be made against us, either directly or
through contractual indemnification provisions with customers, including
copyright or trademark infringement, invasion of privacy, or other legal
theories. Our insurance may not cover potential claims of this type or may not
be adequate to protect us for all liability that may be imposed.
From time to time, third parties have asserted and may assert exclusive
patent, copyright, trademark and other intellectual property rights to
technologies and related standards that are important to us or to third party
providers
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of Technology to us, such as Summus. We and/or Technology partners may
increasingly face infringement claims as the number of competitors in our
industry segments grows and the functionality of products and services in
different industry segments overlaps. We do not have any intellectual property
infringement claims or suits against us of any kind. Although we have not been
party to any litigation asserting claims that allege infringement of
intellectual property rights, we may be party to litigation in the future. Any
third-party claims, with or without merit, could be time-consuming to defend,
result in costly litigation, divert management's attention and resources or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us, if at all. A successful claim of infringement against Summus or us could
harm our future competitiveness and profitability.
- EMPLOYEES
As of September 30, 2000, we had nineteen full time employees. We are
not subject to any collective bargaining agreements and believe that our
relationship with our employees is good.
- PROPERTIES
Our headquarters are in 6,785 square feet of office space located at
Two Hannover Square, 434 Fayetteville Street Mall, Suite 2120, in Raleigh, North
Carolina. Our lease expires September 30, 2005, and we pay $118,650 annual rent.
We believe these terms are consistent with local market conditions.
We believe that the space that we currently occupy will be adequate for
our projected growth needs over the next 12 months.
- LEGAL PROCEEDINGS
In January 2000, Mr. William R. Dunavant, a former Summus Technologies,
Inc. stockholder who received 350,000 shares of our Common Stock and $100,000 in
cash in exchange for his shares of Summus Technologies, filed a law suit against
us. Our former management had agreed to register Mr. Dunavant's 350,000 shares
of our Common Stock under the Securities Act of 1933 by December 11, 1999. Mr.
Dunavant filed a lawsuit against us in January 2000, alleging that we failed to
register his shares as agreed and seeking damages of $13.3 million.
After our share exchange with Mr. Dunavant, Summus Ltd. merged with
Summus Technologies. Summus Ltd. was the surviving company. Prior to this
merger, Mr. Dunavant was not a stockholder of Summus Ltd., nor was he a High
Speed shareholder. Mr. Dunavant became president of Summus Technologies, which
shared common ownership with Summus Ltd.
In June 2000, we entered into a settlement agreement with Mr. Dunavant
and Michael Cimino to resolve the lawsuit against us by Mr. Dunavant. Mr. Cimino
was formerly our President; he has never been a stockholder of Summus Ltd. or
Summus Technologies.
Under this agreement, we agreed to, among other things, register
350,000 shares of Common Stock owned by Mr. Dunavant under the Securities Act of
1933, which we are doing by filing the Registration Statement of which this
Prospectus is a part.
We also issued 175,000 new shares of Common Stock to Mr. Dunavant on
June 6, 2000, which we agreed to register in the Registration Statement.
Additionally, until we have registered all of the shares of Common
Stock owned by Mr. Dunavant, including all of the new shares that we issue to
him under our settlement agreement as this section describes, each month we
must:
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- Pay to Mr. Dunavant the sum of $12,750 in cash; and
- Issuance to Mr. Dunavant 25,000 additional shares of Common
Stock; however, if we have not registered the shares of Common
Stock owned by Mr. Dunavant on or before January 1, 2001, the
number of shares of Common Stock that we must issue to Mr.
Dunavant each month will increase from 25,000 shares to 50,000
shares beginning in January 2001.
Finally, we must also issue to, and register on behalf of Mr. Dunavant,
a number of additional new shares of Common Stock. The number of shares that we
must issue here is equal to the difference between:
(a) the product obtained by multiplying $23.00 by the sum
of:
(i) 400,000, plus
(ii) 25,000 shares per month from June 6, 2000
until the Registration Statement of which
this Prospectus is declared effective, plus
(iii) 50,000 shares a month for each month after
January 1, 2001 until the Registration
Statement is declared effective, if
necessary; and
(b) the product obtained by multiplying the ten-day
average closing price of High Speed's Common Stock
as of the effective date of the Registration
Statement, by the sum of:
(i) 450,000, plus
(ii) any additional shares received by Mr.
Dunavant pursuant to items (a) (i), (ii) and
(iii) above.
Based on the terms of this settlement agreement, we have accrued a loss
of $9,166,875 during the six months ended June 30, 2000. This amount represents
our best estimate of the ultimate outcome of this matter. The most significant
component of this amount relates to the number of additional shares of our
Common Stock that we estimate we will have to issue and register with the
Commission.
We calculated this loss accrual using the closing price of our Common
Stock as quoted on the OTC Bulletin Board(R) on June 30, 2000 as the estimated
closing price on the date we expect that the Registration Statement of which
this Prospectus is a part 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
SUMMUS LTD. OVERVIEW
This section describes material information concerning Summus' business
and products of Summus.
- NEW AGREEMENTS WITH SUMMUS
To facilitate the implementation of our business plan, in February
2000, we entered into a Master Agreement with Summus. The Master Agreement
includes a Software License Agreement, a Software Maintenance Agreement and a
Revenue Sharing Agreement (collectively with the Master Agreement and a letter
agreement between Summus and us, dated March 13, 2000, the "New Agreements").
The New Agreements entirely replace the Marketing License Agreement and the
related agreements incorporated by it or referenced by it, and replace the
various letter agreements between Summus and us concerning one potential
customer, Samsung Electronics of America, Inc. (collectively, the "Terminated
Agreements"). Under the terminated Marketing License Agreement, we committed to
pay Summus $3.0 million in the form of prepaid royalties in various cash
installments. We, and a
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shareholder acting on our behalf, made installments in cash totaling $2,250,000
and we made the final installment by issuing 1.5 million shares of common stock
in lieu of paying cash. Based on the traded value of our Common Stock on the
date the 1.5 million shares were issued, the 1.5 million shares were valued at
$2,278.125.
The New Agreements give us a non-exclusive license to a suite of
products Summus has labeled "MaxxSystem(TM)." MaxxSystem(TM) allows us to
create, compress, decompress and manage audio, video, animation and graphical
content. MaxxSystem(TM) uses a compression technique developed by Summus and
marketed under the brand name of Dynamic Wavelet(TM).
Our use of MaxxSystem(TM) requires us to make ongoing royalty payments
of ten percent (10%) of the revenue we generate from the use of MaxxSystem(TM).
Although the 10% fee is due as soon as we generate revenues, no royalty is
payable by us until our cumulative revenue exceeds $10 million because the New
Agreements grant us a $1,000,000 credit to be applied by offsetting the 10%
revenue fee we would otherwise have to pay. We negotiated this credit as a
condition of terminating the Marketing License Agreement.
The credit will be exhausted when we exceed $10,000,000 in revenues
from our use of MaxxSystem(TM). Our licensed use of MaxxSystem(TM) under the New
Agreements also required an up-front license payment of $1,000,000. Like the
revenue-based payment, we also negotiated a $1,000,000 credit to offset the
up-front license fee as a condition to terminating the Marketing License
Agreement.
Under the New Agreements we also have: (i) rights to maintenance,
support, and any new versions of MaxxSystem(TM) at an annual fee of $180,000,
although this fee is waived for the first year; and (ii) the right to make a
public announcement of our use of MaxxSystem(TM) two weeks in advance of our
competition. The capabilities of MaxxSystem(TM) will allow us to offer a variety
of customized services for advertising and content delivery.
The term of the New Agreements is six years, three years longer than
the Terminated Agreements. The New Agreements give us access to software support
and upgrades from Summus. We had no maintenance or support rights under the
Terminated Agreements.
Under the New Agreements, we have the right to maintenance, support and
all upgrades for six years. For software support and upgrades, we must pay
$180,000 annually for maintenance, support and upgrades. Under the New
Agreements, Summus has the right to increase, but is not scheduled or required
to increase, the $180,000 payment at a rate no greater than a U.S. government
published inflationary index. Summus waived our maintenance fee for the first
year. Support from Summus will include the following:
- "Level 2" and "Level 3" support. (We provide Level 1 support
to our customers. Level 1 support consists of telephone
support for basic questions about how to use Summus' software
products and how to fix regularly recurring problems. Level 2
support is similar, except that Level 2 support provides a
support person who has comprehensive in-depth knowledge of
almost all aspects of Summus' software products. The software
product development team that wrote Summus' software products
provides Level 3 support directly.
- Upgrades or "dot" releases of the software system or
components of the software system. These are upgrades that
increment to the right of the "dot" (i.e., Version "1.2" to
"1.3").
- Generational releases of the software system. These are
upgrades to the left of the "dot" (i.e., Version "2.0" to
"3.0").
We do not have an exclusive license to MaxxSystem(TM) or any other
Summus product or technology. Instead, Summus has agreed to pay us 20% of all
revenues that Summus receives during the six-year term of the New Agreements
from third-party licensees of MaxxSystem(TM) who also operate as a service
bureau. Also, under the Letter Agreement, Summus has agreed that neither Summus
nor its affiliates will operate as an Internet advertising service bureau during
the term of the New Agreements. Further, Summus has also agreed that until
July 1, 2001, it will not license MaxxSystem(TM) to others for Internet
advertising service bureau use. Summus has not yet generated any revenue with
MaxxSystem(TM).
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Initially, we heavily depended upon Summus to implement our business plan.
However, due to delivery delays (although we recently received some of the
products), we decided to move forward with alternate vendors for our next
generation of Rich Media Direct(SM) platform - All Video Network and Epiphany.
We believe that Summus' MaxxSystem(SM) may have value for delivering media
content over wireless networks by effectively compressing media files for
delivery over wireless networks.
To facilitate the implementation of our business plan, we have restructured
our license agreements with Summus Ltd. Our new license agreements give us a
non-exclusive right to use Summus' software product, MaxxSystem(SM), to
distribute compressed content over the Internet or over private network
environments for the purposes of advertising or content delivery. In addition,
the new license agreements with Summus gives us a 20% revenue share of all
upfront or royalty based license revenue that might result from Summus licensing
MaxxSystem(SM) to a third-party service bureau. As part of the new agreements,
Summus cannot license MaxxSystem(SM) to a third party who wants to establish an
online advertising service bureau until July 1, 2001. Under the New Agreements a
service bureau means using MaxxSystem or its components to provide a service
involving creation, distribution and management of rich media content to or for
the benefit of licensee's unaffiliated customers, but excluding use by a
licensee for its or its affiliates' internal promotional purposes. In addition,
the new license agreements give us a percentage of the revenue Summus may derive
from licensing its products or technology to Samsung Electronics of America,
Inc., if Samsung signs an agreement with Summus. As of yet, we have not derived
any revenue under the new license agreements from Summus.
Under the terminated Marketing License Agreement, we made payments of
$2,250,000 in cash toward payment of the $3,000,000 originally due under the
Marketing License Agreement. We renegotiated the final amount due under the
Marketing License Agreement and agreed to issue 1,500,000 shares of Common Stock
to Summus in lieu of making the final cash payment of $750,000. These shares
were valued at $2,278,125, bringing the total value of the transaction to
$4,528,125. We prepaid these royalties to establish a relationship with Summus
because we perceived at that time that Summus' products and technology had
value.
The New Agreements give us a non-exclusive license to a group of software
products designed to work together that Summus has labeled MaxxSystem(SM).
MaxxSystem(SM) allows us to create, compress, decompress and manage audio,
video, animation and graphical content. We are evaluating the use of
MaxxSystem(SM) product(s), when it becomes functionally stable, for creating and
delivering media content over wireless networks at some future time. To perform
this delivery, MaxxSystem(SM) uses a compression technique developed by Summus
and marketed under the brand name of Dynamic Wavelet(TM). Summus was
approximately two months late in delivering two of the various components of
MaxxSystem(SM) under the New Agreements.
During the six year term of the New Agreements, for all qualified
engagements that we refer to Summus for technology licensing, consulting or
other products and/or service sales, Summus will pay us 15% of the revenue
received from such engagements during the first year of the agreement between
Summus and the customer.
Under the New Agreements, we have agreed to a mutual revenue sharing
arrangement with Summus covering all revenues derived from Samsung Electronics
of America, Inc. We have entered into a letter of intent by and among Samsung,
Summus, and us. However, we cannot be certain that the letter of intent will
result in an agreement with Samsung or actual revenues for us. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations.
On March 13, 2000, we signed a Letter of Agreement with Summus. This
agreement is one of the New Agreements. Under the New Agreements, we do not have
an exclusive license to MaxxSystem(SM) or any other Summus product or
technology. However, Summus has agreed that neither Summus nor its affiliates
will operate as an Internet advertising service bureau during the term of the
New Agreements. Further, Summus has also agreed that until July 1, 2001, it will
not license MaxxSystem(TM) to others for Internet advertising service bureau
use. For the purpose of this paragraph, an Internet advertising service bureau
under the letter agreement means a business that is directly competitive with
our business as constituted as of the date of that agreement.
- HISTORY OF SUMMUS LTD.
Summus is a private Delaware corporation. Since it's founding in 1991,
Summus has focused its business on contract engineering and research and
development for the Department of Defense. For example, Summus wrote software to
analyze images and pictures so that the software could recognize an object, such
as a military vehicle, in an image or picture. Summus also wrote and implemented
software for military applications in electronic components that compressed and
transmitted images and pictures over low-bandwidth communications channels.
As of September 30, 2000, Summus employed 62 persons on a full time basis,
had 10 contract employees, and had 12 part-time employees. Summus has limited
financial resources. Summus' failure to raise additional capital would have a
material adverse affect on Summus' ability to deliver key software products to
us.
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Summus' founder, Dr. Bjorn Jawerth, owns a majority of Summus' shares, for
which there is no public market. As of September 30, 2000, we owned 167,000
shares, or 14.1% of Summus' common stock (12.8% on a fully diluted basis), and
Summus owned 8,389,360 shares, or 37.9% of our Common Stock (32.7% on a
fully-diluted basis). We expect that Summus will continue to seek to raise
capital to support its investment in research and product development;
therefore, our ownership in Summus could potentially become diluted.
Despite our cross-ownership, High Speed and Summus are independent
entities. Except as provided in the agreements between Summus and us that we
have described in this Prospectus, we have no rights to any Summus products or
technology.
Summus' Dynamic Wavelet(TM) compression technology uses image outlines or
edges to compress and decompress video and other data. In 1998, Summus
commercialized some of its technology through software development kits and
licensed its technology using the software development kits to the general
software market. Summus' business plan calls for continued commercialization of
its technology and expansion into the commercial products market and Internet
solution business. Specific Summus' objectives include creating widespread use
of its Dynamic Wavelet(TM) compression techniques through licensing and
distribution and completion of its MaxxSystem(SM) suite of software products.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
CURRENT DIRECTORS
The following table provides information about the members of our Board of
Directors:
<TABLE>
<CAPTION>
FIRST YEAR
ELECTED AS TERM
NAME DIRECTOR EXPIRES AGE
---- ---------- ------- ---
<S> <C> <C> <C>
Dr. Bjorn Jawerth 2000 2001 47
Andrew L. Fox 2000 2001 36
Richard F. Seifert 1999 2001 49
Herman Rush 2000 2001 70
C. Cristine Wittress 2000 2001 34
</TABLE>
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers are elected annually and serve at the pleasure of our
Board of Directors. Our current executive officers are as follows:
<TABLE>
<CAPTION>
NAME OFFICE OFFICER SINCE AGE
------------------- ------------------------------------------------- ------------- ---
<S> <C> <C> <C>
Andrew L. Fox President and Chief Executive Officer 1999 36
Alan R. Kleinmaier Executive Vice President, Secretary and Treasurer 2000 52
Robert S. Lowrey Chief Financial Officer, Vice President of 2000 40
Finance, Assistant Secretary
Gregory Gush Executive Vice President, Chief Marketing Officer 2000 52
Douglas May Executive Vice President, Chief Creative Officer 2000 45
</TABLE>
BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS
ANDREW L. FOX is our President and Chief Executive Officer and our
Executive Vice President. Before coming to us, Mr. Fox spent over two and a-half
years at RealNetworks as a Senior Marketing Manager where he managed marketing
and sales operations for the corporate enterprise division of RealNetworks.
Before RealNetworks, Mr. Fox spent ten years at IBM in a variety of sales,
marketing and product management roles. He was responsible for marketing and
sales for IBM's Wireless Data Division and was a product manager at IBM's
Networking Hardware Division. Summus Ltd. also employed Mr. Fox from August 1999
until January 2000 as its Executive Vice President of Sales and Marketing. Mr.
Fox has a Masters in Business Administration degree from Duke University's Fuqua
School of Business in Durham, North Carolina and an undergraduate degree in
Computer Science and Electrical Engineering from Duke University's School of
Engineering
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DR. BJORN JAWERTH, Chairman, President and Founder of Summus Ltd., received
an Masters of Science in Mathematics and Statistics, as well as an M.Sc. in
Technical Physics and Electrical Engineering in 1974 from Lund Institute of
Technology, Lund, Sweden. He also received his Ph.D. in Mathematics from Lund
Institute in 1977. Dr. Jawerth is the David W. Robinson Palmetto Professor,
Professor of Mathematics and Adjunct Professor of Computer Science at the
University of South Carolina. Dr. Jawerth founded Summus Ltd. in 1991 and has
been employed with Summus since that time. He directs a group of approximately
50 researchers in Mathematics, Computer Science, Mechanical Engineering and
Chemistry at the University of South Carolina and Chalmers University of
Technology in Gothenburg, Sweden. Dr. Jawerth has more than 25 years of
experience as a consultant in the areas of image processing and finite element
analysis. Dr. Jawerth has over 90 publications to his credit in books and
referred journals. He has won and administered numerous grant awards from both
industry and government agencies. His research interests include computational
harmonic analysis and partial differential equations, image processing and
pattern recognition.
RICHARD F. SEIFERT is a member of our Board of Directors, having joined us
in March 1999 as the Vice President of Operations. In late 1999 Mr. Seifert
discontinued his operational role but continued to serve us as a member of our
Board of Directors. Under and advisory and consulting agreement with us, Mr.
Seifert has been involved in formulating strategic partnerships and raising
capital for us. Mr. Seifert has over 20 years experience in the areas of
business development, finance, strategic planning and marketing. Mr. Seifert
began his career in the aviation industry where he flew and ran operations for
several private and commercial airlines, including Summit Airlines, Air Indiana,
Nevada Airlines, and the Royal Family of Saudi Arabia. Mr. Seifert holds a
degree in Business Administration from Montgomery County College and Penn State
University.
HERMAN RUSH is a member of our Board of Directors, having joined us in
March 2000. Mr. Rush has over 30 years experience in the entertainment industry
in executive, production and sales position. Since 1999 Mr. Rush has been
Chairman of the Board and Chief Executive Officer of Infotainment International,
Inc., a company that produces content for the Internet. He has been a partner in
Rush Cooperman Associates since 1999 and Chairman of the Board of Internet
Program Providers. From 1995 until 1998 Mr. Rush was Chairman of New Tech
Entertainment, an Internet production company that, in association with American
Interactive Media, is currently producing nine Internet program sites. From 1988
until 1997 he was a partner in Katz/Rush Entertainment, a television production
company. Mr. Rush was the Chief Executive Officer and President of Columbia
Pictures Television Group from 1980 to 1989. Mr. Rush was responsible for
creating and producing such shows as The Montel Williams Show from 1991 to 2000,
and remains an executive producer to that series. He also previously served as
Chairman and Chief Executive Officer of Coca-Cola Telecommunications and senior
vice president of the Entertainment Business Sector of The Coca-Cola Company
from 1980 to 1989.
C. CRISTINE WITTRESS is a member of our Board of Directors, having joined
us in April 2000. Ms. Wittress has expertise in launching products and services
to various marketplaces. Ms. Wittress was at Microsoft from 1994 to 1996 where
she helped launch eight critical Microsoft products, including Microsoft Excel
3.0 and 4.0, Windows NT, and Microsoft SQL Server. Ms. Wittress was the overall
business and product manager for the worldwide Visual FoxPro business,
Microsoft's first Windows 95 and Internet-enabled product. Ms. Wittress was
recruited by RealNetworks in August 1998 and was there until October 1999. At
RealNetworks she managed strategic customer and third-party relationships for
RealNetworks' business-to-business enterprise software sales, and launched a
line of vertical business solutions to augment enterprise sales. Additionally,
Ms. Wittress helped launch RealNetworks' consumer music product, RealJukebox. In
July 1999, Ms. Wittress co-founded The Chakra Group, a hospitality company,
where she is still currently a co-owner and on the Board of Directors. She is
also on the Board of Advisors on a number of other Internet companies including
Planetsquid.com, RadioRiot.com, BraTopia.com and NutrititionGrocer.com. She
holds a Masters in Business Administration from the Harvard Business School in
Cambridge, Massachusetts, where she focused on Internet entrepreneurship and
public relations.
ALAN R. KLEINMAIER is our Executive Vice President, Secretary, and
Treasurer. Mr. Kleinmaier joined Summus Ltd. in May 1999 and was named our
acting Chief Financial Officer from January 2000 to June 2000. Mr. Kleinmaier
has more than 20 years of management experience. From 1976 to 1992, he served as
President and Chief Executive Officer of Specialty Retail Concepts, Inc., a
retail chain of more than 400 confectioneries and coffee stores which he founded
in 1976. From 1993 to 1998, Mr. Kleinmaier was a principal and consultant for EK
Retail Group, Inc., a privately held management and consulting firm. He joined
Summus in May 1999. Mr. Kleinmaier is a graduate of the University of North
Carolina at Chapel Hill, where he was a Morehead Scholar. Mr.
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<PAGE> 50
Kleinmaier is also a graduate of University of North Carolina at Chapel Hill
School of Business's Executive Program and holds his North Carolina Real Estate
Broker's license.
ROBERT S. LOWREY is our Chief Financial Officer and Vice President of
Finance. Before joining us on June 1, 2000, Mr. Lowrey served as a senior audit
manager for Ernst & Young LLP in Raleigh, North Carolina since November 1993.
During this time period, Mr. Lowrey participated extensively on initial public
offerings, secondary debt and equity offerings and merger and acquisition due
diligence. From July 1992 to November 1993, Mr. Lowrey was the Chief Financial
Officer of Florida Dental Care, a company engaged in the delivery of full
service dental care. From January 1985 to June 1992, Ernst & Young in Tampa,
Florida employed Mr. Lowrey. Mr. Lowrey is licensed as a Certified Public
Accountant in North Carolina and is a graduate of Grove City College in Grove
City, Pennsylvania.
GREGORY S. GUSH is our Executive Vice President and Chief Marketing
Officer. Mr. Gush joined us on June 21, 2000. From July of 1998 to June 2000, he
served as President of MMS Media, an interactive media consulting company
located in Phoenix, Arizona. While at MMS Media, Inc. Mr. Gush was very involved
with providing Media consulting services to e-commerce companies and focusing on
establishing and building strategic media company alliances and partnerships. In
July of 1996, he founded PKG Media and served as President and Chief Executive
Office. Between 1992 and 1996, he was Executive Vice President Sales and
Marketing of Independent Television Network. Both companies were based out of
New York. Mr. Gush received a Bachelor of Arts Degree in Economics from Colgate
University.
DOUGLAS MAY, our Executive Vice President and Chief Creative Officer,
joined us during our purchase of Douglas May & Co. in July 2000. Mr. May was
employed by Douglas May & Co. from July 1990 to July 2000. Doug holds
Advertising Design Degrees from the University of North Texas and the Art
Central College of Design.
On an annual basis, our Board of Directors appoints our executive officers,
who serve until their successors have been duly elected and qualified. There are
no family relationships among any of our directors or executive officers.
COMPOSITION OF OUR BOARD OF DIRECTORS
Our bylaws provide that the number of members of our Board of Directors
will consist of at least one director and that the board has the power to
determine the number of directors, when not determined by the shareholders, and
to fill vacancies on the Board of Directors. Currently, the number of Directors
is fixed at five, and we have five Directors and no vacancies on our Board of
Directors. All of our Directors are elected annually to serve until the next
annual shareholders' meeting following their election and until their successors
are elected and qualified.
The Compensation Committee of our Board of Directors reviews the
performance of all executive officers, determines the salaries and benefits for
all executive officers and administers our stock option plan. The entire Board
of Directors is currently administering the duties of the Compensation
Committee. We plan to include the appointment of a Compensation Committee on the
agenda of our Board of Directors' next meeting.
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<PAGE> 51
EXECUTIVE COMPENSATION
The following table and the narrative text discloses the compensation paid
during 1999 and 1998 to our current President and Chief Executive Officer and
the three other individuals who served at different times during 1999 as our
President and Chief Executive Officer. The table also shows the one (1) other
highest paid executive officer(s) whose annual salary and bonus(es) exceeded
$100,000 during 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------
ANNUAL COMPENSATION AWARDS
----------------------------------------------------
SECURITIES
RESTRICTED UNDERLYING
NAME AND SALARY BONUS STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR ($) ($) AWARDS ($) (#) COMPENSATION
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Andrew L. Fox (2) 1999 $66,100 $85,891 -- 240,000 --
Director, President and
Chief Executive Officer
-----------------------------------------------------------------------------------------------------------------
Michael Cimino (3) 1999 -- -- -- 425,000 $ 50,879(7)
Former President and 1998 -- -- $70,500 -- $ 11,000(8)
Chief Executive Officer,
Secretary, and Treasurer
-----------------------------------------------------------------------------------------------------------------
Myung K. Kim (4) 1999 $66,346 -- -- 265,000 112,153(9)
Former President and
Chief Executive Officer
-----------------------------------------------------------------------------------------------------------------
Peter R. Rogina (5) 1999 $17,308 -- -- 240,000 118,895(10)
Former President and
Chief Executive Officer
-----------------------------------------------------------------------------------------------------------------
Richard Seifert (6) 1999 $24,000 -- -- 250,000 $112,646(11)
Former Vice President of
Operations
-----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Amounts in this column include amounts earned during the year
specified but deferred for payment either the following year or
thereafter.
(2) Mr. Fox has served as our President and Chief Executive Officer and
Executive Vice President from August 25, 1999 to present.
(3) Mr. Cimino served as our President and Chief Executive Officer from
September 10, 1998 to March 1, 1999. He continued to be employed as
Chairman of the Board of Directors from September 10, 1998 to August
25, 1999.
(4) Mr. Kim served as our President and CEO from April 20, 1999 to August
25, 1999.
(5) Mr. Rogina served as our President and CEO from March 15, 1999 to
April 20, 1999.
(6) Richard F. Seifert served as our Vice President of Operations from
February 10, 1999 to August 25, 1999.
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<PAGE> 52
(7) This amount represents consulting fees paid to Mr. Cimino in 1999.
(8) This amount represents consulting fees paid to Mr. Cimino in 1998.
(9) This amount consists of a termination amount of $100,000 pursuant to a
verbal agreement ($21,346 was disbursed to Mr. Kim in calendar 1999
and $78,654 was disbursed in 2000) and $12,153 in consulting fees paid
to Mr. Kim during 1999.
(10) This amount consists of $110,000 in connection with the termination of
Mr. Rogina's employment contract and $8,895 in consulting fees paid to
Mr. Rogina in 1999.
(11) This amount consists of $100,000 paid to Mr. Seifert under our
agreement with him in which he receives a fee for identifying
successful financing opportunities for us and $12,646 in consulting
fees paid to Mr. Seifert in 1999.
EMPLOYMENT AGREEMENTS
The section below summarizes all material terms of the employment
agreements that we have with our named executive officers and Messrs. Kleinmaier
and Lowry.
In January 2000, under an employment arrangement without a fixed term that
either party may terminate at any time, we employed Andrew L. Fox as our acting
President and Chief Executive Officer and Executive Vice President and elected
him as a Director. In August 2000, Mr. Fox was appointed President and Chief
Executive Officer. Under this agreement, Mr. Fox's base annual salary is
$135,000 and he is eligible to receive a bonus initially targeted to be up to an
amount equal to his base annual salary. The bonus is based upon goals and
objectives to be established by the Compensation Committee of our Board of
Directors annually following our fiscal year-end. While employed as acting Chief
Executive Officer, Mr. Fox received an additional bonus of $2,500 per month.
These bonuses may be increased or decreased by the Compensation Committee. Mr.
Fox will receive COBRA reimbursement until we establish our health care plan,
and will receive life insurance coverage through Summus Ltd. until we establish
life insurance coverage. Finally, Mr. Fox receives a $600 per month car
allowance. If we terminate Mr. Fox's employment we are obligated to pay him six
months of salary paid monthly or in a lump sum.
Mr. Fox received an option to purchase 240,000 shares of our Common Stock
that vest in three equal installments over a three-year period beginning on
August 25, 1999. The vesting of these options is dependent on the attainment of
specific performance goals such as revenue, EBITDA or other metrics to be
determined by our Board of Directors. The exercise price for the options is
$4.38 per share for 80,000 of the 240,000 shares of Common Stock, and $13.00 per
share for the remaining 160,000 shares of Common Stock.
In August 1999, under an employment arrangement without a fixed term that
either party may terminate at any time, we employed Alan R. Kleinmaier as our
Executive Vice President, Secretary, Treasurer and acting Chief Financial
Officer. Under this agreement, Mr. Kleinmaier's base annual salary is $100,000
and he is eligible to receive a bonus initially targeted to be up to an amount
equal to his base annual salary. The bonus is based upon goals and objectives to
be established by the Compensation Committee of our Board of Directors annually
following our fiscal year-end. These bonuses may be increased or decreased by
the Compensation Committee. Mr. Kleinmaier will receive full medical, dental and
vision for himself and his dependents. Finally, Mr. Kleinmaier receives a $600
per month car allowance. If we terminate Mr. Kleinmaier's employment, we are
obligated to pay him six months of salary.
Mr. Kleinmaier received an option to purchase 50,000 shares of our Common
Stock that were fully vested as of August 25, 1999. The exercise price for these
options is $4.00 per share.
Mr. Kleinmaier was employed by Summus and served as an Executive Vice
President of Summus. Mr. Kleinmaier allocated approximately 10% of his time to
Summus and the remainder of his time to us through September 2000. Mr.
Kleinmaier was paid $25,000 annually by Summus and owns 5,000 shares of Summus
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<PAGE> 53
Common Stock. He has been granted an additional 5,000 shares of Summus stock,
the restrictions on which are expected to lapse in December 2000 based upon the
achievement of certain performance measures.
In May 2000, under an employment arrangement without a fixed term that
either party may terminate at any time, we employed Robert S. Lowrey as our Vice
President and Chief Financial Officer. Under this agreement, Mr. Lowrey's base
annual salary is $125,000 and he is eligible to receive a bonus initially
targeted to be up to an amount equal to one-half of his annual base salary. The
bonus will be based upon goals and objectives to be established by the
Compensation Committee of our Board of Directors annually following our fiscal
year end. The Compensation may increase or decrease bonuses. Mr. Lowrey will
receive full medical, dental and vision insurance coverage for himself and his
dependents. Finally, Mr. Lowrey receives a $500 per month car allowance. If Mr.
Lowrey is terminated from his employment without cause, we are obligated to pay
him severance pay equal to six months' salary. In the event of a sale of High
Speed in which his employment would not continue, he will receive one year of
base salary as a severance payment.
Mr. Lowrey received an option to purchase 100,000 shares of our Common
stock that will vest in three equal installments over a three-year period
beginning on his date of employment. The exercise price for this option is $7.50
per share.
STOCK OPTIONS GRANTED
The following table provides information about the stock options granted to
our executive officers during our fiscal year 1999.
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS MARKET
UNDERLYING GRANTED TO PRICE ON POTENTIAL REALIZABLE VALUE
OPTIONS EMPLOYEES IN EXERCISE OR DATE OF AT ASSUMED ANNUAL RATES
GRANTED FISCAL YEAR BASE PRICE GRANT EXPIRATION OF STOCK PRICE APPRECIATION
NAME (#) 1999 ($/SH) ($/SH) DATE FOR OPTION TERM (1)
---- ---------- ------------ ----------- -------- ---------- -------------------------------------
0% 5% 10%
----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael Cimino 425,000(2) 24% $ 0.01 $2.375 01/01/05 $ 1,005,125 --(3) --(3)
Peter R. Rogina 200,000(4) 11% $ 0.01 $2.75 9/22/04 $ 548,000 $699,955 $883,781
Peter R. Rogina 40,000(5) 2% $ 0.01 $2.75 9/22/04 $ 109,600 $139,991 $176,756
Richard F. Seifert 50,000(6) 3% $ 4.00 $2.375 5/27/09 --(7) --(7) $108,007
Richard F. Seifert 200,000(6) 11% $ 0.01 $2.375 5/27/09 $ 473,000 --(3) --(3)
Myung K. Kim 200,000(8) 11% $ 0.01 $2.375 4/12/09 $ 473,000 --(3) --(3)
Myung K. Kim 65,000(8) 4% $ 4.00 $2.375 4/12/09 --(7) --(7) $108,007
Andrew L. Fox 160,000(9) 9% $13.00 $4.38 8/25/09 --(7) --(7) --(7)
Andrew L. Fox 80,000(9) 5% $ 4.38 $4.38 8/25/09 $ 0 $220,365 $558,447
</TABLE>
(1) The potential realizable value of the options reported above was
calculated by assuming 5% and 10% annual rates of appreciation of the price of
our Common Stock from the date of grant of the options until the expiration of
the options. These assumed annual rates of appreciation were used in compliance
with the rules of the Securities and Exchange Commission and are not intended to
forecast future price appreciation of our Common Stock. We chose not to report
the present value of the options because we do not believe any formula will
determine with reasonable accuracy a present value because of unknown or
volatile factors. The actual value realized from the options could be
substantially higher or lower than the values reported above, depending upon the
future appreciation or depreciation of the Common Stock during the option period
and the timing of exercise of the options. We have reported the 0% column to
describe the value of the options granted to the named executive on the date of
the grant since these grants were at prices below the market price of the common
stock on the date of the respective grants.
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<PAGE> 54
(2) These options were granted in May 1999 per Mr. Cimino's verbal
employment agreement.
(3) No value is reported because these options have been exercised.
(4) Under the terms of our settlement agreement with Peter R. Rogina, dated
September 22, 1999, we granted Mr. Rogina an option, exercisable in full on
September 22, 1999, to purchase 200,000 shares of Common Stock having an
exercise price of $0.01. Mr. Rogina may exercise the option at any time during
the five-year period commencing on September 22, 1999. The option includes
protection from dilution due to recapitalizations, issuances of securities at
less than 67% of fair market value, granting of other options or similar rights,
and dividend or distribution rights. We have not issued any new diluting shares
after the grant date of Mr. Rogina's option for 200,000 shares, therefore, Mr.
Rogina's option is now exercisable for 200,000 shares.
(5) Under the terms of our settlement agreement with Mr. Rogina, dated
September 22, 1999, we granted Mr. Rogina an option to purchase 40,000 shares of
Common Stock having an exercise price of $0.01. Mr. Rogina may exercise the
option during the period commencing on July 1, 2000 and ending on September 22,
2004.
(6) These options were granted on May 27, 1999 per Mr. Seifert's verbal
employment agreement.
(7) There is no calculated potential realized value for these options for
the 5% and 10% annual rates of appreciation because at these rates the exercise
price remains higher than the market price during the entire period of the
options life.
(8) Mr. Kim's options were originally granted as an option to purchase
200,000 shares at an exercise price of $0.01 per share of Common Stock and an
option to purchase 50,000 shares at an exercise price of $4.00 price per share.
Mr. Kim has exercised the option for 200,000 shares. The remaining option for
50,000 shares included protection from dilution due to recapitalizations,
issuances of securities at less than 67% of fair market value, granting of other
options or similar rights, and dividend or distribution rights. Mr. Kim has
agreed to exchange an additional 15,000 options for termination of his
antidilution rights. The additional 15,000 options are included in Mr. Kim's
total number of options in the above table. Based on this, Mr. Kim's option is
now exercisable for 65,000 shares of Common Stock.
(9) These options were granted on August 25, 1999 per Mr. Fox's employment
agreement and become exercisable, subject to continued employment, in cumulative
annual increments of one-third each beginning on the date of grant and the
first, second and third anniversaries of the date of grant.
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<PAGE> 55
STOCK OPTIONS EXERCISED AND YEAR END VALUES OF UNEXERCISED OPTIONS
The following table provides information about the stock options exercised
by our named executive officers during 1999.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1999
AND FISCAL YEAR END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES ACQUIRED VALUE UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
ON EXERCISE REALIZED OPTIONS AT FY-END (#) MONEY OPTIONS AT FY-END ($)
NAME (#) ($)(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (2)
---- --------------- -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Michael Cimino 425,000(3) $952,000(3) 0/0 $0/$0
Richard F. Seifert 200,000 448,000 50,000/0 600,000/0
Myung K. Kim 200,000 448,000 65,000/0 780,000/0
Peter R. Rogina 0 0 240,000/0 3,198,000/639,600
Andrew L. Fox 0 0 0/240,000 0/1,409,600
</TABLE>
----------------------
(1) Upon exercise of the option an option holder did not receive the amount
reported above under the column Value Realized. The amounts reported above under
the column Value Realized merely reflect the amount by which the value of our
Common Stock, on the date the option was exercised, exceeded the exercise price
of the option. The option holder does not realize any cash until the shares of
Common Stock issued upon exercise of the options are sold.
(2) The value of our Common Stock on December 31, 1999 was $16.00 per
share. Value was determined by taking the last sale price of our Common Stock on
that date as reported by OTC Bulletin Board(R). The value of options was
determined by subtracting the aggregate exercise prices of the options from the
value of the Common Stock issuable upon exercise of the options.
(3) This grant of an option to purchase 425,000 shares of Common Stock was
exercised by Mr. Cimino for all 425,000 shares. Later, the shares acquired by
Mr. Cimino were reduced to 95,000 shares of Common Stock through share
cancellations we implemented. The cancellation of these shares were in
connection with transactions we rescinded, primarily two proposed business
combinations with National Direct Corporation and Healthtec, Inc. which were
never consummated. The value realized amount at the grant date would have been
$213,750 if the original option grant had been for 95,000 shares of our Common
Stock.
STOCK OPTION PLAN
The following summary description of our Equity Compensation Plan is not
intended to be complete, and is qualified by reference to the copy of the Equity
Compensation Plan, filed as an exhibit to the Registration Statement.
Our Board of Directors adopted our Equity Compensation Plan on January 27,
2000, which our shareholders approved on February 11, 2000. This plan provides
that our Board may grant stock options for Common Stock to officers, other
employees, directors, consultants and independent contractors who provide
services to us under the terms of the plan. We have reserved an aggregate of
2,000,000 shares of Common Stock for issuance under this plan, some of which
have been issued and are outstanding. If shares subject to outstanding stock
options are not purchased or are reacquired because of termination, expiration
or cancellation of such stock options or for other reasons, those shares will be
available for issuance through future stock option grants under the plan. Shares
of
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<PAGE> 56
Common Stock subject to the stock option plan are made available from authorized
and unissued shares of Common Stock.
The Compensation Committee of the Board of Directors currently administers
the plan. The Compensation Committee may interpret the plan and may prescribe,
amend and rescind rules and make all other determinations necessary or desirable
for the administration of the plan. The stock option plan permits the
Compensation Committee to select the eligible parties who will receive stock
option awards under the plan and generally to determine the terms and conditions
of those awards.
We may issue two types of stock options under this plan: incentive stock
options, which are intended to qualify for specific tax treatment under Section
422 of the Internal Revenue Code of 1986, as amended, and which may be granted
only to eligible parties who are employees; and nonqualified stock options,
which may be granted to all types of eligible parties. The plan contains special
provisions applicable to incentive stock options granted under the plan,
including but not limited to the requirement that the exercise price of each
incentive stock option be at least equal to the fair market value of a share of
Common Stock on the date the incentive stock option is granted. Stock options
granted under the plan are generally not transferable by the optionees.
In connection with any underwritten public offering of our equity
securities covered by an effective registration statement filed under the
Securities Act of 1933, as amended, including an initial public offering, an
optionee may not sell, make any short sale of, loan, hypothecate, pledge, grant
any option for the purchase of, or otherwise dispose or transfer for value or
otherwise agree to engage in any of the foregoing transactions with respect to
any, stock acquired under the plan without our or our underwriters' prior
written consent. This restriction will be in effect for whatever period of time
from and after the effective date of the final prospectus for the offering that
our underwriters or we may request.
If a reorganization, recapitalization, reclassification, stock split, stock
dividend, or consolidation of shares of Common Stock, merger or consolidation of
our company or sale or other disposition by us of all or a portion of our
assets, other change in our corporate structure, or any distribution to
shareholders other than a cash dividend results in the outstanding shares of
Common Stock, or any securities exchanged therefore or received in their place,
being exchanged for a different number or class of shares of Common Stock or
other securities we might issue, or for shares of Common Stock or other
securities of any other corporation, or new, different or additional shares or
other securities of our or of any other corporation being received by the
holders of outstanding shares of Common Stock, then the Compensation Committee
of our Board of Directors shall make equitable adjustments in the limitation on
the aggregate number of shares of Common Stock that may be awarded as stock
option grants under the plan, the number and class of stock that may be subject
to the grant of stock options under the plan and which have not been issued or
transferred under outstanding stock options, and the terms, conditions or
restrictions of any stock option or the corresponding award agreement (including
the exercise price thereunder). However, the plan requires that all such
adjustments shall be made such that incentive stock options granted under the
plan shall continue to constitute incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986. The plan provides that our
Board of Directors may amend or terminate this plan at any time, provided,
however, that specific types of amendments require approval of our shareholders
and no such action may be taken which adversely affects any rights under
outstanding stock options without the holder's consent.
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<PAGE> 57
COMPENSATION OF DIRECTORS
Directors who are not employed with us full-time: (i) are reimbursed for
reasonable travel expenses incurred in attending meetings of the Board or
committees of the Board; (ii) are paid a fee of $1,000 for each day on which the
Board and/or committee meets or is in conference, which such Directors attend,
except for committee meetings held on the same date as a Board meeting or
conference; and (iii) in the future may be granted stock options under the terms
of our Equity Compensation Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We have only recently established our employee stock plan and Compensation
Committee, and currently all members of the Board of Directors serve on the
Compensation Committee. The Compensation Committee made recent decisions
concerning the compensation of our recently appointed executive officers, one of
which, Andrew L. Fox, serves on our Board of Directors. Mr. Fox is the former
Executive Vice President of Sales and Marketing and served as a member on the
Board of Directors of Summus.
Several of the members of our Board of Directors and our Compensation
Committee are members of the Board of Directors of Summus. Dr. Bjorn Jawerth
serves on our Board of Directors and on our Compensation Committee. Mr. Bradford
Silvernail was a member of our Board of Directors from February 17, 2000 to June
1, 2000. During this time, our entire Board of Directors constituted our
Compensation Committee; thus, during this time, Mr. Silvernail was on our
Compensation Committee. Dr. Jawerth is the Chairman of our Board of Directors,
the Chairman of the Board of Directors of Summus, and our largest shareholder.
Other than the interlocking relationships with Summus, no other
interlocking relationships exist.
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<PAGE> 58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table provides information about the beneficial ownership of
shares of each class of our voting stock as of September 30, 2000, by each
person known to be the beneficial owner of 5% or more of the outstanding voting
stock of each class of our securities.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY
CLASS NAME AND ADDRESS OWNED(1) PERCENT OF SHARES OUTSTANDING
----- ---------------- ------------ -----------------------------
<S> <C> <C> <C>
Common Stock Summus Ltd. 9,669,027(2)(3) 43.7%
Two Hannover Square, Suite 600
434 Fayetteville St. Mall
Raleigh, NC 27601
Dr. Bjorn Jawerth 9,669,027(2)(3) 43.7%
Chairman of our Board of Directors
Two Hannover Square, Suite 600
434 Fayetteville St. Mall
Raleigh, NC 27601
William Bradford Silvernail (4) 8,389,360(3)(5) 37.9%
Two Hannover Square, Suite 600
434 Fayetteville St. Mall
Raleigh, NC 27601
</TABLE>
-----------------------------------------
(1) The persons and entities named in the table have sole voting power and
investment power for all shares they beneficially own as shown, except
as otherwise noted.
(2) Includes 8,389,360 shares beneficially owned by Summus Ltd. Summus
also has the right to vote an additional 1,279,667 shares of Common
Stock under voting agreements with and/or proxies from 14 persons.
Total Summus voting power is 43.7% of our outstanding Common Stock.
Dr. Jawerth owns 54.0% of the outstanding shares of Summus Ltd., and
is the President and Chairman of the Board of Directors of Summus Ltd.
Dr. Jawerth exercises shared voting and investment power for all High
Speed shares Summus owns.
(3) Includes 1,279,667 shares for which Summus has voting power through
voting agreements with and/or proxies from 14 persons.
(4) Mr. Silvernail resigned from our Board of Directors on June 1, 2000.
We are not aware of any disagreements between Mr. Silvernail and us.
(5) Includes 8,389,360 shares beneficially owned by Summus Ltd.
SECURITY OWNERSHIP OF MANAGEMENT
The following table provides information about the financial ownership of
our Common Stock as of September 30, 2000, owned by each Director, each Named
Executive Officer, and by the Directors and executive officers as a group.
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<PAGE> 59
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NAME AND ADDRESS OWNED (1) PERCENT OF SHARES OUTSTANDING
---------------- -------------------- -----------------------------
<S> <C> <C>
Dr. Bjorn Jawerth 9,669,027 (2)(3) 43.7%
Chairman of our Board of Directors
Two Hannover Square, Suite 600
434 Fayetteville St. Mall
Raleigh, NC 27601
Andrew L. Fox
Director, President and Chief Executive 0 (5) *
Officer(4)
Richard F. Seifert 250,000 (6)(7) 1.2%
Director(4)
Herman Rush 0 *
Director(4)
C. Cristine Wittress 0
Director(4) *
Alan R. Kleinmaier 90,000 (8) *
Executive Vice President, Secretary, and
Treasurer(4)
Robert S. Lowrey, Chief Financial 0 *
Officer And Vice President of Finance(4)
Michael M. Cimino 800,000 (9) 3.5%
Former Director, President, Secretary and
Treasurer(4)
Myung K. Kim 265,000 (10) 1.2%
Former President and Chief Executive
Officer(4)
Peter R. Rogina 240,000 (11) 1.1%
Former President and Chief Executive
Officer (4)
All current directors and executive 10,029,027 (12) 45.3%
Officers as a group (7 Persons)
</TABLE>
* Represents beneficial ownership of less than one percent (1%) of Common
Stock.
------------------------------------------
(1) The persons and entities named in this table have sole voting
power and investment power for all shares they beneficially own
as shown, except as otherwise noted.
(2) Includes 8,389,360 shares beneficially owned by Summus Ltd.
Summus also has the right to vote an additional 1,279,667 shares
of Common Stock under voting agreements with and/or proxies from
14 persons. Total Summus voting power is 43.7% of our outstanding
Common Stock. Dr. Jawerth owns 54.0% of the outstanding shares of
Summus Ltd., and is the President and Chairman of the Board of
Directors of Summus Ltd. Dr. Jawerth exercises shared voting and
investment power for all High Speed shares Summus owns.
(3) Includes 1,279,667 shares for which Summus has voting power
through voting agreements with and/or proxies from 14 persons.
(4) c/o High Speed Net Solutions, Inc., Suite 2120, 434 Fayetteville
Street Mall, Raleigh, NC 27601.
(5) Mr. Fox has options to acquire 240,000 shares of Common Stock
through stock options exercisable over three years in equal
installments from the anniversary date of August 25, 1999.
(6) These shares include 50,000 shares that Mr. Seifert may
immediately acquire through stock options.
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<PAGE> 60
(7) These shares include 200,000 shares that are beneficially owned
with his wife, Karen Seifert.
(8) These shares include 20,000 shares that Mr. Kleinmaier owns with
Pamela B. Kleinmaier, the wife of Mr. Kleinmaier. These shares
include 50,000 shares that Mr. Kleinmaier may acquire through
stock options immediately exercisable.
(9) These shares include shares that Mr. Cimino beneficially owns
with his wife, Gina M. Cimino.
(10) These shares include 65,000 shares that Mr. Kim may immediately
acquire through stock options.
(11) These shares include 240,000 shares that Mr. Rogina may
immediately acquire through stock options.
(12) This total counts the percentage of ownership attributable to the
Summus shares only once.
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<PAGE> 61
PLAN OF DISTRIBUTION
The Selling Shareholders may sell or distribute some or all of their our
Common Stock from time to time through underwriters or dealers or brokers or
other agents or directly to one or more purchasers, including privately
negotiated transactions in the over-the-counter market, or in transactions in
which Common Stock may be delivered in connection with the issuance of
securities by issuers other than us that are exchangeable for (whether optional
or mandatory), or payable in such Common Stock (whether such securities are
listed on a national securities exchange or otherwise) or pursuant to which such
Common Stock may be distributed (which securities issued by others will, to the
extent required by applicable law, be registered under the Securities Act), or
in a combination of such transactions.
Such transactions may be effected by the Selling Shareholders at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at negotiated prices or at fixed prices, which may be changed.
Brokers, dealers, agents or underwriters, if any, participating in such
transactions as agent may receive compensation in the form of discounts,
concessions or commissions from the Selling Shareholder. Such discounts,
concessions or commissions as to a particular broker, dealer, agent or
underwriter might be in excess of those customary in the type of transaction
involved. This Prospectus may be used, with our prior written consent, by the
Selling Shareholders, or by other persons acquiring Common Stock and who wish to
offer and sell such Common Stock under circumstances requiring or making
desirable its use.
The Selling Shareholders and any such underwriters, brokers, dealers or
agents or underwriters that participate with the Selling Shareholders in the
distribution of the Common Stock may be deemed to be "underwriters" within the
meaning of the Securities Act, and any discounts, commissions or concessions
received by any such underwriters, brokers, dealers or agents might be deemed to
be underwriting commissions or discounts under the Securities Act. Neither we
nor the Selling Shareholders can presently estimate the amount of that
compensation. We know of no existing arrangements between any Selling
Shareholder and any other Selling Shareholder, underwriter, broker, dealer or
other agent relating to the sale or distribution of the Common Stock.
We have agreed to pay all fees and expenses incident to the registration of
the Common Stock, except commissions and discounts of underwriters, brokers,
dealers or agents and fees and expenses of counsel or any other professionals or
other advisors, if any, to the Selling Shareholders. Each Selling Shareholder
may indemnify any broker, dealer, agent or underwriter that participates in
transactions involving sales of the Common Stock against specific liabilities,
including liabilities arising under the Securities Act.
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<PAGE> 62
SELLING SHAREHOLDERS
The following table provides information to reflect the potential sale of
Common Stock in this offering by each Selling Shareholder. Except as otherwise
indicated, and subject to applicable community property laws, the individuals
named below have sole voting and investment power for all shares of Common Stock
they hold. We based the applicable percentage ownership shown in the table on
22,121,479 shares of Common Stock outstanding as of September 30, 2000.
If all 2,443,477 shares of Common Stock covered by this Registration
Statement of which this Prospectus is a part and are sold, this would entail the
issuance of 715,000 new shares of Common Stock. This would result in 22,836,479
shares outstanding at or shortly after the effective date of the Registration
Statement. This excludes:
- Any issuance of shares for stock options not included in the
115,000 options included in this offering; and
- Any issuance of shares for conversion of the Series A Convertible
Preferred Stock that we have outstanding.
The Registration Statement of which this Prospectus is a part covers
2,443,477 shares of Common Stock, of which 1,728,477 shares of Common Stock are
currently issued and outstanding, and of which 715,000 shares represent shares
of Common Stock that would be issued if this entire offering is sold. These
715,000 shares represent options and other rights that the Selling Shareholders
may exercise. Of the 715,000 shares that would be issued, 600,000 shares
represent an estimate of the additional shares that we will have to issue for
Mr. William R. Dunavant on or before the date the Registration Statement becomes
effective under the terms of our settlement agreement with him.
We have deemed options that are exercisable within 60 days of September 30,
2000 to be outstanding and to be "beneficially owned" by the shareholder holding
those options for the purpose of computing that shareholder's percentage
ownership; however, we have not treated these shares as being outstanding for
the purpose of computing the percentage ownership of any other shareholder. We
have determined "beneficial ownership" according to the Commission's rules that
deem shares to be beneficially owned by any person or group who has or shares
voting or investment power for these shares. Unless otherwise indicated, the
individuals we have named on this table have sole voting and investment control
for all of the shares that they beneficially own.
SELLING SHAREHOLDERS TABLE
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
SHARES OF COMMON COMMON STOCK SHARES OF COMMON
STOCK OWNED PRIOR SHARES OF COMMON OWNED AFTER STOCK HELD AFTER
NAME AND ADDRESS TO THE OFFERING STOCK TO BE SOLD THE OFFERING THE OFFERING
---------------- ------------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
Myung K. Kim 265,000(2) 65,000 200,000(2) *
Former President and Chief
Executive Officer(1)
Ron De Jong(1) 100,000(3) 100,000 0 --
Darlene Beck(1) 25,000 25,000 0 --
John Hinton(1) 25,000 25,000 0 --
Mike Bissell(1) 2,000 2,000 0 --
Tom Godfrey(1) 25,000 25,000 0 --
Joseph Repko(1) 5,000 5,000 0 --
William D. Glycenfer(1) 44,647 44,647 0 --
</TABLE>
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<PAGE> 63
<TABLE>
<CAPTION>
SHARES OF PERCENT OF
SHARES OF COMMON COMMON STOCK SHARES OF COMMON
STOCK OWNED PRIOR SHARES OF COMMON OWNED AFTER STOCK HELD AFTER
NAME AND ADDRESS TO THE OFFERING STOCK TO BE SOLD THE OFFERING THE OFFERING
---------------- ------------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
Richard J. Seifert(1) 125,000 125,000 0 --
Rita M. Seifert(1) 125,000 125,000 0 --
William R. Dunavant(1) 1,200,000(4)(5) 1,200,000(4)(5) 0 --
Douglas May(1) 133,070 133,070 0 --
AAA Trust 281,672 281,672 0 --
Van Ernst Jakobs 287,089 287,089 0 --
</TABLE>
* Represents beneficial ownership of less than one percent (1%) of Common
Stock.
-------------------
(1) c/o High Speed Net Solutions, Inc., Suite 2120, 434 Fayetteville
Street Mall, Raleigh, NC 27601.
(2) These shares include 65,000 shares that Mr. Kim may immediately
acquire through stock options.
(3) These shares include 50,000 shares that Mr. De Jong may
immediately acquire through stock options.
(4) In June 2000, we entered into a settlement agreement with William
R. Dunavant and Michael Cimino to resolve a litigation suit filed
in Florida. The settlement agreement provides, among other
things, that we register 350,000 shares of Common Stock owned by
Mr. Dunavant with the Securities and Exchange Commission. Under
the settlement agreement, we issued 175,000 new shares of Common
Stock to Mr. Dunavant on the execution date of the settlement
agreement. In addition, the settlement calls for the payment of
$12,750 per month and 25,000 shares of Common Stock per month
until the registration of all shares are effective. If the
Registration Statement is not effective on or before January 1,
2001, from that date forward and until we have delivered an
effective registration statement, we pay Mr. Dunavant $12,750 and
issue 50,000 shares of Common Stock each month. We must also
register all shares delivered under these monthly allotments.
Finally, we must also issue and register an allotment of shares
of 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 OTC Bulletin Board(R) and $23.00 per
share. See "Business-Legal Proceedings."
(5) If all 2,443,477 shares of Common Stock in this registration are
obtained for sale or are obtained for sale and are sold this
would entail the issuance of 715,000 new shares of Common Stock.
Of the 715,000 shares that would be issued, 600,000 shares
represent an estimate of the additional shares that we will have
to issue for Mr. William R. Dunavant on or before the date the
Registration Statement becomes effective according to the terms
of our settlement agreement with Mr. Dunavant. This estimate
assumes that it will take approximately four months for the
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 our settlement agreement with Mr.
Dunavant.
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<PAGE> 64
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
For all of the transactions described in this section the terms and
conditions associated with each transaction resulted from arms-length
negotiations between each party. The terms of each transaction were as good as
could be obtained from unaffiliated third parties. Through Summus, we have used
and in some minor aspects are still using resources from Summus, to satisfy
basic business needs. These services are provided under an oral agreement in
which we will pay Summus the fair value of the services provided, without
interest, or are provided under the Master Agreement between us and Summus dated
February 18, 2000. This arrangement is temporary until we complete our
infrastructure. As of September 30, 2000, we have has hired 19 full time
employees, and we no longer need to depend on Summus for basic business
operational needs is minimal.
Some Summus directors and executive officers serve on our Board of
Directors. Dr. Bjorn Jawerth, the Chairman, President, and majority shareholder
of Summus, is the Chairman of the Board of High Speed. Alan R. Kleinmaier, our
Executive Vice President, Secretary, and Treasurer, was an Executive Vice
President of Summus through September 2000.
OUR OWNERSHIP IN SUMMUS
We own 167,000 shares of Summus Ltd. Our shares represent approximately
14.1% of Summus' outstanding common stock, but represent only 12.8% of Summus'
common stock on a fully diluted basis. We acquired 1,000,182 shares of Summus
Technologies, Inc.'s common stock during the first half of 1999. We acquired
these shares from individuals in exchange for cash and shares of our Common
Stock. Following our acquisition of these Summus Technologies, Inc. shares,
Summus Ltd. and Summus Technologies, Inc. merged. Summus Ltd. was the surviving
entity. As a result of this merger, we became a stockholder of Summus Ltd. The
following table lists the individuals from whom we acquired the Summus
Technologies, Inc.'s shares and the consideration for these transactions.
<TABLE>
<CAPTION>
CONSIDERATION (IN NUMBER OF HIGH AGGREGATE VALUE OF
SHARES SHARES CASH DISBURSED AS CONSIDERATION
INDIVIDUAL OF SUMMUS TECHNOLOGIES) OR OTHER CONSIDERATION CONSIDERATION GIVEN BY HIGH SPEED
---------- ---------------------- ---------------------- ----------------- -------------------
<S> <C> <C> <C> <C>
William R. Dunavant 250,000 350,000 $ 100,000 $ 887,500
Wallace Permenter 5,000 18,334 -- $ 41,252
Rick Turbin 27,000 30,000 -- $ 67,500
Robert Chalnick 20,000 25,000 -- $ 56,250
Cale Yarborough 100,000 366,667 -- $ 825,000
StoneLeigh Ltd. 418,182 (1) -- (1)
(an entity
established by Mr.
Bradford Richdale)
Debra Richdale 180,000 (1) -- (1)
</TABLE>
(1) High Speed received these shares of Summus Technologies, Inc.'s common
stock in connection with two related and contemporaneous transactions: (i) a
stock purchase agreement executed in August 1999 between Summus and Mr. Bradford
Richdale and various entities established by Mr. Richdale, under which Summus
purchased 9,542,360 shares of our Common Stock from Mr. Bradford Richdale in
exchange for 132,888 shares of Summus Ltd; and (ii) the merger of Summus Ltd.
and Summus Technologies, Inc., described in the paragraph immediately below.
Based upon negotiations between all parties to these related and contemporaneous
transactions, it was agreed that High Speed would not issue any shares of its
common stock in exchange for shares of Summus
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<PAGE> 65
Technologies stock held by either Bradford Richdale, Debra Richdale or entities
established by Mr. Richdale. Therefore, we did not issue any shares of Common
Stock to the individual or entity transferring Summus Technologies, Inc.'s
shares to us because the consideration the individual or entity received was in
connection with and satisfied under the two related and contemporaneous
transactions described in this footnote.
In August 1999, Summus Technologies, Inc. and Summus Ltd merged. Under the
terms of that merger, our 1,000,182 shares of Summus Technologies, Inc. were
converted into 167,000 shares of Summus Ltd. In conjunction with the merger, we
entered into a shareholders agreement in August 1999, in some cases under which
we cannot transfer our shares without first granting Summus the opportunity to
purchase our shares. We cannot transfer our Summus shares to a third party
without first offering Summus and then the other Summus stockholders the
opportunity to purchase our shares on the same terms offered to us by the third
party, except that Summus or the Summus stockholder purchasing our shares may
pay 25% of the purchase price in cash and pay the remainder of the purchase
price in three equal annual installments with interest at the prime rate of Bank
of America. However, we can transfer our Summus shares if High Speed is sold
through a stock sale and: (i) the transaction does not have an adverse effect on
Summus; and (ii) the entity purchasing our shares is not an affiliate of Mr.
William R. Dunavant. The shareholders agreement obligates parties to the
agreement to vote on some matters as directed by Dr. Bjorn Jawerth, however,
High Speed is exempt from these voting provisions of the shareholder agreement.
THE ASSET PURCHASE OF MARKETERS WORLD, INC.
In August 1998, we acquired the business and assets of, and assumed the
liabilities of, Marketers World, Inc. To pay the sole shareholder of Marketers
World, Mr. Bradford Richdale, we issued 9,275,000 shares of Common Stock to
Marketers World, Inc. Before this transaction Mr. Richdale was not a related
party to High Speed. Immediately before issuing these 9,275,000 shares of Common
Stock, we had 1,000,000 shares of Common Stock issued and outstanding.
At the time of the merger with Marketers World, High Speed was a
non-operating public shell with no assets or liabilities. Marketers World 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 Marketers World. For
accounting purposes, this merger was accounted for as a reverse merger, with
Marketers World treated as the accounting acquirer. Since Marketers World was
treated as the accounting acquirer, the value of its recorded assets was
maintained at their historical net book value of approximately $350,000. These
assets were primarily office furniture and fixtures and computer equipment. The
accounting literature for a reverse merger involving non-operating public shell
considers such a transaction to be a capital transaction in substance.
Therefore, we accounted for our issuance of the 9,275,000 shares of our Common
Stock to acquire the net assets of Marketers World as a recapitalization of our
company, with no resulting goodwill. Consequently, it was not necessary to
record the value of the shares High Speed issued in this transaction. However,
based on transactions in our Common Stock on the date of the merger, the
estimated value of the 9,275,000 shares issued was approximately $742,000. At
the time of the merger, our Common Stock was not publicly traded.
In addition to the issuance of these shares, as the related party in the
transaction, our President and then sole Director and Sole Corporate Officer,
Mr. Rene Hamouth, transferred the 725,000 shares of our Common Stock that he
personally owned to Marketers World to effect the transaction.
Prior to the merger with us, Mr. Richdale owned 100% of Marketers World.
Subsequently, the 10,000,000 shares that Marketers World received in the
transaction were assigned by Mr. Richdale as follows: (i) 6,835,000 shares to
Ormond Trust, an entity established by Mr. Richdale; (ii) 140,000 shares to Mr.
Cimino; and (iii) the remaining 3,025,000 shares to 24 other persons. After
these assignments, Mr. Richdale, including entities established by him, owned
approximately 66.52% of our outstanding Common Stock.
Marketers World was incorporated in January 1998, and its planned principal
operations were to lease computer systems to businesses and to distribute
Internet oriented products and perform related services. During 1998, Marketers
World was unable execute its planned activities and consequently ceased all
operating activities in December 1998. Since Marketers World was a development
stage enterprise, there were minimal assets to be disposed. Assets and licensing
rights which had no alternative use totaled $105,748 were written off. No
proceeds were realized on the disposition of these assets. The purpose of our
acquisition of Marketers World was our initial
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<PAGE> 66
attempt to become an operating company. The effect of this transaction was the
recording of a loss on discontinued operations of Marketers World of $1,334,855
in 1998 and the voluntary return of 5,161,100 shares of High Speed common stock
initially issued to acquire Marketers World. The majority shareholder who held
these shares agreed with us that the initial purchase price was over valued.
Accordingly, we cancelled these shares after they were voluntarily surrendered
to us.
The Marketers World officer executing the asset purchase agreement as
President of Marketers World was Mr. Michael Cimino, who was subsequently
elected the sole director and executive officer of High Speed.
Immediately after, and as a result of, the foregoing transaction, Mr.
Bradford Richdale became our primary shareholder. No independent valuation was
made of this transaction. After that transaction, we decided not to continue in
the line of business we acquired in that transaction. We do not believe that the
transaction added value to our company on an ongoing basis.
1998 OFFERING
In September 1998, we issued 1,550,000 shares of Common Stock to Mr.
Bradford Richdale, our controlling shareholder at the time of the transaction,
as forgiveness of a debt valued at $149,820 that we owed to him. These amounts
owed to Mr. Richdale resulted from various cash advances made by Mr. Richdale to
High Speed for operating capital purposes. These amounts were classified and
recorded as non-interest bearing, short-term advances from related parties,
payable on demand. The total amount of $149,820 represents an accumulation of
advances since January 1, 1998. Mr. Richdale loaned us these funds to finance
our operations. We also issued 1,100,000 shares of Common Stock to StoneLeigh
Ltd., an entity established by Mr. Richdale, and we issued 2,330,000 shares of
Common Stock to Rene Hamouth, our president, sole director, and sole corporate
officer at the time of the transaction. These shares of Common Stock were issued
in conjunction with shares issued to thirty other investors. The aggregate
consideration we received for these issuances was $317,000, including
forgiveness of debt.
The price per share of the 1,550,000 shares of Common Stock issued to Mr.
Richdale was $0.097 per share, representing the fair value of our Common Stock
on the date of issue. The price per share of the 1,100,000 shares issued to
Stoneleigh Ltd., the 2,330,000 shares issued to Rene Hamouth, and the 336,600
shares issued to third parties was $0.084 per share, representing the fair value
of our Common Stock on the dates of issuance.
BRD ACQUISITION
In September 1998 we acquired Brad Richdale Direct, Inc., ("BRD"). In
exchange for all of the outstanding and issued stock of Brad Richdale Direct we
issued: (i) 775,000 shares of Common Stock to Ormond Trust, Brad Richdale
Direct's major shareholder, and an entity established by Mr. Bradford Richdale,
our controlling shareholder at the time of the transaction; and (ii) 225,000
shares of Common Stock to Mr. Michael Cimino, who at the execution of the
transaction was president of Brad Richdale Direct and president of High Speed.
At the time High Speed entered into the transaction with BRD, BRD had
established a business relationship with Summus based on a letter agreement
dated March 3, 1998. This letter agreement provided BRD with licensing and
marketing rights to certain products to be provided by Summus. This agreement
was terminated at the end of 1998 in connection with the decision to discontinue
the operations of both BRD and Marketers World, as discussed in the following
paragraphs. There were no further business relationships between BRD and Summus
during 1998.
The transaction was accounted for as an acquisition of licensing rights
rather than a business combination because at the time of the acquisition BRD's
primary asset was marketing and licensing rights for Summus technology. In
connection with this transaction, in February 1999 we issued an immediately
vested option for 1,000,000 shares of Common Stock to Mr. Bradford Richdale,
exercisable at a price of $0.01 per share. Also, in connection with this
transaction, in September 1998, we issued 140,000 shares of Common Stock to Mike
Cimino. Finally, we issued 100,000 shares to Mr. Cimino as consideration for his
services in effecting this transaction. BRD was incorporated in August 1997.
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<PAGE> 67
The acquisition of BRD was a transaction between us and a company owned by
our primary shareholder. No independent valuation was made. The value
attributable to the licensing rights totaled $77,500. This amount represents the
775,000 shares issued that were valued using the most recent transactions in our
Common Stock of approximately $0.10 per share. The acquisition of the licensing
rights from BRD occurred in September 1998. At the time of this transaction, BRD
was not an operating entity and its only significant asset was the marketing and
licensing rights to Summus technology. The decision not to ramp up operations of
BRD was made in December 1998 along with the decision to discontinue the
operations of Marketers World. Consequently, as a part of the discontinuance of
these operations, the net book value of the capitalized licensing rights was
written off at December 31, 1998. Since BRD was a non-operating company, no
consideration was received when the decision was made to not operate it.
After that transaction, we decided not to operate the business that we
acquired in that transaction. Other than the licensing rights for Summus
technology, we do not believe that transaction added value to our company on an
ongoing basis.
NATIONAL DIRECT CORPORATION AND HEALTHTEC ACQUISITION
In September 1998, under a stock purchase agreement, we issued 300,000
shares of Common Stock for the purpose of acquiring HealthTec, Inc., and
National Direct Corporation. We issued 100,000 of these shares to Mr. Bradford
Richdale, our controlling shareholder at the time of the transaction, and we
issued 100,000 of these shares to Mr. Michael Cimino, our president and chief
executive officer. The final 100,000 shares were issued to an unrelated party.
Mr. Cimino received his shares in the capacity as our employee. The value
of these shares were compensatory in nature. Mr. Richdale received his shares in
the capacity of the sole shareholder of both National Direct Corporation and
HealthTec, Inc. The unrelated party received his shares in the capacity as a
consultant. This transaction was rescinded in November 1998 and in August 1999
and we implemented the cancellation of the 300,000 shares issued for this
acquisition. Any compensatory costs initially recorded in connection with this
transaction were reversed as a consequence to the rescinding of the transaction.
The Board of Directors of High Speed decided to rescind this transaction due to
lack of consideration. The Board concluded that High Speed received little or no
consideration as compared to the consideration it made in connection with this
transaction.
VR MALL AND GOLF VACATIONS RESORT ACQUISITION
In September 1998, under a stock purchase agreement, we agreed to issue
200,000 shares of Common Stock to Mr. Bradford Richdale, our controlling
shareholder at the time of the transaction, for the purpose of acquiring all of
the stock of VR Mall, Inc. In September 1998, under a stock purchase agreement,
we agreed to issue 600,000 shares of Common Stock to Mr. Bradford Richdale for
the purpose of acquiring all of the stock of Golf Vacations Resort. These two
transactions were canceled in November 1998. The Common Stock issuances
contemplated by these transactions were never implemented. Prior to the issuance
of these shares, the Board of Directors decided to rescind this transaction
based on evaluation of the consideration High Speed would have received had the
transaction consummated. No shares were ever issued in connection with these
proposed transactions; consequently, no accounting treatment was applied.
ADVISORY AGREEMENT WITH A DIRECTOR
In February 1999 we entered into an advisory agreement with Mr. Richard F.
Seifert under which Mr. Seifert provides advisory services for investor
relations and identification of funding and revenue opportunities. Mr. Seifert
is a member of our Board of Directors. For successful funding opportunities
introduced by Mr. Seifert, we pay 10% of the amount secured for non-debt funding
and revenue opportunities, and for introductions which result in successful debt
funding we pay 5% of the amount secured. During 1999, Mr. Seifert served as our
Vice President of Operations from February 10, 1999 through August 25, 1999.
During 1999 when he was not an employee of High Speed, Mr. Seifert served in the
capacity of a consultant. During 1999, Mr. Seifert received fees totaling
$62,500 in connection with various fund raising activities for us during the
year.
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<PAGE> 68
ISSUANCE OF CONVERTIBLE DEBENTURES
During the period between March 3, 1999 and May 24, 1999, we issued
$1,636,858 principal amount of convertible debentures. The debentures bore
interest at a rate of 8% per annum and were convertible into shares of Common
Stock at a conversion rate of $0.50 per share. The principal on these debentures
was due July 31, 2000. The aggregate consideration we received by issuing these
debentures was $1,636,858. All of these debentures were issued to Mr. Bradford
Richdale, our controlling shareholder at the time of these transactions, or to
entities established by Mr. Richdale: Ormond Trust and StoneLeigh Ltd. On May
24, 1999, all holders converted these debentures into shares of Common Stock and
we issued 3,273,716 shares of Common Stock upon conversion of these debentures.
The effective price paid by Mr. Richdale for these shares was $0.50 per share.
These debentures were issued and converted between March 3, 1999 and May 24,
1999. The market value of our Common Stock between these dates ranged from a low
of $1.13 per share for a high of $4.88 per share.
On July 15, 1999, we issued a $62,500 principal amount convertible
debenture to Mr. Bradford Richdale. The debenture bore interest at a rate of 8%
per annum and was convertible into shares of Common Stock at a conversion rate
of $0.25 per share. The principal on these debentures was due July 15, 2000. The
consideration we received for this debenture was $62,500. On July 15, 1999, the
holder converted this debenture into shares of Common Stock and we issued
250,000 shares of Common Stock upon conversion of this debenture. The effective
price paid by Mr. Richdale for these shares was $0.25 per share. These
debentures were issued and converted on July 15, 1999 and the market value of
our Common Stock on that date was $1.63 per share at the close of the trading
day.
In August 1999 we issued $458,640 principal amount of convertible
debentures to Mr. Bradford Richdale and to Ormond Trust, an entity established
by Mr. Richdale. The debentures bore interest at a rate of 8% per annum and were
convertible into shares of Common Stock at a conversion rate of $1.00 per share.
The principal on these debentures was due August 5, 2000 and August 12, 2000.
The consideration we received for these three debentures was $458,640. On the
date they were issued, the holder converted these debentures into shares of
Common Stock and we issued 458,640 shares of Common Stock upon conversion of
these debentures. The effective price paid by Mr. Richdale for these shares was
$0.50 per share. These debentures were issued and converted between August 5,
1999 and August 12, 1999. The market value of our Common Stock between these
dates ranged from a low of $3.38 per share to a high of $4.72 per share.
The aggregate value of all the debentures issued to Mr. Richdale described
in the three preceding paragraphs totaled $2,157,998. All the debentures bore an
interest rate of 8% per annum, had a one year maturity date and were convertible
immediately into shares of High Speed common stock with conversion rates ranging
from $0.25 to $1.00 per share. The convertible debentures described above with a
total aggregate value of $2,157,998 were issued as partial consideration for
$2,190,000 that was directly paid by Mr. Bradford Richdale to Summus to cover a
portion of the first three payments that we were obligated to make to Summus
under the Marketing License Agreement. Under the Marketing License Agreement, we
were to make four payments of $750,000 each for our rights under the agreement.
The terms of the Marketing License Agreement called for four equal installments
of $750,000 beginning with the execution of the Marketing License Agreement in
February 1999. Mr. Richdale, on our behalf, paid an aggregate amount of
$2,190,000 in cash to Summus from February 1999 through May 1999. These amounts
were not actually paid to Summus in equal installments. They were made based on
available cash during this four-month time period. High Speed paid $60,000 as a
partial payment during this time period. Total cash payment made to Summus
equaled $2,250,000. The final installment due to Summus was satisfied though the
issuance of 1.5 million shares of our Common Stock. The issuance of this common
stock was valued at $2,278,125, based on the traded value of our Common Stock on
the date of the transaction. The value attributable to each of the convertible
debentures issued to Mr. Richdale was equal to the stated principal amount of
each debenture. These debentures were issued to Mr. Richdale in consideration
for the cash payments he personally made to Summus on behalf of High Speed.
Accordingly, we did not realize any cash proceeds from the issuance of these
debentures. Mr. Richdale did not receive any registration rights with respect to
the common stock acquired in connection with the convertible debentures.
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<PAGE> 69
ISSUANCE OF SHARES FOR BRD OPTION
In August 1999, we issued 1,000,000 shares of Common Stock when Mr.
Bradford Richdale, our controlling shareholder at the time of the transaction,
exercised his Common Stock option, which were issued with an exercise price of
$0.01 per share. We waived payment of the exercise price in exchange for Mr.
Richdale transferring to us specific marketing rights to Summus technology.
These marketing rights were the rights to market Summus technology in direct
marketing channels. Mr. Richdale received these stock options in connection with
the purchase by High Speed of all of the stock of Brad Richdale Direct, Inc., as
discussed above.
CANCELLATION OF PRIOR ACQUISITIONS
In August 1999, we canceled 5,461,100 shares of Common Stock for the
following transactions. We canceled 300,000 shares of Common Stock because we
rescinded the acquisitions of National Direct Corporation and HealthTec.
Furthermore, we canceled 5,161,100 shares of Common Stock as part of a partial
voluntary unwinding of the Marketers World acquisition after we ceased operating
the Marketers World assets.
PAYMENTS TO SUMMUS UNDER THE MARKETING LICENSE AGREEMENT
During February 1999 we entered into a Marketing License Agreement with
Summus. During 1999, we made payments of $2,250,000 in cash and a payment in the
form of 1,500,000 shares of Common Stock, valued at $2,278,125, for the purpose
of making the final cash payment of $750,000 due to Summus under the Marketing
License Agreement as described in the section entitled "Business." Our original
obligation was to pay $750,000 in cash for the final payment, but due to lack of
available cash, we renegotiated the final payment so that we could pay by
issuing Common Stock. In exchange for the $2,250,000 cash payment and the stock
payment under the marketing License Agreement, we received the right to license
Summus products and the right to share revenues from Summus technologies. As
described in the section entitled "Business," we have replaced the Marketing
License Agreement and its related agreements with new agreements under which we
must make future payments to Summus for our use of their software products.
These new agreements include: a Master Agreement, a Software License Agreement,
a Revenue Sharing Agreement, and a Software Maintenance Agreement.
As of August 1999, Summus became our controlling shareholder.
ISSUANCE OF COMMON STOCK TO THE PARENTS OF A DIRECTOR
In August 1999, we issued 250,000 shares of Common Stock at $1.00 per share
to two investors under a subscription agreement. These investors are the parents
of Mr. Richard F. Seifert, a member of our Board of Directors. The market value
of these shares when issued was $4.38.
LOANS DUE TO MR. BRADFORD RICHDALE, A HIGH SPEED SHAREHOLDER
As of December 31, 1999, we owe $435,815 to entities controlled by Mr.
Bradford Richdale. We owe these amounts to Mr. Richdale for loans that he
extended to us to finance our operations. The loans are unsecured and are
payable on demand. We do not pay any interest on these loans.
AMOUNTS DUE TO SUMMUS
In order to ramp up our business operations and satisfy anticipated future
customer demand, we have borrowed, and will continue to borrow in a minor
fashion, resources from Summus to satisfy basic business operational needs.
Obtaining resources in this manner is intended to temporarily support our
operations until qualified individuals can be hired to operate these functions
or we put in place facilities to support these functions. We are obtaining
resources from Summus under an oral agreement and we will pay Summus, without
interest, the fair value of the resources we are using, or under the Master
Agreement between us and Summus dated February 18, 2000. Through September 30,
2000, we have hired 19 full time employees, and we have further developed our
own operating
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<PAGE> 70
infrastructure. Consequently, reliance on Summus for basic operational support
is minimal. The value of services provided to date is not yet determinable and
is currently being negotiated between the parties. We plan on settling this
matter with Summus prior to the end of 2000.
SUMMUS OWNERSHIP OF HIGH SPEED
In August 1999, under a stock purchase agreement, Summus purchased
9,542,360 shares of our Common Stock from Mr. Bradford Richdale and various
entities established by Mr. Richdale in exchange for 132,888 shares of Summus
Ltd. Under amendment number 1 to this agreement, Mr. Richdale agreed that he
would not serve on the Board of Directors of High Speed without Summus written
consent. Amendment number 2 to this agreement states that the purchase of the
High Speed shares by Summus is conditioned upon Mr. Michael Cimino resigning as
a member of the Board of Directors of High Speed and Summus, and upon Mr.
Michael Cimino signing a release in favor of High Speed for any claims, past or
future. As of September 30, 2000, Summus held 8,389,360 shares of our Common
Stock (37.9% of our outstanding Common Stock, and 32.7% 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 43.7% of our outstanding Common Stock and 37.6% on a fully diluted
basis.
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<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
In accordance with our amended and restated certificate of incorporation,
we are authorized to issue up to 50,000,000 shares of common stock, par value
$0.001 per share (the "Common Stock"), and 5,000,000 shares of preferred stock,
par value $0.001 per share (the "Preferred Stock").
As of September 30, 2000, we had 22,121,479 shares of Common Stock
outstanding. As of September 30, 2000, there were 2,000 shares issued and
outstanding of our Series A Convertible Preferred Stock. We have no other class
or series of preferred stock.
COMMON STOCK
As of September 30, 2000, we had 22,121,479 shares of Common Stock
outstanding. In addition, as of September 30, 2000, there were outstanding stock
options to purchase 1,733,000 shares of Common Stock. If the 2000 shares of
Series A Convertible Preferred Stock issued and outstanding were to convert to
Common Stock, then an additional 147,066 shares of Common Stock would be issued
and outstanding. Based upon the number of shares outstanding as of September 30,
2000, and giving effect to the issuance of Common Stock upon the exercise of all
outstanding stock options, assuming that these options fully vest, and the
conversion of all of the Series A Convertible Preferred Stock into Common Stock,
there would be 25,684,899 shares of Common Stock outstanding.
Each share of Common Stock entitles the holder to one vote on all matters
submitted to a vote of shareholders, including the election of directors.
Holders of Common Stock are entitled to receive ratably the dividends, if any,
declared from time to time by the Board of Directors out of legally available
funds. Holders of Common Stock have no conversion, redemption or preemptive
rights to subscribe to any of our securities. In the event of any liquidation,
dissolution or winding-up of our affairs, holders of Common Stock will be
entitled to share ratably in our assets remaining after provision for payment of
liabilities to creditors. The rights, preferences and privileges of holders of
Common Stock may be subject to the rights of the holders of any shares of
preferred stock, which we may issue in the future.
PREFERRED STOCK
As of September 30, 2000, we had 2,000 shares issued and outstanding of our
Series A Convertible Preferred Stock. We have no other class or series of
preferred stock. Before February 28, 2000, we had never issued any shares of
preferred stock.
We have recently amended and restated our articles of incorporation to
eliminate the specific rights and privileges originally associated with our
preferred stock. We have replaced these specific rights and privileges with
language in our articles of incorporation granting the Board of Directors the
power to determine by resolution at a future date the designations, rights and
privileges of the preferred stock.
Our Board of Directors, without further action by shareholders, may from
time to time authorize the issuance of shares of preferred stock in one or more
series and with specific limitations, rights, preferences, qualifications, or
restrictions thereon and the number of shares constituting such series and the
designation of such series. Satisfaction of any dividend preferences on
outstanding Preferred Stock would reduce the amount of funds available for the
payment of dividends on Common Stock. Holders of Preferred Stock would normally
be entitled to receive a preference payment in the event of any liquidation,
dissolution, or winding up of High Speed before any payment is made to the
holders of Common Stock. In addition, under some circumstances, the issuance of
preferred stock may render more difficult or tend to discourage a change in
control of High Speed. The Board of Directors of High Speed, without shareholder
approval, may issue preferred stock with voting and conversion rights, which
could adversely affect the rights of holders of Common Stock.
On February 28, 2000, we designated a series of Preferred Stock called
Series A Convertible Preferred Stock consisting of 10,000 shares. The rights of
the Series A Convertible Preferred Stock include the following rights:
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<PAGE> 72
- a cumulative dividend of $80 each year per share of Series A
Convertible Preferred Stock, and we have the right to pay this
dividend by issuing additional shares of Series A Convertible
Preferred Stock;
- no voting rights except for the right to approve by a majority
vote of the holders of the Series A Convertible Preferred Stock
our issuance of any shares of a series or class of preferred
stock that ranks senior to the Series A Convertible Preferred
Stock and any voting rights required under Florida law;
- the right to convert the Series A Convertible Preferred Stock
into shares of Common Stock at a conversion price of $14.24,
subject to anti-dilution adjustment in the case of Common Stock
dividends, splits and reorganizations; and
- a liquidation preference of $1,000 per share of Series A
Convertible Preferred Stock, plus accrued unpaid dividends,
payable in the event of any liquidation, dissolution, or winding
up of High Speed. After March 1, 2002, we have the right to
redeem any outstanding shares of the Series A Convertible
Preferred Stock at a redemption price of $1,000 per share of
Series A Convertible Preferred Stock plus accrued dividends that
have not been paid.
On February 28, 2000 we issued 2,000 shares of our Series A Convertible
Preferred Stock for gross consideration of $2,000,000. As of September 30, 2000,
if the 2,000 shares of Series A Convertible Preferred Stock issued and
outstanding were to convert to Common Stock, then an additional 147,066 shares
of Common Stock would be issued and outstanding.
REGISTRATION RIGHTS
The following summary description of registration rights outstanding on
some of our Common Stock is not intended to be complete and is qualified by
reference to the exhibits filed with the Registration Statement.
In June 2000, we entered into a settlement agreement with William R.
Dunavant and Michael Cimino to resolve a litigation suit filed in Florida. The
settlement agreement provides, among other things, that we register 350,000
shares of Common Stock owned by Mr. Dunavant with the Securities and Exchange
Commission. Under the settlement agreement, we issued 175,000 new shares of
Common Stock to Mr. Dunavant on the execution date of the settlement agreement.
In addition, the settlement calls for the payment of $12,750 per month and
25,000 shares of Common Stock per month until the registration of all shares are
effective. If the Registration Statement is not effective on or before January
1, 2001, from that date forward and until we have delivered an effective
registration statement, we pay Mr. Dunavant $12,750 and issue 50,000 shares of
Common Stock each month. We must also register all shares delivered under these
monthly allotments. Finally, we must also issue and register an allotment of
shares of 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 OTC Bulletin Board(R) and
$23.00 per share. See "Management's Discussion and Analysis."
Excluding Mr. Dunavant, all of the other Selling Shareholders listed in the
section entitled "Selling Shareholders" executed a form of the Selling
Shareholder Agreement included with the Registration Statement as an exhibit.
This Selling Shareholder Agreement terminated any prior registration rights that
the Selling Shareholder may have had and specified that the registration rights
granted by the Selling Shareholder Agreement would be implemented and satisfied
in full by the Registration Statement.
RIGHTS TO COMMON STOCK AND OPTIONS FOR COMMON STOCK IN EXCHANGE FOR SERVICES
We have a consulting agreement dated September 24, 1999 with Mr. Kyoung
Park under which Mr. Park receives the rights to 2,000 shares of Common Stock
for revenue we derive from Samsung Electronics of America, Inc., a potential
customer of ours and Summus'. Under this consulting agreement we also pay Mr.
Park 4% of all revenue we receive from this customer. If revenues with this
potential customer in 2000 are $1,000,000 then Mr.
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<PAGE> 73
Park would receive 20,000 shares. As revenue levels rise Mr. Park has the right
to proportionally receive more shares for higher revenue levels. To date, we
have no agreement with this potential customer. Consequently, we have not paid
Mr. Park any funds nor issued Mr. Park any shares under this agreement.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The following summary description of indemnification and limitation of
liability for our officers is not intended to be complete and is qualified by
reference to our amended and restated certificate of incorporation and our
amended and restated bylaws, filed as exhibits to the Registration Statement,
and is qualified by the applicable provisions of the Florida Business
Corporation Act (the "FBCA").
Our Articles of Incorporation and Bylaws provide for indemnification of
officers and directors to the fullest extent permitted by Florida law and, to
the extent permitted by such law, eliminate, or limit the personal liability of
directors to High Speed and its shareholders for monetary damages for specific
breaches of fiduciary duties. The liability of a director is not eliminated or
limited (i) for any breach of the director's duty of loyalty to High Speed or
its shareholders; (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii) for any improper
distribution under the FBCA; or (iv) for any transaction from which the director
derived an improper personal benefit. Insofar as indemnification for liabilities
under the Securities Act may be permitted to directors, officers, or persons
controlling High Speed under the foregoing provisions, we have been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
We intend to obtain liability insurance for our directors and officers. At
present, there is no pending litigation or proceeding involving any director,
officer, employee or agent as to which indemnification will be required or
permitted under the amended and restated certificate of incorporation. We are
not aware of any threatened litigation or proceeding that may result in a claim
for this type of indemnification.
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LEGAL MATTERS
The law firm of Kilpatrick Stockton LLP of Raleigh, North Carolina will
issue a legal opinion about the validity of the issuance of the shares of Common
Stock that may be sold using this Prospectus.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1999 and 1998, and for each of the two years in the
period ended December 31, 1999, as set forth in their report (which contains an
explanatory paragraph describing conditions that raise substantial doubt about
our ability to continue as a going concern as described in Note 2 to the
financial statements). We have included our financial statements in this
Prospectus and the Registration Statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
Ernst & Young LLP, independent auditors, have audited Summus Ltd.'s
financial statements at December 31, 1999, and for the period ended December 31,
1999, as set forth in their report (which contains an explanatory paragraph
describing conditions that raise substantial doubt about Summus Ltd.'s ability
to continue as a going concern as described in Note 1 to the financial
statements). We have included Summus Ltd.'s financial statements in this
Prospectus and the Registration Statement in reliance on Ernst & Young LLP's
report, given on their authority as experts in accounting and auditing.
Bauknight Pietras & Stormer, P.A., independent auditors, have audited
Summus Ltd.'s financial statements at December 31, 1998, and for each of the two
years in the period ended December 31, 1998 and 1997, as set forth in their
report. We have included Summus Ltd.'s financial statements in this Prospectus
and the Registration Statement in reliance on Bauknight Pietras & Stormer,
P.A.'s report, given on their authority as experts in accounting and auditing.
CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
(A) PREVIOUS INDEPENDENT ACCOUNTANT
(i) In November 1999, we engaged Ernst & Young LLP as our
independent auditors. Ernst & Young has audited our
financial statements for the years ended December 31,
1998 and 1999. Barry L. Friedman, P.C. ("Friedman"),
which had served as our independent auditors in prior
years, was dismissed by High Speed on the date Ernst
& Young was engaged.
(ii) The report of Friedman on our financial statements
for the period January 1, 1998 to July 22, 1998 and
for the two years in the period ended December 31,
1997 included an explanatory paragraph about our
ability to continue as a going concern.
(iii) Our Board of Directors approved the change in our
independent auditors.
(iv) In connection with the audits performed by Friedman,
there were no disagreements with Friedman on any
matter of accounting principles or practices,
financial statement disclosure, or auditing scope or
procedure which disagreements, if not resolved to the
satisfaction of Friedman, would have caused it to
make reference to the subject matter of the
disagreement in connection with its report on our
financial statements for those periods.
(v) During the time period Friedman performed his audits
and through the date of dismissal, there were no
"reportable events", as that term is defined in Item
304(a)(1)(v) of Regulation S-K, about the services
provided by Friedman.
High Speed requested that Friedman furnish it with a letter addressed
to the Commission stating whether it agrees with the above statements and, if
not, stating the respects in which it does not agree. We have filed a copy of
this letter as Exhibit 16 to the Registration Statement.
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<PAGE> 75
(B) NEW INDEPENDENT AUDITORS
During our two most recent fiscal years and through the date
that we engaged Ernst & Young, LLP, we did not consult with
Ernst & Young LLP on matters
(i) about the application of accounting principles to a
specified transaction or the type of audit opinion
that might be rendered on High Speed's financial
statements, or
(ii) which concerned the subject matter of a disagreement
or reportable event with the former auditor (as
described in Regulation S-K, Item 304).
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information we file at the Commission's
public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549,
or at its Southeast Regional Offices located at 1401 Brickell Avenue, Suite 200,
Miami, Florida 33131, and copies of these materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. You may call the Commission at
1-800-732-0330 for further information on the operation of such public reference
rooms. You also can request copies of such documents, upon payment of a
duplicating fee, by writing to the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or obtain copies of these documents from the Commission's
web site: http://www.sec.gov.
The Commission allows us to "incorporate by reference" information into
this Prospectus, which means that we can disclose important information to you
by referring you to another document filed separately with the Commission. The
Commission deems information incorporated by reference to be part of this
Prospectus, except for any information superseded by information in, or
incorporated by reference in, this Prospectus. This Prospectus incorporates by
reference the documents listed below, which we have previously filed with the
Commission (SEC file number 333-41730). These documents contain important
information about our company and its finances.
Quarterly Report on Form 10-Q/A for the quarterly period ended June 30,
2000 (filed on October 18, 2000)
Quarterly Report on Form 10-Q for the quarterly period ended June 30,
2000 (filed on August 14, 2000)
Quarterly Report on Form 10-Q for the quarterly period ended March 30,
2000 (filed on May 15, 2000)
Current Report on 8-K/A dated October 18, 2000 (filed on October 18,
2000)
Current Report on Form 8-K dated September 5, 2000 (filed on September
5, 2000)
Current Report on Form 8-K dated July 25, 2000 (filed on July 25, 2000)
Current Report on Form 8-K dated June 14, 2000 (filed on June 14, 2000)
Current Report on Form 8-K dated May 8, 2000 (filed on May 8, 2000)
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<PAGE> 77
INDEX TO THE FINANCIAL STATEMENTS
PAGE
----
HIGH SPEED NET SOLUTIONS, INC.
INTERIM FINANCIAL STATEMENTS - UNAUDITED
Balance Sheets as of December 31, 1999 (audited) and
June 30, 2000 (Unaudited).........................................F-2
Statements of Operations for the six months ended
June 30, 1999 and June 30, 2000 and for the period
from January 2, 1998 (Inception) through June 30, 2000
(Unaudited).......................................................F-3
Statement of Stockholders' Equity (Deficit).........................F-4
Statements of Cash Flows for the six months ended
June 30, 1999 and June 30, 2000 and for the
period from January 2, 1998 (Inception) through
June 30, 2000 (Unaudited).........................................F-5
Notes to the Financial Statements...................................F-7
ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors......................................F-13
Balance Sheets as of December 31, 1998 and 1999.....................F-14
Statements of Operations for the years ended
December 31, 1998 and 1999 and for the period
from January 2, 1998 (Inception) to December 31, 1999.............F-15
Statement of Shareholders' Equity (Deficit)
for the period from January 2, 1998 (Inception)
to December 31, 1999..............................................F-16
Statement of Cash Flows for the years ended
December 31, 1998 and 1999 and for the period
from January 2, 1998 (Inception) to December 31, 1999.............F-18
Notes to the Financial Statements...................................F-20
PROFORMA FINANCIAL INFORMATION - UNAUDITED
Proforma Financial Information Introduction.........................F-33
Proforma Combined Balance Sheet at December 31, 1999................F-34
Proforma Combined Statement of Operations for the year ended
December 31, 1999.................................................F-35
SUMMUS, LTD.
INTERIM FINANCIAL STATEMENTS - UNAUDITED
Balance Sheets as of December 31, 1999 (audited) and
June 30, 2000 (unaudited).........................................F-36
Statements of Operations for the six months ended
June 30, 1999 and 2000............................................F-37
Statements of Cash Flows for the six months ended
June 30, 1999 and 2000............................................F-38
Notes to the Financial Statements...................................F-39
ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors......................................F-43
Report of Independent Auditors......................................F-44
Balance Sheets as of December 31, 1998 and 1999.....................F-45
Statements of Operations for the years ended
December 31, 1997, 1998 and 1999..................................F-46
Statements of Shareholder's Equity (Deficit) for the
years ended December 31, 1997, 1998 and 1999......................F-47
Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999..................................F-48
Notes to the Financial Statements...................................F-49
F-1
<PAGE> 78
High Speed Net Solutions, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
----------- -----------
(Restated) (Restated)
(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
-------------------------------
Total assets $ 6,813,168 $ 6,674,712
===============================
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 (23,512,221) (11,881,242)
Treasury stock, at cost (38,500 shares) (227,619) (227,619)
-------------------------------
Total stockholders' equity (deficit) (3,155,441) 5,185,021
-------------------------------
Total liabilities and stockholders' equity (deficit) $ 6,813,168 $ 6,674,712
===============================
</TABLE>
See accompanying notes.
F-2
<PAGE> 79
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
----------------------------------------------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C>
Selling, general and administrative expenses $ 2,132,823 $ 4,058,232 $ 9,292,336
Loss contingency 9,166,875 -- 9,966,875
Interest expense (income), net (16,952) -- 2,638,812
----------------------------------------------------
Loss from continuing operations $(11,282,746) $ (4,058,232) $(21,898,023)
Loss from discontinued operations -- -- (1,265,965)
----------------------------------------------------
Net loss $(11,282,746) $ (4,058,232) $(23,163,988)
====================================================
Net loss applicable to common shareholders:
Net loss $(11,282,746) $ (4,058,232) $(23,163,988)
Beneficial conversion feature of preferred stock (294,900) -- (294,900)
Preferred stock dividends (53,333) -- (53,333)
----------------------------------------------------
Net loss applicable to common shareholders $(11,630,979) $ (4,058,232) $(23,512,221)
====================================================
Per share amounts (basic and diluted):
Loss applicable to common shareholders from continuing
operations $ (0.55) $ (0.24) $ (1.36)
Loss applicable to common shareholders from discontinued
operations -- -- $ (0.08)
----------------------------------------------------
Net loss $ (0.55) $ (0.24) $ (1.44)
====================================================
Weighted average shares outstanding 21,135,597 17,011,596 16,372,995
====================================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 80
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 (Restated) -- -- -- 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 (Restated)
(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 $(11,881,242) $(227,619) $ 5,185,021
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 -- (11,282,746) -- (11,282,746)
--------------------------------------------------------------
Balance June 30, 2000 (Restated)
(Unaudited) $18,563,104 $(23,512,221) $(227,619) $ (3,155,441)
==============================================================
</TABLE>
F-4
<PAGE> 81
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
---------------------------------------------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations $(11,282,746) $(4,058,232) $(21,931,807)
Adjustments to reconcile net loss to net cash used in operating
activities:
Loss on disposal of equipment and abandonment of licensing
rights -- -- 105,748
Non cash compensation and consulting charges relating to
stock awards and stock subscriptions 51,090 3,640,000 5,749,128
Depreciation and amortization 133,730 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>
F-5
<PAGE> 82
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.
F-6
<PAGE> 83
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.
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-and six- month periods ended June 30,
2000 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000.
F-7
<PAGE> 84
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.
The accompanying financial statements have been restated to reflect the
write-off of previously capitalized licensing rights at December 31, 1998 as
part of discontinued operations for that year and to remove the related
amortization expense previously associated with those capitalized licensing
rights from the statements of operations for the three and six month periods
ended June 30, 2000. The effect of these changes was to reduce assets at June
30, 2000 and December 31, 1999 by $35,106 and $43,060, respectively and to
reduce selling, general and administrative expenses by $3,977 for the three
months ended 2000 and $7,954 for the six months ended 2000.
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 would need to be recognized.
F-8
<PAGE> 85
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
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.
F-9
<PAGE> 86
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.
F-10
<PAGE> 87
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.
F-11
<PAGE> 88
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 on the date of the closing of the
transaction. 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 issuance of
the 50,000 shares will be recorded at the guaranteed amount of $10.00 per share
on the date of issuance, July 10, 2000. Payment or issuance of any additional
shares will not change the cost of the acquisition of Douglas May & Co. 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
totalling $576,000 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. Until
the time this contingency is settled, these shares will be treated as
outstanding for loss per share purposes in accordance with the guidance set
forth in SFAS No. 128. All shares issued that are subject to repurchase by the
Company will be presented on the Company's balance sheet as redeemable stock
outside of stockholder's equity.
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.
F-12
<PAGE> 89
Report of Independent Auditors
The Board of Directors and Shareholders
High Speed Net Solutions, Inc.
We have audited the accompanying balance sheets of High Speed Net Solutions,
Inc. (a development stage company) as of December 31, 1999 and 1998, and the
related statements of operations, stockholders' equity (deficit), and cash flows
for the years ended December 31, 1999 and 1998 and for the period from January
2, 1998 (inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of High Speed Net Solutions, Inc.
(a development stage company) at December 31, 1999 and 1998 and the results of
its operations and its cash flows, for the years ended December 31, 1999 and
1998 and for the period from January 2, 1998 (inception) to December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that High
Speed Net Solutions, Inc. (a development stage company) will continue as a going
concern. As more fully described in Note 2, the Company has incurred operating
losses since inception and will require additional capital in 2000 to continue
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
February 15, 2000, except for Note 12, as to which date is April 24, 2000
Raleigh, North Carolina
F-13
<PAGE> 90
High Speed Net Solutions, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
----------- ------------
(Restated) (Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,609 $ 248,740
Accounts receivable 7,559 --
----------- ------------
Total current assets 26,168 248,740
Furniture and equipment, net -- 3,720
Investment in common stock of related party -- 1,894,127
Prepaid royalties -- 4,528,125
----------- ------------
Total assets $ 26,168 $ 6,674,712
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Payables to related parties $ 295,558 $ 589,815
Accounts payable and accrued expenses 8,457 99,876
Loss contingency accrual -- 800,000
----------- ------------
Total current liabilities 304,015 1,489,691
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.001 par value, authorized 50,000,000 shares; issued
and outstanding 16,651,700 and 21,112,149 shares 16,652 21,112
Additional paid-in capital 1,642,816 17,272,770
Deficit accumulated during the development stage (1,709,696) (11,881,242)
Treasury stock, at cost (38,500 shares) (227,619) (227,619)
----------- ------------
Total stockholders' equity (deficit) (277,847) 5,185,021
----------- ------------
$ 26,168 $ 6,674,712
=========== ============
</TABLE>
See accompanying notes.
F-14
<PAGE> 91
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31
1998 1999 1999
------------ ------------ ------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C>
Selling, general and administrative expenses $ 374,841 $ 7,515,797 $ 7,890,638
Interest expense -- 2,655,749 2,655,749
------------ ------------ ------------
Loss from continuing operations (374,841) (10,171,546) (10,546,387)
Loss from discontinued operations (1,334,855) -- (1,334,855)
------------ ------------ ------------
Net loss $ (1,709,696) $(10,171,546) $(11,881,242)
============ ============ ============
Per share amounts (basic and diluted):
Loss from continuing operations $ (0.03) $ (0.53) $ (0.74)
============ ============ ============
Loss from discontinued operations $ (0.11) $ -- $ (0.09)
============ ============ ============
Net loss $ (0.14) $ (0.53) $ (0.83)
============ ============ ============
Weighted average shares outstanding 11,898,867 19,080,492 14,324,778
============ ============ ============
</TABLE>
See accompanying notes.
F-15
<PAGE> 92
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
DATE OF COMMON STOCK
TRANSACTION SHARES PAR VALUE
-------------- ------------ ---------
<S> <C> <C> <C>
Balance at January 2, 1998 (inception) reflecting the
recapitalization of the Company 9,325,000 $ 9,325
Founders shares issued for no consideration Jan. 1998 100 --
Shareholders capital contributions June-July 1998 -- --
Common Stock issued to acquire net assets of Marketers World,
Inc Aug. 1998 1,000,000 1,000
Common stock sold for cash at $0.08 per share Sept. 1998 3,766,600 3,767
Common stock issued for payment of debt to a shareholder
$0.10 per share Sept. 1998 1,550,000 1,550
Treasury stock acquired for cash -- --
Common stock issued for licensing rights at $0.10 per share
(Note 5) Sept. 1998 775,000 775
Common stock issued for services at $0.10 per (Note 8) Sept. 1998 765,000 765
Net loss for the year ended December 31, 1998 -- --
Cancellation of compensatory stock Sept. 1998 (530,000) (530)
------------ --------
Balance at December 31, 1998 (Restated) 16,651,700 16,652
Compensation expense related to grant of stock option to
purchase 1,000,000 shares at no exercise price (Note 8) Feb. 1999 -- --
Common stock sold for cash at $1.08 per share March 1999 118,188 118
Common stock sold for cash at $1.00 per share April 1999 220,000 220
Compensation expense related to grant of options to purchase
825,000 shares at $.01 per share (Note 8) May 1999 -- --
Common stock issued for investment in related party at May 1999 795,001 795
$2.25 per share (Note 8)
Common stock issued for services at $1.53 per share (Note 8) July 1999 85,500 85
Common stock issued for advance royalty payment at $1.52 per
share (Note 4) July 1999 1,500,000 1,500
Common stock issued in exchange for convertible debentures at
$0.55 per share Aug. 1999 4,852,860 4,853
Beneficial conversion feature related to convertible debt Aug. 1999 -- --
(Note 6)
Common stock canceled in connection with merger between High
Speed Net Solutions, Inc. and Marketers World, Inc. in
August 1998 (Note 8) Aug. 1999 (5,161,100) (5,161)
Cancellation of compensatory stock Aug. 1999 (25,000) (25)
Stock option exercises Aug. 1999 1,825,000 1,825
Common stock issued in conjunction with subscription
agreement, 250,000 shares at $1.00 per share (Note 8) Aug. 1999 250,000 250
Compensation expense related to grant of option to purchase
240,000 shares at $.01 per share (Note 8) Sept. 1999 -- --
Net loss for the year ended December 31, 1999 -- --
------------ --------
Balance at December 31, 1999 (Restated) 21,112,149 $ 21,112
============ ========
</TABLE>
F-16
<PAGE> 93
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
PAID-IN DEVELOPMENT TREASURY
CAPITAL STAGE STOCK TOTAL
------------- ------------ ------------ -----------
<S> <C> <C> <C>
$ (9,325) $ -- $ -- $ --
-- -- -- --
1,091,648 -- -- 1,091,648
(1,000) -- -- --
313,233 -- -- 317,000
148,270 -- -- 149,820
-- -- (227,619) (227,619)
76,725 -- -- 77,500
75,735 -- -- 76,500
-- (1,709,696) -- (1,709,696)
(52,470) -- -- (53,000)
------------- ------------ ------------ -----------
1,642,816 (1,709,696) (227,619) (277,847)
2,000,000 -- -- 2,000,000
127,382 -- -- 127,500
219,780 -- -- 220,000
1,640,000 -- -- 1,640,000
1,791,332 -- -- 1,792,127
130,729 -- -- 130,814
2,276,625 -- -- 2,278,125
2,650,896 -- -- 2,655,749
2,655,749 -- -- 2,655,749
5,161 -- -- --
(38,225) -- -- (38,250)
(1,825) -- -- --
1,094,750 -- -- 1,095,000
1,077,600 -- -- 1,077,600
- (10,171,546) -- (10,171,546)
------------- ------------ ------------ -----------
$ 17,272,770 $(11,881,242) $ (227,619) $ 5,185,021
============= ============ ============ ===========
</TABLE>
See accompanying notes.
F-17
<PAGE> 94
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31
1998 1999 1999
----------- ------------ ------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations $ (374,841) $(10,171,546) $(10,546,387)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of equipment 36,858 -- 36,858
Non cash compensation and consulting charges relating to
stock awards and stock subscriptions -- 5,698,038 5,698,038
Depreciation and amortization 21,900 332 22,232
Common stock issued for services 23,500 92,564 116,064
Interest expense relating to beneficial conversion feature
of convertible debt -- 2,655,749 2,655,749
Changes in operating assets and liabilities:
Prepaid royalties -- (60,000) (60,000)
Accounts receivable (7,559) 7,559 --
Accounts payable and accrued expenses 8,457 91,419 99,876
Loss contingency -- 800,000 800,000
----------- ------------ ------------
Net cash used in operating activities from continuing operations
(291,685) (885,885) (1,177,570)
Net cash used in discontinued operations (1,265,965) -- (1,265,965)
----------- ------------ ------------
Total net cash used in operating activities (1,557,650) (885,885) (2,443,535)
INVESTING ACTIVITIES
Capital expenditures (50,148) (4,052) (54,200)
Cash investment in related party -- (102,000) (102,000)
----------- ------------ ------------
Net cash used in investing activities (50,148) (106,052) (156,200)
FINANCING ACTIVITIES
Proceeds from sale of common stock 317,000 242,062 559,062
Shareholder capital contributions 1,091,648 -- 1,091,648
Advances from stockholders 445,378 430,852 876,230
Repayments to stockholders -- (9,486) (9,486)
Proceeds from issuance of convertible debentures -- 558,640 558,640
Purchase of treasury stock (227,619) -- (227,619)
----------- ------------ ------------
Net cash provided by financing activities 1,626,407 1,222,068 2,848,475
----------- ------------ ------------
Net increase in cash and cash equivalents 18,609 230,131 248,740
Cash and cash equivalents at beginning of year -- 18,609 --
----------- ------------ ------------
Cash and cash equivalents at end of year $ 18,609 $ 248,740 $ 248,740
=========== ============ ============
</TABLE>
F-18
<PAGE> 95
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31
1998 1999 1999
--------- ---------- ----------
<S> <C> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Common shares issued for investment in related party $ -- $1,792,127 $1,792,127
========= ========== ==========
Common stock issued in exchange for convertible debentures $ -- $2,665,749 $2,665,749
========= ========== ==========
Common stock issued for prepaid royalties $ -- $2,278,125 $2,278,125
========= ========== ==========
Debentures issued for shareholder advances on behalf of company $ -- $2,097,109 $2,097,109
========= ========== ==========
Common stock issued for payment of debt to stockholder $ 149,820 $ -- $ 149,000
========= ========== ==========
Common stock issued for stockholder advances on behalf of Company $ -- $ 220,000 $ 220,000
========= ========== ==========
</TABLE>
See accompanying notes.
F-19
<PAGE> 96
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
DECEMBER 31, 1999
1. BUSINESS, ORGANIZATION AND DEVELOPMENT STAGE COMPANY
High Speed Net Solutions, Inc. ("the Company" or "HSNS") was incorporated in
1984 and was inactive until it merged with Marketers World, Inc. ("MWI") on
August 24, 1998. Prior to the merger, HSNS was a non-operating public shell and
MWI was a private operating company. In legal form, this merger was effected by
HSNS issuing its shares in exchange for the net assets of MWI. Total outstanding
shares of HSNS common stock subsequent to the merger were 10,275,000, which
consisted of the 1,000,000 shares outstanding prior to the merger and the
9,275,000 shares issued to acquire the net assets of MWI. At the time of the
merger, HSNS had no assets or liabilities, and accordingly, the transaction was
accounted for as a recapitalization of HSNS, and the outstanding shares are
recorded accordingly.
MWI was incorporated in January 1998 and its planned principal operations were
to lease computer systems to businesses and to distribute Internet oriented
products and perform related services. For the period prior to August 24, 1998
the historical amounts are those of MWI. During 1998, MWI was not able to
execute its planned activities, other than the sale of pilot products and
services, and consequently ceased all operating activities in December 1998. MWI
was subsequently legally dissolved in September 1999. Accordingly, the operating
results of MWI have been presented as discontinued operations for the year ended
December 31, 1998. Revenues of MWI during the year ended December 31, 1998 were
approximately $1,335,300, and the loss totaled $1,334,855. As of December 31,
1998, the Company had completed its disposal of the discontinued operations of
MWI. There were no remaining assets or liabilities related to MWI at December
31, 1998. Results for the year ended December 31, 1999 represent solely the
activity of HSNS which primarily related to raising capital and establishing
strategic relationships. Since the Company has not yet commenced its planned
principal operations and since MWI also never commenced its planned principal
operations, the accompanying financial statements are presented as those of a
development stage company.
In 1984, the Company was incorporated under the name EMN Enterprises, Inc. The
Company was inactive from the time of its incorporation in 1984 until the time
of the MWI transaction in 1998. In September 1998, in conjunction with the MWI
merger, the Company changed its name to ZZAP.NET, Inc. and in January 1999 the
name changed to High Speed Net Solutions, Inc.
F-20
<PAGE> 97
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. BUSINESS, ORGANIZATION AND DEVELOPMENT STAGE COMPANY (CONTINUED)
In August 1999, Summus Ltd. ("Summus") acquired 51% of the outstanding common
stock of the Company. Subsequently, Summus sold certain of the shares it
acquired and at December 31, 1999, Summus owned 40.7% of the Company's
outstanding common stock. The Company's operating and business strategy is
dependent on the development of Summus' technology and products under the terms
of various agreements between both parties. Summus is developing media
compression and delivery software that the Company intends to use to deliver its
services to its customers.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the basis that High
Speed Net Solutions, Inc. will continue as a going concern. The Company has
incurred operating losses since inception and has experienced negative cash
flows and expects these losses and negative cash flow to continue into the
foreseeable future. The Company's ability to continue operations as a going
concern is predicated on its ability to continue to raise capital, including
significant new capital in 2000, the successful completion of its operational
plan and, ultimately, upon achieving profitable operations.
The accompanying financial statements have been restated to reflect the
write-off of previously capitalized licensing rights at December 31, 1998 as
part of the loss on discontinued operations for that year and to remove the
related amortization expense previously associated with those capitalized
licensing rights from the 1999 statement of operations. The effect of these
changes was to reduce assets and increase the loss from discontinued operations
in 1998 by $68,890 and to reduce selling, general and administrative expenses by
$25,830 in 1999.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
EQUIPMENT AND FURNITURE
Equipment and furniture is stated at cost. Depreciation, as recorded by MWI, was
computed using the straight-line method over the estimated useful lives of the
assets beginning when assets were placed in service. Depreciation expense
amounted to $13,290 for the year ended
F-21
<PAGE> 98
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1998. Based on the discontinuance of MWI's operations in 1998,
along with no future alternative use, the net book value of MWI's equipment and
furniture at December 31, 1998, totaling $36,858, was written off.
PREPAID ROYALTIES
Prepaid royalties represent prepayments made to Summus under various agreements
further described in Note 4. As future revenues from services subject to the
provisions of these agreements are earned, the prepaid royalties will be charged
to royalty expense. Credits earned under the SLA (see description in Note 4)
will be applied directly to reduce the prepaid balances and the remaining amount
will be amortized over the term of the agreements.
Management will assess, on a going forward basis, the need for any impairment
charges related to the realization of these amounts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of unrestricted cash accounts and highly
liquid investments with an original maturity of three months or less when
purchased.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. In accordance with APB 25,
the Company has valued employee stock awards and stock issued to employees for
services performed based on the traded value of the Company's common stock, or
its estimated fair value prior to it becoming traded, at the measurement date of
the stock options and awards.
INCOME TAXES
Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
(See Note 10).
LOSS PER SHARE
Loss per share has been calculated in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share." The Company has potential
common stock equivalents
F-22
<PAGE> 99
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
related to its outstanding stock options. These potential common stock
equivalents were not included in loss per share for all periods because the
effect would have been antidilutive.
INVESTMENT IN COMMON STOCK OF RELATED PARTY
Investment in common stock of related party represents the Company's 14.0%
ownership interest in Summus (see Note 8). The Company accounts for its
investment in Summus using the cost method. Under this method, the investment is
recorded at its historical cost. Although the market value of this investment is
not readily determinable, management believes its fair value is not less than
its carrying amount.
REVENUE RECOGNITION
Revenue was recognized by MWI when products were shipped and services were
performed. Operating activity for MWI has been presented as discontinued
operations for the year ended December 31, 1998. To date, no revenues have been
generated by HSNS. On a prospective basis, the Company expects to generate
revenue from the sale of services such as design and execution of email
marketing campaigns and advertising design. Revenue from such services will
include upfront fees and a fee based on the number of emails delivered. Revenue
will be recognized when each campaign is completed and there are no significant
remaining obligations, and collection of the fee is probable. Advertising design
revenues will be recognized at the time the services are rendered based upon the
terms of individual contracts.
The Company is entitled to receive a percentage of revenues Summus earns from
third party licenses of its products for rich media distribution as well as
revenue sharing with respect to sales to a potential customer (See Note 4).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 2000. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new statement will have a significant effect on operations
or the financial position of the Company.
F-23
<PAGE> 100
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
MWI expensed advertising costs as incurred. Advertising expense was
approximately $128,000 for the year ended December 31, 1998. To date, High Speed
Net Solutions has not incurred any advertising expense.
4. PREPAID ROYALTIES
In February 1999, the Company entered into a Marketing and Licensing Agreement
("MLA") with Summus. As consideration for this agreement, the Company prepaid
royalty payments to Summus. The amount of prepaid royalties consists of cash
payments of $2,250,000 ($2,190,000 of which was made by a stockholder on behalf
of the Company) and the issuance of 1,500,000 shares of the Company's common
stock valued at $2,278,125, for a total aggregate value of $4,528,125. The value
assigned to the 1,500,000 common shares was based on the traded value of the
Company's common stock on the date of the transaction. This amount is presented
as a non-current asset in the accompanying balance sheet as of December 31,
1999.
The Shareholder of the Company who made the cash payments to Summus on behalf of
the Company controlled a trust which owned 8.2% of Summus Technologies, Inc. On
August 16, 1999, Summus Technologies, Inc. and Summus, Ltd. merged (see note 8).
The Company recorded a payable to the shareholder which was subsequently offset
by debentures issued to the shareholder (see Note 6).
In January 2000, the Company and Summus entered into a Master Agreement, which
includes a Software License Agreement ("SLA"), a Software Maintenance Agreement
("SMA") and an Agency and a Revenue Sharing Agreement ("RSA") (collectively with
the Master License Agreement, the "New Agreements"). The New Agreements entirely
replace the MLA entered in February 1999.
The SLA gives the Company the right to license Summus' current and future
products for digital content management solutions for rich media distribution.
Additionally, the SLA gives the Company non-exclusive rights to distribute
wavelet encoded content over the Internet or over private network environments
for the purposes of advertising or content delivery. The Company will be
credited for the $1.0 million upfront license fee due under the SLA from the
prepayments made under the MLA. Upon commencement of the SLA, this $ 1.0 million
will be amortized on a straight-line basis over the six-year term of the SLA.
The remaining amount of the Prepaid Royalties will be charged to royalty expense
on a systematic basis, as revenues are earned, over the term of the agreement.
The Company is also required to make ongoing payments equal to 10% of revenues
generated from use of the Summus' products, as defined in the agreement. The
F-24
<PAGE> 101
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. PREPAID ROYALTIES (CONTINUED)
Company was granted a $1.0 million credit, from the prepayments made under the
MLA, for such payments. The Company has been granted other rights under the SLA
which are defined in the agreement. The SLA has a term of six years.
The RSA entitles the Company to receive 20% of all revenues that Summus receives
from third party licenses of its products for rich media distribution. For all
customers that the Company refers to Summus for technology licensing, consulting
or other product or services sales, the Company will receive 15% of the first
year revenue earned by Summus. The RSA also provides for revenue sharing with
respect to sales to a potential customer by either the Company or Summus.
Revenue earned from this customer in the first two years by either the Company
or Summus will be shared equally between both parties. Beginning in the third
year, 40% of revenue earned by the Company will be remitted to Summus decreasing
to 20% in the final two years. Conversely, 40% of revenue earned by Summus in
the third year and 20% of revenue earned by Summus in years four, five and six
will be shared with the Company.
Under the new agreements discussed above, the Company is required to make annual
payments to Summus for approximately $ 180,000 in return for software
maintenance and upgrades. The payment for the first year beginning February 2000
has been waived. The Company will recognize the aggregate amount of the annual
fees on a straight-line basis over the entire six-year term of the agreements.
5. LICENSING RIGHTS
In September 1998, the Company issued 775,000 shares of its common stock, valued
at $77,500 for all of the issued and outstanding common stock of Brad Richdale
Direct, Inc. ("BRD"). The primary purpose of this transaction was to obtain
certain licensing and marketing rights held by BRD for certain products to be
developed by Summus. Since BRD had nominal assets and operations, this
transaction was accounted for as an acquisition of licensing rights, rather than
as a business combination. The value of this transaction was based on recent
transactions in the Company's common stock on the date of the transaction. The
products to be delivered by Summus under these licensing rights were to be used
in the planned operations of MWI. Since these products were not completed by the
end of 1998 and in connection with the discontinuance of MWI operations, the
Company abandoned its rights to these yet-to-be delivered products. Accordingly
the net book value of these costs of $68,890 was written off at December 31,
1998 and is included as part of the loss on discontinued operations.
F-25
<PAGE> 102
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. CONVERTIBLE DEBENTURES
During 1999, the Company issued $2,655,749 in convertible debentures (the
"debentures") to officers, stockholders and third parties. These debentures were
issued in exchange for both cash of $558,640 and in partial satisfaction of
advances of $2,097,109 from a stockholder of the Company. The remaining amounts
owed to the stockholder are included in Payables to Related Parties in the
Company's balance sheet. The debentures were convertible into the Company's
common stock at conversion prices ranging from $0.25 to $1.33 per share (all of
which were substantially "in-the-money" at date of issuance).
Shortly after the issuance of the debentures, the debenture holders exercised
the conversion feature and converted all outstanding debentures into 4,852,860
shares of the Company's common stock. The debentures were convertible at the
date of issuance. Since the conversion price of the debentures was below the
fair market value of the common stock, the Company recorded a $2,655,749
beneficial conversion feature as debt discount and additional paid-in-capital on
the date the debentures were issued. The resulting interest expense was
immediately recognized because the debentures were convertible upon issuance.
As of December 31, 1999, all debentures had been converted.
7. RELATED PARTY TRANSACTIONS
As of December 31, 1999 Summus holds a 40.7% ownership interest in the Company.
The Company's operating and business strategy is dependent on the development of
Summus' technology and products under the New Agreements. Summus is developing
media compression and delivery software that the Company has rights to use to
deliver services to its customers under its various agreements with Summus.
During 1999, Summus funded certain expenses of the Company. For the year ended
December 31, 1999, Summus paid $154,000 of operating expenses on behalf of the
Company. This amount is owed to Summus and is included in Payables to Related
Parties in the accompanying balance sheet at December 31, 1999.
Payables to related parties, also includes advances made to the Company from a
former majority shareholder during 1998 and 1999. These amounts are unsecured
and are payable on demand.
8. STOCKHOLDERS' EQUITY
On June 20, 1998, the Company amended its articles of incorporation to increase
the number of authorized shares of its $.001 par value common stock to
50,000,000 and to effect a 200 for one stock split thereby increasing its issued
and outstanding shares to 1,000,000. The Company has
F-26
<PAGE> 103
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
5,000,000 authorized shares of $.001 par value preferred stock. No preferred
shares have ever been issued and outstanding as of December 31, 1999.
During the year ended December 31, 1998 the Company issued 765,000 shares of its
stock to employees for services rendered. These shares were valued at $76,500
based on the estimated fair value of the common stock, as determined by a recent
sale of the Company's common stock. At that time, the Company's common stock was
not publicly traded. During the year ended December 31, 1999, the Company issued
85,500 shares of common stock to employees for services rendered. These shares
were valued at $130,814 based on the traded value of the common stock.
During 1998, the Company acquired 38,500 shares of its common stock for $227,619
in cash and currently holds these shares as treasury stock.
In August 1999, the Company issued 795,001 shares of its common stock valued at
$1,792,127, along with a cash payment of $102,000, to acquire 1,000,182 shares
of common stock, or 19%, of Summus Technologies Inc. The value assigned to these
shares was based on the traded value of the Company's common stock.
Subsequently, Summus Technologies, Inc. and Summus Ltd. merged. Summus Ltd. was
the surviving entity. The Company's ownership in Summus Ltd. after the merger
was 16.7% and as of December 31, 1999 is 14.0%. The Company's shares of Summus
Ltd. are subject to a shareholder agreement, which restricts the Company's
ability to transfer or sell its shares without first granting Summus Ltd. the
opportunity to purchase them.
In August 1999, former management of the Company entered into a stock
subscription agreement with a related party. The agreement provided for the
Company to sell 250,000 shares of its common stock for $1.00 per share. Since
the subscription price was below the fair market value of the underlying stock
on the date of the agreement, $845,000 of expense related to this transaction
has been charged to the statement of operations in 1999.
Stock Options
During 1999, the Company granted to certain employees and directors 2,520,000
stock options that had exercise prices below the fair value of the underlying
common stock. Compensation expense of $4,717,600 has been recognized based upon
the difference between the exercise price and the traded value of the common
stock on the date of grant. These options vested immediately upon issuance and
1,825,000 of these options were exercised during 1999. Unexercised options
expire between 5 and 10 years from date of grant.
F-27
<PAGE> 104
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
In connection with a 200,000 stock option grant, the optionee received
protection from potential dilution resulting from future issuances of the
Company's securities, as defined. The maximum number of common shares issuable
under this agreement is 400,000.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123; "Accounting for Stock-Based
Compensation." As permitted by the provisions of SFAS No. 123, the Company
continues to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations for its stock-based
awards.
A summary of the Company's stock option activity is as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
Outstanding - December 31, 1998 -- $ --
Granted 2,520,000 1.21
Exercised (1,825,000) 0.06
---------- --------
Outstanding - December 31, 1999 695,000 2.29
========== ========
The following table summarizes information about stock options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING
------------------------------------------------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
---------------- ----------- ---------------- ----------------
$ .01 240,000 5 years $ .01
2.00 - 4.38 295,000 6.9 years 3.45
10.00 - 13.00 160,000 7 years 13.00
-----------
695,000 6.4 years 5.70
===========
OPTIONS EXERCISABLE
-------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
---------------- ----------- ----------------
$ .01 240,000 $ .01
2.00 - 4.38 165,000 4.00
10.00 - 13.00 -- --
-----------
405,000 1.18
===========
F-28
<PAGE> 105
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
In accordance with SFAS 123, the fair value of each option grant was determined
by using the Black-Scholes option pricing model with the following weighted
average assumptions for the twelve month period ended December 31, 1999:
dividend yield of 0%; volatility of 2.054; risk free interest rate of 4.25% and
expected option lives of 5 years. The weighted average fair value at the date of
grant was $2.29 per option. Had the compensation expense for the Company's stock
options been determined based on the fair value at the date of grant consistent
with the provisions of SFAS 123, the Company's net loss and net loss per share
would have been $13.5 million and $.71 for the twelve months ended December 31,
1999.
During August 1999, the Company negotiated and Board of Directors approved the
cancellation of 5,161,100 shares of its common stock which were originally
issued in connection with the merger between the Company and MWI. This
cancellation was a result of MWI ceasing its operations in 1998. Both the
majority holder of these shares and the Company agreed that the initial purchase
price was over valued and accordingly, the shares were voluntary returned to the
Company and the Company then canceled the shares. Since no value was ascribed to
the initial shares issued in connection with the MWI merger, no value was
ascribed to the subsequent cancellation. Also during 1999, the Company executed
the cancellation of 555,000 shares of its common stock, 530,000 of which were
originally issued in 1998 and 25,000 issued in 1999 for services rendered by an
employee for a total value of $91,250. During 1999, it was determined that these
services had not been performed satisfactorily and therefore the common stock
was voluntarily returned to the Company and canceled.
9. LEASES
During 1999, the Company established it headquarters in Raleigh, North Carolina
and entered into a noncancelable lease for office space and certain office
equipment. Rent expense incurred during the twelve months ended December 31,
1999 was $11,375.
The following is a schedule of future minimum lease payments for operating
leases:
2000 $ 32,973
2001 32,973
2002 32,973
2003 32,973
2004 32,973
----------
$ 164,865
==========
F-29
<PAGE> 106
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
9. LEASES (CONTINUED)
During 1998, MWI leased its office facility and certain office equipment under
noncancelable operating leases, all which were terminated in 1998. Total rent
expense incurred in 1998 by MWI was approximately $40,000.
10. INCOME TAXES
No provision for income taxes has been recorded during the current year due to
the Company's significant losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
DECEMBER 31 DECEMBER 31
1998 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 57,000 $ 224,000
Start-up expenses 134,000 100,500
Related party expenses 178,000 234,000
Other deductible temporary differences 79,000 79,000
----------- -----------
Total deferred tax assets 448,000 637,500
Deferred tax asset valuation allowance (448,000) (637,500)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
Management has determined that a 100% valuation allowance for existing deferred
tax assets is appropriate given uncertainty regarding the ultimate realization
of any such assets.
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $560,000 for income tax purposes. The tax benefit
of these carryforwards are reflected in the above table of deferred tax assets.
If not used, these carryforwards begin to expire in 2018 for federal tax
purposes and in 2003 for state tax purposes. U. S. tax rules impose limitations
on the use of net operating losses following certain changes in ownership. If
such a change occurs, the limitation could reduce the amount of these benefits
that would be available to offset future taxable income each year, starting with
the year of ownership change.
F-30
<PAGE> 107
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
11. COMMITMENTS
In December 1999, the Company entered into a consulting agreement whereby the
consulting firm received options rights to purchase, up to 200,000 shares of the
Company's common stock at an exercise price of $10.00 per share. The options
vest and become exercisable in increments of 50,000 shares based on the
achievement of certain levels of revenue earned by the Company. As of December
31, 1999, no options were vested under this agreement. These options will be
accounted for under the provisions of FAS 123.
In October 1999, the Company entered into a consulting agreement whereby the
consultant will receive the rights to purchase 2,000 shares of the Company's
common stock based on the achievement of revenue, as defined, from a potential
customer of the Company and Summus. The Company is also obligated to pay the
consultant 4% of all revenue the Company earns from this potential customer. As
revenues earned from this potential customer increase, the consultant has the
right to proportionally receive more shares based on the higher levels of
revenues earned. As of December 31, 1999, no amounts have been earned under this
agreement. As options are granted, they will be accounted for under the
provisions of FAS 123.
All non-employee and non-director stock option grants will be valued on the
appropriate measurement date using the Black Scholes option-pricing model. The
weighted average assumptions to be used in this option-pricing model include the
dividend yield, volatility, risk free interest rate and the expected option
life.
12. SUBSEQUENT EVENTS
In January 2000, a former shareholder of Summus Technologies, Inc., who received
350,000 shares of HSNS common stock and $100,000 in cash in exchange for his
shares of Summus Technologies, Inc. stock (see Note 8) has filed a lawsuit
against the Company seeking damages of $13.3 million resulting from the
Company's alleged failure to register such shares under the Securities Act of
1933 (the "Act"). Under an agreement between the former shareholder and the
Company, the Company is required to issue and include in a registration
statement under the Act additional 25,000 shares of the Company's common stock
for each additional month that passes subsequent to the Company's initial
deadline date to register the 350,000 shares. Management is attempting to settle
this matter out-of-court. The Company as accrued $800,000 for settlement of this
matter, representing management's best estimate of the ultimate outcome.
However, the ultimate exposure could be more or less, depending on the outcome
of settlement discussions the length of time that passes prior to the
effectiveness of a registration statement covering shares of the Company held by
the plaintiff and the ultimate value of the Company's shares on the date of
settlement. Because the matter is expected to be resolved by issuing additional
shares, the
F-31
<PAGE> 108
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
12. SUBSEQUENT EVENTS (CONTINUED)
ultimate outcome is not expected to have an adverse impact on the Company's
liquidity or cash flow.
On April 24, 2000, the Company acquired 100% of the issued and outstanding
shares of common stock of JSJ Capital Corp., a Nevada Corporation ("JSJ"), in
exchange for 50,000 shares of 144 restricted common stock of the Company. As a
result of HSNS's 100% ownership of JSJ, the Board of Directors of HSNS approved
the merger of JSJ into HSNS whereby HSNS will be the surviving corporation. The
acquisition was accounted for as an issuance of HSNS common stock in exchange
for the net monetary assets of JSJ, accompanied by a recapitalization.
The 50,000 shares issued by the Company in connection with the acquisition of
JSJ are considered a nominal issuance to effect the acquisition. All shares and
per share data presented herein have been restated to reflect the issuance of
these shares. The pro forma impact of the JSJ acquisition is a $400,000 charge
to retained earnings on the Company's balance sheet, representing cash legal
fees paid in excess of the net assets acquired.
This charge was recognized in earnings upon consummation of the acquisition.
Subsequent to year-end, the Company entered into a settlement agreement with
William Dunavant and Michael Cimino to resolve a litigation suit filed in
Florida. The settlement agreement provides, among other things, that the Company
register 350,000 shares of common stock with the Securities and Exchange
Commission.
F-32
<PAGE> 109
PRO FORMA FINANCIAL INFORMATION
On April 21, 2000, High Speed Net Solutions, Inc., a Florida Corporation
("HSNS") acquired 100% of the issued and outstanding shares of common stock of
JSJ Capital Corp., a Nevada Corporation ("JSJ"), in exchange for 50,000 shares
of 144 restricted common stock of HSNS and $400,000 in cash. As a result of
HSNS's 100% ownership of JSJ, the Board of Directors of HSNS approved the merger
of JSJ into HSNS whereby HSNS will be the surviving corporation.
The pro forma exhibits include a combining consolidated balance sheet as of
December 31, 1999 that reflects the effect of the stock issued and cash paid for
legal service in connection with the acquisition. The acquisition has been
accounted for as an issuance of HSNS common stock in exchange for the net
monetary assets of JSJ, accompanied by a recapitalization. In addition, a
combining consolidated statement of operations is included which presents loss
from operations for the year ended December 31, 1999. The pro forma balance
sheet is presented assuming the reverse acquisition occurred as of December 31,
1999 and the pro forma statements of operations are presented assuming the
reverse acquisition occurred on January 1, 1999.
F-33
<PAGE> 110
High Speed Net Solutions, Inc.
Pro Forma Combined Balance
Sheet (Unaudited)
December 31, 1999
10/31/99
JSJ
Capital Pro Forma Pro Forma
Audited Corp Adjustment Combined
------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and Equivalents $ 248,740 $30 $ (400,000)(a) $ --
1,642,202 (b) 1,490,972
Other Current Assets -- --
------------------------------------------------------
TOTAL CURRENT ASSETS 248,740 30 1,242,202 1,490,972
Fixed Assets, Net 3,720 3,720
Investment in Common
Stock of Related Party 1,894,127 1,894,127
Prepaid Royalties 4,528,125 4,528,125
------------------------------------------------------
TOTAL ASSETS $6,674,712 $30 $1,242,202 $7,916,944
======================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts Payable and
Accrued Expenses $ 899,876 -- -- $ 899,876
Payables to Related
Parties 589,815 -- -- 589,815
------------------------------------------------------
TOTAL CURRENT LIABILITIES 1,489,691 -- -- 1,489,691
Stockholders' Equity:
Series A Convertible
Preferred Stock, $0.001
par value, 5,000,000 shares
authorized 2,000 shares
issued and outstanding on
a pro forma basis -- 1,642,202 (b) 1,642,202
Common Stock, $0.001 par
value, 50,000,000 shares
authorized, 21,062,149
issued and outstanding at
December 31, 1999 and
21,112,149, pro forma 21,062 67 (67)(c)
50 (d) 21,112
Additional Paid-in Capital 17,272,820 233 67 (c)
(50)(d)
(270)(e) 17,272,800
Deficit accumulated during
development stage (11,881,242) (270) (400,000)(a)
270 (e) (12,281,242)
Treasury Stock, at cost (227,619) -- -- (227,619)
------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 5,185,021 30 1,242,202 (6,427,253)
------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $6,674,712 $30 $1,242,202 $7,916,944
======================================================
(a) Represents $400,000 in legal fees paid in connection with the merger. As
this amount exceeds the net assets of the acquired Company, this charge will be
recognized in earnings upon consummation of the acquisition.
(b) Reflects the issuance of 2,000 shares of preferred stock for net cash
proceeds of $1.6 million in February, 2000.
(c) Reflects the elimination of the historical common stock of JSJ Capital
Corporation.
(d) Records the issuance of 50,000 restricted common shares of HSNS to effect
the recapitalization.
(e) Reflects the elimination of the historical accumulated deficit of JSJ
Capital Corporation.
F-34
<PAGE> 111
High Speed Net Solutions, Inc.
Pro Forma Combined Statement of Operations
(Unaudited)
Year ended December 31, 1999
10/31/99
JSJ
Capital Pro Forma Pro Forma
Audited Corp Adjustment Combined
------------------------------------------------------
Selling, general and
administrative expenses $ 7,515,797 $270 $-- (b) $ 7,516,067
Interest Expense 2,655,749 -- 2,655,749
------------------------------------------------------
Net loss $(10,171,546) $270 $-- (b) $(10,171,816)
======================================================
Per share amounts (basic
and diluted) --
Net loss (0.53) -- (0.53)
Weighted average shares
outstanding 19,030,492 50,000 (a) 19,080,492
======================================================
(a) The adjustment records the effect of the acquisition and merger which
resulted in an increase in the weighted average shares outstanding.
(b) Upon consummation of the merger, the Company will recognize $400,000 in
legal expenses representing legal fees paid in connection with the
merger in excess of net assets of JSJ acquired. This charge is not
included as a pro forma adjustment as it is not expected to have a
continuing impact on the Company.
F-35
<PAGE> 112
Summus, Ltd.
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,098,435 $ 647,704
Accounts receivable (net of allowance of $11,800) 493,479 59,314
Receivable from related party 215 154,000
Other current assets 44,247 64,967
------------ ------------
Total current assets 1,636,376 925,985
Furniture and equipment, net 629,105 610,787
Capitalized software development costs, net 182,636 290,960
Investment in equity investee -- 4,361,579
------------ ------------
Total assets $ 2,448,117 $ 6,189,311
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 853,201 $ 330,179
Compensation payable to shareholder 81,050 91,050
Deferred royalty revenue 166,656 352,778
Note payable, current portion 119,277 119,268
Capital lease obligations, current portion 123,501 161,087
------------ ------------
Total current liabilities 1,343,685 1,054,362
Capital lease obligations, net of current portion 184,136 187,718
Note payable, net of current portion -- 59,647
Deferred royalty revenue, less current portion 2,569,543 2,466,754
Shareholders' equity:
Common stock, $.0001 par value, 10,000,000 shares authorized,
1,186,289 shares issued and outstanding 118 118
Additional paid-in capital 15,729,143 13,804,378
Deferred compensation (1,145,671) --
Accumulated deficit (16,232,837) (11,383,666)
------------ ------------
Total shareholders' (deficit) equity (1,649,247) 2,420,830
------------ ------------
Total liabilities and shareholders' (deficit) equity $ 2,448,117 $ 6,189,311
============ ============
</TABLE>
See accompanying notes.
F-36
<PAGE> 113
Summus, Ltd.
Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
2000 1999
----------- -----------
<S> <C> <C>
Revenue $ 753,679 $ 260,959
Cost of revenues 109,337 135,694
Selling, general and administrative expenses 4,605,512 913,061
Research and development 633,962 335,801
----------- -----------
Operating loss (4,595,132) (1,123,597)
Gain on sale of stock of equity investee 4,057,500 --
Loss on investment in equity investee (4,361,579) --
Interest income (expense) 50,040 (7,066)
----------- -----------
Net loss $(4,849,171) $(1,130,663)
=========== ===========
</TABLE>
See accompanying notes.
F-37
<PAGE> 114
Summus, Ltd.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30
2000 1999
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(4,849,171) $(1,130,663)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 129,236 131,148
Loss on disposal of assets -- --
Gain on sale of investment in equity investee (4,057,500) --
Non-cash compensation charge 779,094 --
Loss on investment in affiliate 4,361,579 --
Changes in operating assets and liabilities:
Accounts receivable (434,165) (15,459)
Receivable from related party 153,785
Accounts payable and accrued expenses 513,022 91,428
Deferred revenue (83,333) --
Other current assets 20,720 (3,149)
----------- -----------
Net cash used in operating activities (3,466,733) (926,695)
INVESTING ACTIVITIES
Proceeds from deferred revenue -- 2,250,000
Proceeds from sale of investment in equity investee 4,057,500
Purchases of furniture and equipment (39,230) (81,905)
----------- -----------
Net cash provided by (used in) investing activities 4,018,270 2,168,095
FINANCING ACTIVITIES
Repayments to affiliate -- (608,634)
Principal payments on note payable (59,638) (23,065)
Principal payments on capital lease obligations (41,168) (6,519)
----------- -----------
Net cash used in financing activities (100,806) (638,218)
----------- -----------
Net change in cash 450,731 603,182
Cash and cash equivalents at beginning of year 647,704 137,038
----------- -----------
Cash and cash equivalents at end of year $ 1,098,435 $ 740,220
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 8,833 $ 7,066
=========== ===========
</TABLE>
See accompanying notes.
F-38
<PAGE> 115
Summus, Ltd.
Notes to Financial Statements
June 30, 2000
(Unaudited)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summus, Ltd. ("Summus" or the "Company") markets proprietary software products
for sound, image, and video compression for license to third party software
developers. The Company also performs related research and development under
various contracts with the U. S. government and others. In the opinion of
management, all normal and recurring adjustments necessary to present fairly the
financial position, results or operations and cash flow at June 30, 2000 and for
all periods presented have been made.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION AND DEFERRED REVENUE
The Company recognizes revenue on time and materials consulting projects at the
time services are rendered based upon the terms of individual contracts.
The Company follows the provisions of AICPA Statement of Position 97-2,
"Software Revenue Recognition", as amended by AICPA Statement of Position 98-9
"Modification of SOP No. 97-2 Software Revenue Recognition with Respect to
Certain Transactions." Revenues from software license fees and hardware sales
are generally recognized upon delivery provided that a contract has been
executed, the vendor fee is fixed or determinable, no significant vendor
obligations or uncertainties surrounding customer acceptance remain, and
collection of the resulting receivable is deemed probable.
Deferred revenue represents prepaid amounts from High Speed Net Solutions, Inc.
("HSNS"), a related party, under various licensing agreements. Revenue subject
to the provisions of these agreements will be recognized as earned over the
various terms of the agreements.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost. Depreciation is computed over the
estimated useful lives of the assets (generally 3-7 years) using the
straight-line method.
F-39
<PAGE> 116
Summus, Ltd.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
SOFTWARE DEVELOPMENT COSTS
Capitalization of software development costs begins with the establishment of
technological feasibility of new or enhanced software products. Technological
feasibility of a computer software product is established when the Company has
completed all planning, designing, coding and testing that is necessary to
establish that the software product can be produced to meet design
specifications including functions, features and technical performance
requirements. All costs incurred prior to establishing technological feasibility
of a software product are charged to research and development expense as
incurred.
The Company amortizes capitalized software development costs on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
estimated remaining economic life of the software products, generally three
years. Amortization begins when the product is available for general release to
customers.
INCOME TAXES
The Company uses the liability method to account for income taxes. Under this
method, deferred income taxes are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established if and when necessary to reduce deferred
tax assets to the amounts expected to be realized.
2. INVESTMENT IN EQUITY INVESTEE
Investment in equity investee represents the Company's 40% ownership interest in
HSNS as of June 30, 2000. The Company accounts for its investment using the
equity method of accounting. The Company adjusts the carrying value of its
investment in HSNS for its share of HSNS's earnings and losses, and records such
earnings or losses in income. Additionally, the Company is amortizing the excess
of the cost of its investment over the amount of underlying equity in net assets
of HSNS at the time of the investment over a five-year period.
During the six months ended June 30, 2000, the Company's loss in equity of HSNS
exceeded the carrying value of its investment. Accordingly, the carrying value
was adjusted to zero.
F-40
<PAGE> 117
Summus, Ltd.
Notes to Financial Statements (continued)
3. STOCK-BASED COMPENSATION
The Company accounts for stock options in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Under APB No. 25, no compensation
expense is recognized for stock options issued to employees at fair value. For
stock options granted at exercise prices below the deemed fair value, the
Company records deferred compensation expense for the difference between the
exercise price of the shares and the deemed fair market value. The deferred
compensation expense is amortized ratably over the vesting period of the related
options. During the six months ended June 30, 2000, the Company recognized
$779,094 of compensation expense related to vested options issued at less than
fair market value.
4. DEFERRED ROYALTY REVENUE
In February 1999, the Company entered into a Marketing and Licensing Agreement
("MLA") with High Speed Net Solutions, Inc. ("High Speed"). As consideration for
this agreement, the Company received prepaid royalty payments. The amount of
prepaid royalties received consisted of cash payments of $2,250,000 and the
receipt of 1,500,000 shares of High Speed common stock valued at $569,532, for
total aggregate consideration of $2,819,532. The value assigned to the 1,500,000
common shares was based on the estimated fair value of High Speed's common stock
on the date of the transaction. This deferred revenue amount is presented as a
non-current liability in the accompanying balance sheet as of December 31, 1999.
In February 2000, the Company and High Speed entered into a Master Agreement,
which includes a Software License Agreement ("SLA"), a Software Maintenance
Agreement ("SMA") and an Agency and a Revenue Sharing Agreement ("RSA")
(collectively with the Master License Agreement, the "New Agreements"). The New
Agreements entirely replace the MLA entered in February 1999.
The SLA gives High Speed the right to license Summus' products for digital
content management solutions for rich media distribution. Additionally, the SLA
gives High Speed non-exclusive rights to distribute wavelet encoded content over
the Internet or over private network environments for the purposes of
advertising or content delivery. High Speed will be credited for the $1.0
million upfront license fee due under the SLA from the prepayments made under
the MLA. The deferred royalty revenue will be recognized as royalty income on a
systematic basis, over the term of the agreement. High Speed is also required to
make ongoing payments equal to 10% of revenues generated from the use of Summus'
products, as defined in the agreement. High Speed was granted a $1.0 million
credit, from the prepayments made under the MLA, for such payments. High Speed
has been granted other rights under the SLA which are defined in the agreement.
The SLA has a term of six years.
F-41
<PAGE> 118
Summus, Ltd.
Notes to Financial Statements (continued)
4. DEFERRED ROYALTY REVENUE (CONTINUED)
The RSA entitles High Speed to receive 20% of all revenues that Summus receives
for rich media distribution from third party licenses of its products that
operate as a service bureau. For all customers that High Speed refers to Summus
for technology licensing, consulting or other product or services sales, High
Speed will receive 15% of the first year revenue earned by Summus. The RSA also
provides for revenue sharing with respect to one potential customer by either
High Speed or Summus. Revenue earned from this customer in the first two years
by either the Company or High Speed will be shared equally between both parties.
Beginning in the third year, 40% of revenue earned by High Speed will be
remitted to Summus decreasing to 20% in the final two years. Conversely, 40% of
revenue earned by Summus in the third year and 20% of revenue earned by Summus
in years four, five and six will be shared with High Speed.
During the six months ended June 30, 2000, the Company recognized $83,333 of
revenue under these agreements.
F-42
<PAGE> 119
Report of Independent Auditors
The Board of Directors
Summus, Ltd.
We have audited the accompanying balance sheet of Summus, Ltd. as of December
31, 1999 and the related statements of operations, shareholders' equity
(deficit), and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Summus, Ltd. at
December 31, 1999 and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the
Company has incurred operating losses for each year during the three year period
ended December 31, 1999 and has negative working capital. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ Ernst & Young LLP
March 31, 2000, except for Note 12
as to which the date is September 28, 2000
F-43
<PAGE> 120
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Summus, Ltd.
We have audited the accompanying balance sheet of Summus, Ltd. as of December
31, 1998, and the related statements of operations, changes in shareholders'
equity (deficit), and cash flows for the years ended December 31, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the financial position of Summus, Ltd. as of December 31,
1998, and the results of its operations, and its cash flows for the years ended
December 31, 1998 and 1997, in conformity with generally accepted accounting
principles.
As disclosed in Note 10, the 1998 financial statements have been restated to
reflect the combination of Summus, Ltd. and Summus Technologies, Inc. in a
manner similar to a pooling of interests, since the companies were under common
control.
/s/ Bauknight Pietras & Stormer, P.A.
March 24, 1999
Columbia, South Carolina
F-44
<PAGE> 121
Summus, Ltd.
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 647,704 $ 137,038
Accounts receivable (net of allowance of $11,800)) 59,314 24,487
Receivable from related party 154,000 --
Other current assets 64,967 15,015
------------ -----------
Total current assets 925,985 176,540
Furniture and equipment, net 610,787 179,457
Capitalized software development costs, net 290,960 370,767
Investment in equity investee 4,361,579 --
------------ -----------
Total assets $ 6,189,311 $ 726,764
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 330,179 $ 133,600
Compensation payable to shareholder 91,050 96,382
Deferred royalty revenue, current portion 352,778 --
Short-term note payable -- 144,000
Note payable, current portion 119,268 --
Capital lease obligations, current portion 161,087 13,074
------------ -----------
Total current liabilities 1,054,362 387,056
Capital lease obligations, net of current portion 187,718 22,882
Note payable, net of current portion 59,647 --
Deferred royalty revenue, less current portion 2,466,754 --
Shareholders' equity (deficit):
Common stock, $.0001 par value, 10,000,000 shares
authorized, 1,196,489 and 571 shares issued and
outstanding at December 31, 1999 and 1998 118 100
Additional paid-in capital 13,804,378 3,432,578
Accumulated deficit (11,383,666) (3,115,852)
------------ -----------
Total shareholders' equity 2,420,830 316,826
------------ -----------
Total liabilities and shareholders' equity $ 6,189,311 $ 726,764
============ ===========
</TABLE>
See accompanying notes.
F-45
<PAGE> 122
Summus, Ltd.
Statements of Operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------ ----------- ----------
<S> <C> <C> <C>
Revenue: $ 515,216 $ 556,638 $ 606,633
Cost of revenues 281,254 1,074,633 317,008
Selling, general and administrative expenses 3,364,278 1,917,220 342,833
Non-cash compensation charge 2,670,050 -- --
Research and development 1,142,435 421,685 211,338
------------ ----------- ----------
Operating loss (6,942,801) (2,856,900) (264,546)
Other income (expense):
Gain on sale of stock of equity investee 2,314,390 -- --
Equity in loss of equity investee (3,447,110) -- --
Loss on disposal of assets (119,180) (9,869) (262)
Interest income (expense) (5,239) (14,455) (15,617)
------------ ----------- ----------
Other income (expense) (1,257,139) (24,324) (15,879)
------------ ----------- ----------
Net loss $ (8,199,940) $(2,881,224) $ (280,425)
============ =========== ==========
</TABLE>
See accompanying notes.
F-46
<PAGE> 123
Summus, Ltd.
Statements of Shareholders' Equity (Deficit)
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL SHAREHOLDERS'
NUMBER OF COMMON PAID-IN ACCUMULATED EQUITY
SHARES STOCK CAPITAL DEFICIT (DEFICIT)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 169,071 17 (67,422) 45,797 (21,608)
Net loss -- -- -- (280,425) (280,425)
Balance at December 31, 1997 169,071 17 (67,422) (234,628) (302,033)
Net loss -- -- -- (2,881,224) (2,881,224)
Sale of common stock 831,000 83 3,500,000 -- 3,500,083
------------------------------------------------------------------------------------------
Balance at December 31, 1998 1,000,071 100 3,432,578 (3,115,852) 316,826
Repurchase of common stock (71) -- (200,499) (67,874) (268,373)
Common stock issued in exchange for
investment in equity investee 132,888 13 7,902,254 -- 7,902,267
Issuance of common stock for services 53,401 5 2,670,045 -- 2,670,050
Net loss -- -- -- (8,199,940) (8,199,940)
==========================================================================================
Balance at December 31, 1999 1,186,289 $118 $ 13,804,378 $(11,383,666) $ 2,420,830
==========================================================================================
</TABLE>
See accompanying notes.
F-47
<PAGE> 124
Summus, Ltd.
Statements of Cash Flows
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (8,199,940) $(2,881,224) $ (280,425)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 262,295 244,495 163,226
Loss on disposal of assets 119,180 9,869 262
Gain on sale of investment in equity investee (2,314,390) -- --
Non-cash compensation charge 2,670,050 -- --
Loss on investment in equity investee 3,447,110 -- --
Changes in operating assets and liabilities:
Accounts receivable (34,827) (110,033) 21,107
Receivable from related party (154,000) -- --
Accounts payable and accrued expenses 127,779 (12,046) 199,301
Deferred revenue -- (31,018) (46,982)
Other current assets (49,952) (15,015) --
------------ ----------- -----------
Net cash (used in) provided by operating activities (4,126,695) (2,794,972) 56,489
INVESTING ACTIVITIES
Proceeds from deferred revenue 2,250,000 -- --
Proceeds from sale of investment in equity investee 2,977,500 -- --
Purchases of property and equipment (318,289) (205,100) (34,668)
Capitalized software development costs -- (307,490) (165,756)
------------ ----------- -----------
Net cash provided by (used in) investing activities 4,909,211 (512,590) (200,424)
FINANCING ACTIVITIES
Capital contributions -- 3,500,000 --
Proceeds from short-term borrowings -- 25,000 125,000
Principal payments on short-term borrowings (233,458) (76,000) (25,294)
Principal payments on capital lease obligations (38,392) (16,219) (10,060)
------------ ----------- -----------
Net cash (used in) provided by financing activities (271,850) (3,432,781) 89,646
------------ ----------- -----------
Increase in cash 510,666 125,219 (54,289)
Cash and cash equivalents at beginning of year 137,038 11,819 66,108
------------ ----------- -----------
Cash and cash equivalents at end of year $ 647,704 $ 137,038 $ 11,819
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest $ 21,792 $ 14,455 $ 15,617
============ =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITY
Assets acquired under capital leases $ 351,241 $ 44,965 $ --
============ =========== ===========
Acquisition of common stock of equity investee
in exchange for common stock and
deferred revenue $ 8,459,298 $ -- $ --
============ =========== ===========
Repurchase of common stock with a note payable $ 268,373 $ -- $ --
============ =========== ===========
</TABLE>
See accompanying notes.
F-48
<PAGE> 125
Summus, Ltd.
Notes to Financial Statements
December 31, 1999
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summus, Ltd. ("Summus" or the "Company") markets proprietary software products
for image and video compression for license to third party software developers
and others. The Company also performs research and development under various
contracts with the U. S. government and others.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements for the year ended December 31, 1999, the Company has incurred a net
loss of $8,199,940, has an accumulated deficit of $11,383,666, and has
experienced negative cash flows from operations. These factors, among others,
indicate that the Company may be unable to continue as a going concern for a
reasonable period of time. The financial statements presented herein do not
include any adjustments relating to the recoverability of assets and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
The Company's continuation as a going concern is dependent on its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing and ultimately to attain profitability. The Company
is actively promoting its product line and pursuing additional financing from
third parties. However, there can be no assurance that management's plans will
be executed as anticipated.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F-49
<PAGE> 126
Summus, Ltd.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue on time and materials consulting projects at the
time services are rendered based upon the terms of individual contracts.
The Company follows the provisions of AICPA Statement of Position 97-2,
"Software Revenue Recognition", as amended by AICPA Statement of Position 98-9
"Modification of SOP No. 97-2 Software Revenue Recognition with Respect to
Certain Transactions." Revenues from software license fees and hardware sales
are generally recognized upon delivery provided that a contract has been
executed, the vendor fee is fixed or determinable, no significant vendor
obligations or uncertainties surrounding customer acceptance remain, and
collection of the resulting receivable is deemed probable.
FURNITURE AND EQUIPMENT
Furniture and equipment is stated at cost. Depreciation is computed over the
estimated useful lives of the assets (generally three to seven years) using the
straight-line method.
RECLASSIFICATIONS
Certain 1998 and 1997 balances have been reclassified to conform to the 1999
presentation. The reclassifications had no impact on net loss or shareholders'
equity (deficit).
F-50
<PAGE> 127
Summus, Ltd.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATIONS OF CREDIT RISK
During 1999 and 1998, revenue from the U.S. Government and related entities
represented 76%, 72% of total revenue, respectively.
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of its trade accounts receivable. Collateral is generally
not required.
At certain times, cash on deposit in the bank may exceed the limit on insured
deposits.
SOFTWARE DEVELOPMENT COSTS
Capitalization of software development costs begins with the establishment of
technological feasibility of new or enhanced software products. Technological
feasibility of a computer software product is established when the Company has
completed all planning, designing, coding and testing that is necessary to
establish that the software product can be produced to meet design
specifications including functions, features and technical performance
requirements. All costs incurred prior to establishing technological feasibility
of a software product are charged to research and development expense as
incurred.
The Company amortizes capitalized software development costs on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current gross revenues for a product to the total of current and
anticipated future gross revenues or (b) the straight-line method over the
estimated remaining economic life of the software products, generally three
years. Amortization begins when the product is available for general release to
customers. During 1999, the Company capitalized $136,837 of costs incurred
related to product development that met the criteria for capitalization.
Capitalized software development costs are presented net of accumulated
amortization of $634,199, $417,554 and $229,906 as of December 31, 1999, 1998
and 1997, respectively. Amortization expense related to software development
costs of $216,644 for the year ended December 31, 1999 is included in the cost
of revenues in the accompanying statement of operations.
F-51
<PAGE> 128
Summus, Ltd.
Notes to Financial Statements (continued)
1. DESCRIPTION OF BUSINESS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
The Company uses the liability method to account for income taxes. Under this
method, deferred income taxes are determined based on the difference between the
financial statement and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established if and when necessary to reduce deferred
tax assets to the amounts expected to be realized.
2. FURNITURE AND EQUIPMENT
Furniture and equipment consists of the following at December 31:
1999 1998
--------- ---------
Computer equipment $ 596,400 $ 126,483
Computer software 45,623 49,661
Automobiles -- 18,395
Furniture and office equipment 23,379 72,757
--------- ---------
665,402 267,296
Less accumulated depreciation (54,615) (87,839)
--------- ---------
$ 610,787 $ 179,457
========= =========
3. LEASES
The Company leases equipment and office space under long-term operating lease
agreements and also leases certain equipment under capital leases. Rental
expense amounted to $180,215, $95,089 and $39,872 for the years ended December
31, 1999, 1998 and 1997, respectively.
F-52
<PAGE> 129
Summus, Ltd.
Notes to Financial Statements (continued)
3. LEASES (CONTINUED)
Minimum future lease payments at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
2000 $177,499 $ 232,937
2001 167,240 231,796
2002 29,214 238,678
2003 -- 245,766
2004 -- 253,067
Thereafter -- 215,554
-------- ----------
Total minimum lease payments 373,953 $1,417,798
==========
Less amounts representing interest (25,148)
Present value of minimum lease payments 348,805
Less current portion (161,087)
---------
$ 187,718
=========
</TABLE>
4. INCOME TAXES
At December 31, 1999 and 1998, the Company had net operating loss carryforwards
for federal and state income tax purposes of approximately $2,400,000 and
$1,775,000, respectively, which begin to expire in 2009 for federal and 2013 for
state purposes. The Company has recorded a valuation allowance of $950,000 which
is equal to the entire deferred tax asset balance because the Company's
financial condition, its lack of earnings, and possible limitations on the use
of carryforwards give rise to uncertainty as to whether the deferred tax asset
is realizable.
The Company made no income tax payments during the years ended December 31,
1999, 1998 and 1997.
F-53
<PAGE> 130
Summus, Ltd.
Notes to Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
During 1999, the Company provided cash advances to High Speed Net Solutions,
Inc. ("High Speed"), its equity investee. The balance outstanding related to
these advances as of December 31, 1999 was $154,000.
During 1999 and 1998, the Company deferred a portion of the salary of an officer
and significant shareholder of the Company in the amount of $91,050 and $96,382,
respectively.
At December 31, 1998, the Company maintained a liability to Summus Technologies,
Inc., an entity under common control, for approximately $1.7 million. During
1999, the Company merged with Summus Technologies, thus eliminating this
intercompany balance (see Note 10).
6. NOTE PAYABLE
During 1999, the Company entered into an agreement with a shareholder to
repurchase 71.428 shares of its common stock from that shareholder for an
aggregate value of $268,373. Concurrently, the Company entered into a promissory
note with the shareholder whereby Summus agreed to pay approximately $10,000
monthly over a 27-month period in exchange for these shares. During any period
where the Company is in default of the note agreement, it shall bear interest at
an annual rate of 18%. As of December 31, 1999, $178,915 remains outstanding on
this note, and all payments are current.
During 1998, the Company maintained a $170,000 line of credit with a financial
institution, which bore interest at an annual rate of prime plus 1% and had a
maturity date of July 2, 1999. The line was collateralized by a security
interest in substantially all of the Company's assets. As of December 31, 1998,
$144,000 was outstanding on this line, which was subsequently repaid in 1999.
F-54
<PAGE> 131
Summus, Ltd.
Notes to Financial Statements (continued)
7. INVESTMENT IN EQUITY INVESTEE
During 1999, the Company acquired 1,500,000 restricted shares of High Speed Net
Solutions, Inc. ("High Speed") common stock in connection with a Marketing and
Licensing Agreement between the Companies. Subsequently, the Company acquired an
additional restricted 9,542,360 shares from a significant shareholder of High
Speed in exchange for the issuance of 132,888 shares of the Company's common
stock. This resulted in the Company having a 51% ownership interest in High
Speed. As of December 31, 1999, the Company's ownership percentage decreased to
44% since Summus sold a portion of the shares initially acquired. The Company is
accounting for this investment using the equity method of accounting. The
initial carrying amount was recorded at estimated fair value considering that
the stock was not registered and thus was not freely tradable. The Company
adjusts the carrying amount of its investment in High Speed for its share of
High Speed's earnings or losses subsequent to the date of investment, and record
such earnings or losses in income. Additionally, the Company is amortizing the
excess of the cost of the investment over the amount of the underlying equity in
net assets of High Speed at the time of the investment over a 5-year period. For
the year ended December 31, 1999, the Company recognized approximately $2.7
million as its share of High Speed's 1999 net loss, as well as $1.6 million of
amortization expense related to this investment. These amounts are included in
other income (expense) on the statement of operations for the year ended
December 31, 1999.
The condensed results of operations and financial position of High Speed at
December 31, 1999 are summarized below:
Total assets $ 6,717,772
==============
Total liabilities $ 1,489,691
==============
Total stockholders' equity $ 5,228,081
==============
Net loss $ (10,197,376)
==============
F-55
<PAGE> 132
Summus, Ltd.
Notes to Financial Statements (continued)
8. DEFERRED ROYALTY REVENUE
In February 1999, the Company entered into a Marketing and Licensing Agreement
("MLA") with High Speed Net Solutions, Inc. ("High Speed"). As consideration for
this agreement, the Company received prepaid royalty payments. The amount of
prepaid royalties received consisted of cash payments of $2,250,000 and the
receipt of 1,500,000 shares of High Speed common stock valued at $1,252,969, for
total aggregate consideration of $3,502,969. The value assigned to the 1,500,000
common shares was based on the estimated fair value of High Speed's common stock
on the date of the transaction. This deferred revenue amount is presented as a
non-current liability in the accompanying balance sheet as of December 31, 1999.
In February 2000, the Company and High Speed entered into a Master Agreement,
which includes a Software License Agreement ("SLA"), a Software Maintenance
Agreement ("SMA") and an Agency and a Revenue Sharing Agreement ("RSA")
(collectively with the Master License Agreement, the "New Agreements"). The New
Agreements entirely replace the MLA entered in February 1999.
The SLA gives High Speed the right to license Summus' products for digital
content management solutions for rich media distribution. Additionally, the SLA
gives High Speed non-exclusive rights to distribute wavelet encoded content over
the Internet or over private network environments for the purposes of
advertising or content delivery. High Speed will be credited for the $1.0
million upfront license fee due under the SLA from the prepayments made under
the MLA. The deferred royalty revenue will be recognized as royalty income on a
systematic basis, over the term of the agreement. High Speed is also required to
make ongoing payments equal to 10% of revenues generated from the use of Summus'
products, as defined in the agreement. High Speed was granted a $1.0 million
credit, from the prepayments made under the MLA, for such payments. High Speed
has been granted other rights under the SLA which are defined in the agreement.
The SLA has a term of six years.
F-56
<PAGE> 133
Summus, Ltd.
Notes to Financial Statements (continued)
8. DEFERRED ROYALTY REVENUE (CONTINUED)
The RSA entitles High Speed to receive 20% of all revenues that Summus receives
for rich media distribution from third party licenses of its products that
operate as a service bureau. For all customers that High Speed refers to Summus
for technology licensing, consulting or other product or services sales, High
Speed will receive 15% of the first year revenue earned by Summus. The RSA also
provides for revenue sharing with respect to one potential customer by either
High Speed or Summus. Revenue earned from this customer in the first two years
by either the Company or High Speed will be shared equally between both parties.
Beginning in the third year, 40% of revenue earned by High Speed will be
remitted to Summus decreasing to 20% in the final two years. Conversely, 40% of
revenue earned by Summus in the third year and 20% of revenue earned by Summus
in years four, five and six will be shared with High Speed.
9. PROFIT SHARING PLAN
The Company has established a 401(k) profit sharing plan for the benefit of
employees who have a minimum of six months of service and have attained the age
of 21 years. The Company's contribution to the Plan is discretionary and is not
limited to profits. For the years ended December 31, 1999, 1998 and 1997, the
Company contributed approximately $26,000, $21,000 and $21,000 to the Plan,
respectively.
10. MERGER WITH SUMMUS TECHNOLOGIES, INC.
During 1998, shareholders of the Company formed Summus Technologies, Inc.
("Technologies"). Technologies was formed for the purpose of marketing Summus,
Ltd.'s products. In August 1999, Summus Ltd., and Summus Technologies, Inc.
merged, resulting in Summus Ltd. being the surviving entity.
The acquisition of Summus Technologies, Inc. has been accounted for in a manner
similar to a pooling of interests since it was acquired from a company under
common control. Approximately 999,500 shares of stock was issued to the
shareholders of Summus Technologies, Inc. in exchange for the net assets of the
company.
11. CHANGE IN PAR VALUE
In 1999, the Company's shareholders approved a change in the par value of the
Company's common stock retroactively from $1 per share to $.0001 per share.
Amounts in the financial statements have been restated to reflect this change.
F-57
<PAGE> 134
Summus, Ltd.
Notes to Financial Statements (continued)
12. SUBSEQUENT EVENT
During 2000, the Company's investment in the restricted stock of High Speed Net
Solutions has experienced a significant decline. As of September 28, 2000, the
public market trading price of High Speed stock was $5-1/8 compared to $16 at
December 31, 1999. As private sales of these restricted shares at a significant
discount from the public market trading price have been the primary source of
liquidity for the Company, this decline in market value and the resulting lack
of market for private sales indicates that the Company's continuation as a going
concern is dependent upon its ability to obtain adequate liquidity necessary to
continue its operations and to satisfy its obligations. In this regard,
management plans to raise additional capital in the near future; however, there
can be no assurances that management will be successful in executing its plans.
On September 5, 2000, the Company entered into a letter of intent to merge with
High Speed Net Solutions, Inc. in a stock for stock transaction.
F-58
<PAGE> 135
================================================================================
You should rely only on the information contained in this Prospectus or
contained in a prospectus supplement. Neither we nor the selling shareholders
have authorized anyone else to provide you with different or additional
information. The selling shareholders are not making an offer of these
securities in any state where the offer is not permitted. You should not assume
that the information in this Prospectus or in any prospectus supplement is
accurate as of any date other than the date on the front of the document.
================================================================================
[High Speed Logo]
2,443,477 SHARES
HIGH SPEED NET SOLUTIONS, INC.
COMMON STOCK
----------
P R O S P E C T U S
----------
October __, 2000
================================================================================
<PAGE> 136
PART II
ITEM 13. EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table provides the fees and expenses, payable by us in
connection with the issuance and distribution of the securities being registered
hereunder, all of which are being paid by us. Except for the SEC registration
fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee ........................ $ 3,289.90
Other fees .................................. $ 20,000.00
Printing and filing expenses ................ $ 30,000.00
Legal fees and expenses ..................... $ 100,000.00
Accounting fees and expenses ................ $ 15,000.00
Blue sky fees and expenses .................. $ 5,000.00
Transfer agent fees ......................... $ 5,000.00
------------
Total ....................................... $ 178,289.90
============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The following summary description of indemnification and limitation of
liability for our officers is not intended to be complete and is qualified by
reference to our amended and restated certificate of incorporation and our
amended and restated bylaws, filed as exhibits to the Registration Statement,
and is qualified by the applicable provisions of the Florida Business
Corporation Act (the "FBCA").
Our Articles of Incorporation and Bylaws provide for indemnification of
officers and directors to the fullest extent permitted by Florida law and, to
the extent permitted by such law, eliminate, or limit the personal liability of
directors to High Speed and its shareholders for monetary damages for specific
breaches of fiduciary duties. The liability of a director is not eliminated or
limited (i) for any breach of the director's duty of loyalty to High Speed or
its shareholders; (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law; (iii) for any improper
distribution under the FBCA; or (iv) for any transaction from which the director
derived an improper personal benefit. Insofar as indemnification for liabilities
under the Securities Act may be permitted to directors, officers, or persons
controlling High Speed under the foregoing provisions, we have been informed
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
We intend to obtain liability insurance for our directors and officers.
At present, there is no pending litigation or proceeding involving any director,
officer, employee or agent as to which indemnification will be required or
permitted under the amended and restated certificate of incorporation. We are
not aware of any threatened litigation or proceeding that may result in a claim
for this type of indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
As of January 1, 1997, 5,000 shares of Common Stock were issued and
outstanding. Of this 5,000 shares, High Speed's sole director and corporate
officer at this time owned beneficially 4,875 shares of Common Stock and 25
non-affiliates of High Speed each owned five shares of Common Stock. From our
inception until corporate action taken on July 20, 1998, our articles of
incorporation authorized the issuance of up to 5,000 shares of Common Stock. On
this same date we increased our authorized Common Stock to 50,000,000 shares.
Since January 1, 1997, we have issued the following securities as described
below. In the summary below, all references to "High Speed," "us," "we," or
"our" refer to High Speed Net Solutions, Inc. under any of its prior corporate
names (ZZAP.NET Inc., and EMN Enterprises, Inc.).
II-1
<PAGE> 137
(1) During the period commencing on January 1, 1997, and ending on June 20,
1998, no Common Stock was issued.
(2) On July 20, 1998, we took the following corporate actions: (i) our
authorized Common Stock was increased to 50,000,000 shares; and (ii)
the outstanding 5,000 shares of Common Stock were split 200:1, creating
an issued and outstanding capitalization of 1,000,000 shares of Common
Stock.
(3) In September 1998, we issued 1,550,000 shares of Common Stock to Mr.
Bradford Richdale as forgiveness of a debt valued at $149,820 that we
owed to him. Mr. Richdale loaned us these funds to enable us to finance
our operations during 1998. The per share value for these shares is
$0.097.
(4) In August 1998, we issued 3,766,600 shares of Common Stock for an
aggregate consideration of $317,000. Included in these issuances were:
(i) issuance of 1,100,000 shares to StoneLeigh Ltd., an entity
established by Mr. Richdale; (ii) issuance of 2,330,000 shares to Mr.
Rene Hamouth, the sole director and sole corporate officer of High
Speed; (iii) issuance of 116,600 shares to 24 investors; and (iv)
issuance of 220,000 shares to five investors. All of these issuances
were at $0.084 per share. The proceeds from these transactions were
used to finance operations.
The 116,600 shares issued to 24 investors and the 220,000 shares issued
to five investors are listed below with the number of shares issued to
each of the individuals or entities listed:
<TABLE>
<CAPTION>
Individual Number of Shares
---------- ----------------
<S> <C>
J. Danny Hodge 1,500
Frank D. Brigio 10,000
Joseph W. Veight 10,000
Corsica Marketing Services 4,000
International
Forest C. Troutner/Janet L. 3,000
Troutner
Todd Surgill 1,000
Robert P. Atwood 2,500
Jim Estep 10,000
Paul Vernon, MD 4,000
Malone Enterprises, Inc. 1,000
Fairwind Investments Limited 10,000
Ira Butler 2,000
Dawkins Concrete Products, Inc. 6,000
Randy Sells 3,300
Jerry Wilhite 11,100
John Allen 5,000
Mike/Judy Johnson 1,500
Tim/Linda Johnson 10,000
Joe Morgan 1,100
Prosper International Trust 9206 7,000
David Crescenzo 1,100
David Arnold 500
Richard Allen 1,000
</TABLE>
II-2
<PAGE> 138
<TABLE>
<S> <C>
Frick Enterprises, Inc. 10,000
Mike Pruit 125,000
Virtual Realty Mall, Inc. 20,000
Clair Calvert 30,000
Jule Berar 35,000
Catherine Cox 10,000
</TABLE>
(5) In August 1998, we acquired the business and assets of, and assumed the
liabilities of, Marketers World, Inc. The planned principal operations
of Marketers World were to lease computer systems to businesses and to
distribute Internet oriented products and perform related services. Its
assets were $495,259, and its liabilities were $75,000. To pay Marketers
World, we issued 9,275,000 shares of Common Stock to Marketers World,
Inc. Mr. Bradford Richdale was the sole shareholder of Marketers World.
In addition, the president and then sole director and sole corporate
officer of High Speed, Mr. Hamouth, transferred 725,000 shares of his
personal Common Stock to Marketers World to effect the transaction. No
independent valuation was made of the amount of assets we acquired and
the liabilities we assumed.
The book value of assets obtained from Marketers World was $420,259.
Before and at the time of the merger, High Speed was a non-operating
public shell that had no assets or liabilities. Marketers World was a
private operating company. Accordingly, this transaction was accounted
for as a recapitalization of High Speed. Since this merger was accounted
for as a recapitalization of High Speed, the common shares issued to
acquire Marketers World were not valued and consequently, no goodwill
was recorded. The Marketers World officer executing the asset purchase
agreement was Mr. Michael Cimino, who subsequently was elected the sole
director and officer of High Speed. Subsequently, the 10,000,000 shares
that Marketers World received in the transaction were assigned by Mr.
Richdale as follows: (i) 6,835,000 shares to Ormond Trust, an entity
established by Mr. Richdale; (ii) 140,000 shares to Mr. Cimino; and
(iii) the remaining 3,025,000 shares to 24 other persons.
(6) In September 1998, we acquired the business, assets and liabilities of
Brad Richdale Direct, Inc. The planned principal operation of Brad
Richdale Direct was to acquire product-licensing rights and sell the
products through direct marketing channels. Brad Richdale Direct's
assets were its rights to license and market Summus technology. Its
liabilities were nominal. In exchange for all of the outstanding and
issued stock of Brad Richdale Direct we issued: (i) 775,000 shares of
Common Stock to Ormond Trust, Brad Richdale Direct's major shareholder,
and an entity established by Mr. Bradford Richdale; and (ii) 225,000
shares of Common Stock to Mr. Michael Cimino, who at the execution of
the transaction was President of Brad Richdale Direct and President of
High Speed.
The primary purpose of this transaction was to obtain specific
licensing and marketing rights held by Brad Richdale Direct for
specific products to be developed by Summus. Since Brad Richdale Direct
had nominal assets and operations, this transaction was accounted for
as an acquisition of licensing rights, rather than as a business
combination. The value of this transaction was based on recent
transactions in our Common Stock on the date of the transaction, and
has been recorded as an intangible asset in High Speed's balance sheet.
The 225,000 shares issued to Mr. Cimino were valued based on recent
transactions in our Common Stock on the date of the transaction and has
been recorded as compensation expense.
In connection with this transaction, in February 1999, we issued an
immediately vested option for 1,000,000 shares of Common Stock to Mr.
Bradford Richdale, exercisable at a price of $0.01 per share. As
discussed below, this option was later exercised in August 1999. Also,
in connection with this transaction, in September 1999, we issued
140,000 shares of Common Stock to Mike Cimino. Finally, we issued
100,000 shares to Mr. Cimino as consideration for his services in
effecting this transaction. The value of these transactions was
recorded as compensation expense based on the traded value of our
Common Stock on the date each transaction occurred.
(7) In September 1998, we issued 300,000 shares of Common Stock for the
purpose of acquiring HealthTec, Inc., and National Direct Corporation.
We issued 100,000 of these shares to Mr. Bradford Richdale and we
issued 100,000 of these shares to Mr. Michael Cimino. This transaction
was rescinded in November 1998 and in August 1999 we implemented the
cancellation of the 300,000 shares issued for this acquisition.
II-3
<PAGE> 139
In September 1998, under a stock purchase agreement, we agreed to issue
200,000 shares of Common Stock to Mr. Bradford Richdale for the purpose
of acquiring all of the stock of VR Mall, Inc. In September 1998, under
a stock purchase agreement, we agreed to issue 600,000 shares of Common
Stock to Mr. Bradford Richdale for the purpose of acquiring all of the
stock of Golf Vacations Resort. These two transactions were rescinded
in November 1998. The Common Stock issuances contemplated by these
transactions were never implemented.
(8) In February 1999, we issued 157,323 shares of Common Stock to GEM
Singapore for an agreement that GEM Singapore pay us $471,987. On July
16, 1999, we canceled these shares for lack of consideration because
the transaction did not close.
(9) From February to April 1999, we issued 338,188 shares of Common Stock
to 15 individuals or entities identified below for a price per share
ranging from $1.00 to $2.50 per share and we received an aggregate
investment of $347,500 for these shares, net of stock issuance costs of
$109,168. The proceeds from these investments were used to finance
operations.
The 15 investors purchasing the 338,188 shares are listed below with
details concerning the price paid and number of shares issued to each
of the individuals listed:
<TABLE>
<CAPTION>
Number
Individual Price Paid of Shares
---------- ---------- ---------
<S> <C> <C>
Joel Holt $ 100,000 49,286
Joe Pacifico $ 11,668 4,667
Tom Godfrey $ 25,000 10,000
D. Mark White $ 50,000 24,268
First Southwest $ 50,000 29,967
C. Dawkins $ 30,000 30,000
Greg Thompson $ 15,000 15,000
OL Thompson $ 15,000 15,000
N. Maero $ 15,000 15,000
John D. Allen $ 15,000 15,000
Jerry Wilhite $ 45,000 45,000
Rene Hansen $ 20,000 20,000
D.L. and J.P. Smith $ 30,000 30,000
J. Walsh $ 25,000 25,000
J & L Nadelman $ 10,000 10,000
</TABLE>
(10) In May 1999, we issued 795,001 shares of Common Stock in exchange for a
16.7% investment in Summus Technologies, Inc. After this transaction,
Summus Technologies merged with Summus Ltd. giving us a 16.7% ownership
in Summus Ltd. We issued the 795,001 shares to five individuals for
their shares of Summus Technologies. Except for one individual, we gave
no other consideration for the Summus Technologies shares beyond the
issuance of Common Stock. Of the 795,001 shares issued, 350,000 shares
were issued to Mr. William R. Dunavant under a stock purchase
agreement. In addition to the issuance of the 350,000 shares, we also
paid Mr. Dunavant $100,000 in cash. In return we received 250,000
shares of the Common Stock of Summus Technologies.
The five investors receiving 795,001 shares are listed below with
details concerning the consideration and number of shares issued to
each of the individuals listed:
II-4
<PAGE> 140
<TABLE>
<CAPTION>
Individual Consideration Number of Shares
---------- -------------------- ----------------------------
(in shares of Summus (and other consideration, as
Technologies) applicable)
<S> <C> <C>
William R. Dunavant 250,000 350,000
(and $100,000 cash)
Wallace Permenter 5,000 18,334
Rick Turbin 27,000 30,000
Robert Chalnick 20,000 25,000
Cale Yarborough 100,000 366,667
</TABLE>
(11) In May 1999, we issued 200,000 shares of Common Stock when Myung K. Kim
exercised his Common Stock options for an exercise price of $0.01 per
share. Mr. Kim received these stock options under his employment
agreement as our President.
(12) In May 1999, we issued 200,000 shares of Common Stock when Richard F.
Seifert exercised his Common Stock options for an exercise price of
$0.01 per share. Mr. Seifert received these stock options under his
verbal employment agreement as our Vice President.
(13) In May 1999, we issued 425,000 shares of Common Stock when Mike Cimino
exercised his Common Stock options for an exercise price of $0.01 per
share. Mr. Cimino received these stock options under his verbal
employment agreement as our President.
(14) During the four-month period between February 1, 1999 and May 24, 1999,
we issued 17 convertible debentures at 8% per annum at a $0.50 per
share conversion rate. The aggregate consideration we received by
issuing these debentures was $1,986,858. Except for one debenture in
the amount of $350,000, issued to Williston UBOT, all of these
debentures were issued to Mr. Bradford Richdale or to entities
established by Mr. Richdale: Ormond Trust and StoneLeigh Ltd. On May
24, 1999, all holders converted these debentures into shares of Common
Stock and we issued 3,973,720 shares of Common Stock upon conversion of
these debentures.
The debenture to Williston UBOT was issued on February 1, 1999. The
market value of our Common Stock on this date was $2.00 per share. Upon
conversion of the debenture to Common Stock on May 24, 1999, Williston
UBOT paid an effective price of $0.50 per share.
The debentures to Mr. Richdale or entities established by Mr. Richdale
were issued between March 3, 1999, and May 24, 1999. The market value,
as represented by the close price, of our common Stock, between these
dates ranges from a low of $1.25 per share to a high of $4.88 per
share. Upon conversion of the debentures to our Common Stock Mr.
Richdale and the entities established by him paid an effective price of
$0.50 per share.
(15) From July 1, 1999 through July 15, 1999, we issued 6 convertible
debentures at 8% per annum at $0.50 per share conversion rate. The
aggregate consideration we received by issuing these debentures was
$47,750. On July 15, 1999, all holders converted these debentures into
shares of Common Stock and we issued 95,500 shares of our Common Stock
upon conversion of these debentures. The effective price paid by all
holders was $0.50 per share.
The individuals to whom we issued the 6 convertible debentures and the
number of shares into which each was converted are listed below:
<TABLE>
<CAPTION>
Individual Market Price Number of Shares
---------- --------------- ----------------
<S> <C> <C>
Darlene Beck $1.94 on 7/1/99 25,000
John Minton $1.94 on 7/1/99 25,000
Mike Bissell $1.94 on 7/1/99 2,000
Joseph Pacifico $1.94 on 7/1/99 13,500
Tom Godfrey $1.94 on 7/1/99 25,000
Joseph Repko $1.94 on 7/1/99 5,000
</TABLE>
II-5
<PAGE> 141
(16) On July 15, 1999, we issued 1 convertible debentures to Mr. Bradford
Richdale at 8% per annum at a $0.25 per share conversion rate. The
consideration we received for this debenture was $62,500. On July 15,
1999, the holder converted this debenture into shares of Common Stock
and we issued 250,000 shares of our Common Stock upon conversion of
this debenture.
The market value of our Common Stock on July 15, 1999, was $1.63 per
share. The effective price paid by Mr. Richdale was $0.25 per share.
(17) On August 12, 1999, we issued 1 convertible debenture to Mr. Bradford
Richdale and on August 5, 1999, and August 18, 1999, we issued 2
convertible debentures to Ormond Trust, an entity established by Mr.
Richdale, all at 8% per annum at a $1.00 per share conversion rate. The
consideration we received for these three debentures was $458,640. On
the date they were issued, the holder converted these debentures into
shares of Common Stock and we issued 458,640 shares of our Common upon
conversion of these debentures.
The market value, as represented by the close price, of our Common
Stock between August 5, 1999, and August 18, 1999, ranged from a low of
$3.50 per share to a high of $3.44 per share. The effective price paid
by Mr. Richdale and the entity he established, Ormond Trust, was $1.00
per share.
(18) On August 5, 1999, we issued 1 convertible debenture at 8% per annum at
a $1.50 per share conversion rate to Mr. William D. Glycenfer. The
consideration for this debenture was $100,000. On the date it was
issued, the holder converted this debenture into shares of Common Stock
and we issued 75,000 shares of Common Stock upon debenture conversion.
The market value, as represented by the close price, of our Common
Stock on August 5, 1999, was $3.50 per share. The effective price paid
by Mr. Glycenfer was $1.50 per share.
To summarize the debenture issuances, the total aggregate consideration
for all 28 convertible debentures issued was $2,655,748. Of the amounts
given above for issuance of the convertible debentures, $2,190,000 was
directly paid by Mr. Bradford Richdale to Summus to cover a portion of
the first three payments that we were obligated to make to Summus under
the Marketing License Agreement. Under the Marketing License Agreement,
we were obligated to make four payments of $750,000 each for our rights
under the agreement. The remaining $558,640 was used to finance
operations. As discussed in the items above, all of these debentures
were converted shortly after their issuance by the respective holders
to an aggregate of 4,852,856 shares of Common Stock.
(19) In July 1999, we issued 500 shares of Common Stock to Mr. Jason Parsons
in exchange for Mr. Parson's services in developing our company logo.
The value of this transaction was based on the traded value of our
Common Stock and was recorded as compensation expense.
(20) In July 1999, we issued 50,000 shares of Common Stock to Mr. Ron De
Jong as payment for his services as a consultant to us. The value of
this transaction was based on the traded value of our Common Stock and
was recorded as compensation expense.
(21) In July 1999, we issued 25,000 shares of Common Stock to Mr. Bradford
Richdale beneficially in exchange for Mr. Richdale's assistance in the
William R. Dunavant Summus Technology stock acquisition which is
described in paragraph 10 in this "Item 15 - Recent Sales of
Unregistered Securities." The value of this transaction was based on
the traded value of our Common Stock and was recorded as compensation
expense.
(22) In July 1999, we issued 10,000 shares of Common Stock to Mr. Greg
Catinella in exchange for Mr. Catinella's fundraising services. The
value of this transaction was based on the traded value of our Common
Stock and was recorded as compensation expense.
(23) In August 1999, we issued 1,000,000 shares of Common Stock when Mr.
Bradford Richdale exercised his Common Stock options. We issued these
shares with an exercise price of $0.01 per share. We waived payment of
the exercise price in exchange for Mr. Richdale transferring to us
specific marketing rights to Summus technology. Mr. Richdale received
these stock options in connection with the purchase by High Speed of
all of the stock of Brad Richdale Direct, Inc.
II-6
<PAGE> 142
(24) In August 1999, we implemented the cancellation of 5,873,423 shares of
Common Stock due to lack of consideration for the following
acquisitions and investments. We canceled 300,000 shares of Common
Stock because we rescinded the acquisitions of National Direct
Corporation and Healthtec. We canceled 5,161,100 shares of Common Stock
as part of a voluntary rollback of the Marketers World acquisition. The
cancellation of these shares was a result of Marketers World ceasing
its operations 1998. The majority shareholder who owns these shares
agreed with us that the initial purchase price was over valued and
voluntarily returned these shares to us for cancellation. We canceled
the 25,000 shares issued to Mr. Bradford Richdale for his assistance
with the William R. Dunavant transaction. We canceled the 230,000
shares issued to Mr. Michael Cimino for his services. Finally, we
canceled 157,323 shares due to lack of consideration for a transaction
involving GEM Singapore.
(25) In August 1999, we issued 1,500,000 shares of Common Stock to Summus
Ltd. as part of the payment for our rights under a Marketing License
Agreement. These shares were issued in lieu of paying Summus the final
of four $750,000 payments due to Summus under the Marketing License
Agreement. The value assigned to the 1,500,000 common shares was based
on the traded value of our Common Stock on the date of the transaction.
This amount, along with the cash payments made for the first three
installments are recorded as a non-current asset on our balance sheet.
(26) In August 1999, we issued 250,000 shares of Common Stock at $1.00 per
share to two investors under a subscription agreement. These investors
are the parents of Mr. Richard F. Seifert, a member of our Board of
Directors. The value of this transaction was $1,095,000 based on the
traded value of our Common Stock. Since the subscription price was
below the fair market value of the underlying stock on the date of the
agreement, $845,000 of expense related to this transaction has been
recorded in the 1999 statement of operations.
(27) On February 28, 2000, we sold 2,000 shares of Series A Convertible
Preferred Stock to an investor at a price of $1,000 per share, for an
aggregate consideration of $2,000,000. The investors were F. van
Lanschot Bankiers (350 shares), Insinger de Bearfort (250 shares) and
AAA Trust (1,400 shares). The sale and issuance of the Series A
Convertible Preferred Stock was made in reliance on Rule 506 of
Regulation D.
(28) In May 2000, under 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 we were the successor corporation.
We negotiated the consideration for the Merger Agreement with JSJ. In
evaluating the Merger, JSJ used criteria such as the value of assets of
High Speed, High Speed's ability to compete in the marketplace, High
Speed's current and anticipated business operations, and High Speed
management's experience and business plan. In evaluating JSJ, High
Speed placed a primary emphasis on JSJ's status as a reporting company
under Section 12(g) of the Securities Exchange Act of 1934, as amended,
and JSJ's potential to facilitate High Speed becoming a reporting
company under the Securities Exchange Act.
The value of this transaction as recorded for financial purposes was
based on the traded value of our Common Stock, which produced a
valuation of $356,250.
(29) In June 2000, we issued 7,500 shares of Common Stock to Mr. Gregory
Gush in association with Mr. Gush's acceptance of our offer of
employment as an Executive Vice President at High Speed. The value of
this transaction was based on the traded value of our Common Stock,
which produced a valuation of $51,094, and for financial purposes was
treated as compensation expense.
II-7
<PAGE> 143
(30) In June 2000, we issued 175,000 shares to Mr. William R. Dunavant under
the terms of our settlement agreement with him, which resolved a
lawsuit he filed in Florida. Among other things, this settlement
agreement requires us to 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 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 September 30, 2000, we have issued 250,000
shares of Common Stock to Mr. Dunavant under the settlement agreement.
If the Registration Statement for Mr. Dunavant 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
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 OTC
Bulletin Board(R) and $23.00 per share.
The Registration Statement assumes that we will have to issue
approximately 600,000 additional shares to Mr. Dunavant on or before
the date the Registration Statement becomes effective according to the
terms of our settlement agreement with Mr. Dunavant. This estimate
assumes that it will take approximately four months for the
Registration Statement to become effective and that the price of our
Common Stock will be at a particular price per share at that time that
is significantly below the $23.00 threshold value specified by the
calculation in the settlement agreement with Mr. Dunavant.
The value of this transaction as recorded for financial purposes was
based on the traded value of our Common Stock, which produced a
valuation of $1,359,375.
(31) 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 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. Before the
acquisition, Mr. May was not a shareholder in High Speed and had no
relations with us. Under the terms of the acquisition, we issued three
allotments of 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 OTC Bulletin
Board(R) trading price on the date of the closing of the transaction.
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 Common Stock coupled
with a guarantee that if the OTC Bulletin Board(R) 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 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 Common Stock
coupled with contractual obligations that (i) we would register these
shares in this registration and (ii) if the registration is not
effective by 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 Common Stock coupled with
contractual obligations that (i) we would register these shares in this
registration and (ii) since the registration was not effective by
October 10, 2000, then Mr. May has the right to cause us to repurchase
these shares from him by releasing funds the acquisition agreement
places into an escrow account, the funds being from accounts receivable
of Douglas May & Co. valued at $300,000.
The value of this transaction as recorded for financial purposes was
based on the traded value of our Common Stock on the date of closing,
except for the 50,000 shares with a guaranteed value of $10.00 per
share that were valued at $500,000. The total recorded value for this
acquisition was approximately $1,376,000.
II-8
<PAGE> 144
(32) In July 2000, we issued 541,677 shares of Common Stock and issued
warrants to purchase additional 1,083,353 shares of Common Stock for an
aggregate consideration of $2,500,000. Included in these issuances
were: (i) issuance of 281,672 shares to AAA Trust Company, Ltd., plus
the issuance of warrants to purchase an additional 563,344 shares of
Common Stock and (ii) issuance of 260,005 shares to Van Ernst Jakobs,
plus the issuance of warrant to purchase 520,010 shares of additional
stock. These 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, we issued 27,084 shares of
Common Stock as a placement fee. The per share value of these
transactions was $4.61. We committed to file a registration statement
on or before December 31, 2000 to register all of these shares.
The sales and issuances of securities in the above transactions were
made in reliance on the exemptions from registration under the Securities Act
of 1933, as amended (the "Securities Act"), provided by Section 4(2) thereof,
and/or Regulation D and/or Rule 701 thereunder.
The purchasers of restricted securities represented their intention to
acquire the securities for investment only and not with a view to the
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. We believe that all recipients of restricted
securities had adequate access, through employment or other relationships, to
information about High Speed to make an informed investment decision.
Sales of shares of Common Stock and Preferred Stock were made as listed
below:
This following list details, by category, the securities issuances
described in paragraphs 3 through 32 above. The issuances described below are
not additional issuances.
(i) We issued 1,397,500 shares of Common Stock to persons who were
officers, directors or employees of High Speed in exchange for
services valued at $1,738,645 in transactions that were exempt under
Rule 701.
These recipients are listed below with details concerning the
consideration and number of shares issued to each of the recipients
listed:
<TABLE>
<CAPTION>
Number
Individual or Entity Consideration of Shares
-------------------- ------------- ---------
<S> <C> <C>
Michael Cimino Services 990,000
Myung Kim Services 200,000
Richard F. Seifert Services 200,000
Gregory S. Gush Services 7,500
</TABLE>
(ii) We issued 1,285,500 shares of Common Stock to persons who were
consultants and advisors in exchange for services valued at $2,147,646
in transactions that were exempt under Rule 701.
These recipients are listed below with details concerning the
consideration and number of shares issued to each of the recipients
listed of the shares recorded below as issued to Mr. Richdale, 225,000
of the shares issued were canceled as part of the share cancellation
discussed in paragraph 24 above in this "Item 15 - Recent Sales of
Unregistered Securities."
<TABLE>
<CAPTION>
Number
Individual or Entity Consideration of Shares
-------------------- ------------- ---------
<S> <C> <C>
Bradford Richdale Services 1,225,000
Ron De Jong Services 50,000
Greg Catinella Services 10,000
Jason Parsons Services 500
</TABLE>
(iii) We sold 1,939,260 shares of Common Stock for $4,731,825 to 13 persons
not in the foregoing categories in transactions that were exempt under
Section 4(2).
II-9
<PAGE> 145
These recipients are listed below with details concerning the price paid and/or
valuation and the number of shares issued to each of the recipients listed:
<TABLE>
<CAPTION>
Price Paid or Number
Individual or Entity Effective Valuation of Shares
-------------------- ------------------- ---------
<S> <C> <C>
Williston UBOT $ 350,000 700,000
Darlene Beck $ 12,500 25,000
John Minton $ 12,500 25,000
Mike Bissell $ 1,000 2,000
Joseph Pacifico $ 6,750 13,500
Tom Godfrey $ 12,500 25,000
Joseph Repko $ 2,500 5,000
William D. Glycenfer $ 100,000 75,000
Richard J. Seifert $ 125,000 125,000
Rita M. Seifert $ 125,000 125,000
William R. Dunavant $1,359,375 200,000
AAA Trust $1,300,000 384,618
Van Ernst Jakobs $1,325,000 287,089
</TABLE>
(iv) We issued 11,550,000 shares of Common Stock to acquire the assets of
two companies owned by Mr. Bradford Richdale and to acquire rights
under agreements with Summus in transactions that were exempt under
Section 4(2). These transactions are discussed in paragraphs 5, 6, and
25 above in this "Item 15 - Recent Sales of Unregistered Securities."
(v) We sold 3,982,360 shares of Common Stock for $2,158,299 to Mr. Bradford
Richdale and to entities established by Mr. Richdale through issuance
and conversion of the convertible debentures discussed in paragraphs
14, 16, and 17 above of this "Item 15 - Recent Sales of Unregistered
Securities." Mr. Richdale is the founder of High Speed. The issuances
in these transactions were exempt under Section 4(2).
(vi) We issued 795,001 shares of Common Stock in exchange for Summus shares
valued at $1,792,127 in transactions that were exempt under Section
4(2).
These recipients are listed below with details concerning the price
paid and number of shares issued to each of the recipients listed:
<TABLE>
<CAPTION>
Consideration (in shares Number of Shares (and other
Individual or Entity of Summus Technologies) consideration, as applicable)
-------------------- ----------------------- -----------------------------
<S> <C> <C>
William R. Dunavant 250,000 350,000
(and $100,000 in cash)
Wallace Permenter 5,000 18,334
Rick Turbin 27,000 30,000
Robert Chalnick 20,000 25,000
Cale Yarborough 100,000 366,667
</TABLE>
(vii) We sold 5,654,788 shares of Common Stock for $814,320 to 46 persons in
transactions that were exempt under Rule 504. These recipients are
listed above in this "Item 15 - Recent Sales of Unregistered
Securities," in the entries and tables associated with paragraph
numbers four and nine.
II-10
<PAGE> 146
(viii) We sold 2,000 shares of our Series A Convertible Preferred Stock for
$2,000,000 to one investor in a transaction that was exempt under Rule
506 of Regulation D. This investors were F. van Lanschot Bankiers (350
shares), Insinger de Beaufort (250 shares) and AAA Trust (1,400
shares).
(ix) We issued 233,070 shares of Common Stock to acquire the assets of two
companies in transactions that were exempt under Section 4(2). These
transactions are discussed in paragraphs 28 and 31 above in this "Item
15 - Recent Sales of Unregistered Securities."
ITEM 16. EXHIBITS
The exhibits indicated by an asterisk (*) are incorporated by reference from
previous filings with the Commission. The exhibits indicated with a (+) were
previously filed with this Registration Statement on Form S-1
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
2.01* Agreement and Plan of Merger between High Speed Net Solutions, Inc. and
J S J Capital Corp., dated as of April 19, 2000 (Exhibit 1.1 to our
Current Report on Form 8-K dated as of April 21, 2000)
2.02* Certificate of Merger between High Speed Net Solutions, Inc. and J S J
Capital Corp., dated April 21 2000 (Exhibit 1.2 to our Current Report
on Form 8-K dated as of April 21, 2000)
3.01+ Articles of Incorporation, dated April 30, 1984
3.02+ Amendment to Articles of Incorporation, dated July 20, 1998
3.03+ Amendment to Articles of Incorporation, dated August 24, 1998
3.04+ Amendment to Articles of Incorporation, dated December 10, 1998
3.05* Restated Articles of Incorporation, filed February 28, 2000 (as
currently in effect) (Exhibit 3.01 to our Form 10-Q dated as of March
31, 2000)
3.06+ Bylaws
3.07* Amended and Restated Bylaws (Exhibit 3.02 to our Form 10-Q dated as of
March 31, 2000)
3.08* Articles of Amendment and Statement of Rights and Preferences of the 8%
Series A Convertible Preferred Stock filed March 3, 2000 (Exhibit 3.03
to our Form 10-Q dated as of March 31, 2000)
3.09* Articles of Correction filed June 23, 2000 to Articles of Amendment
filed March 2, 2000 (Exhibit 3.09 to our Form 10-Q dated as of June 30,
2000)
4.01+ Specimen Common Stock certificate
4.02+ Specimen Series A preferred stock certificate
5.01 Opinion of Kilpatrick Stockton LLP
10.01* Master Agreement with Summus, Ltd., dated February 18, 2000 (Exhibit
10.01 to our Form 10-1 dated as of March 31, 2000)
10.02* Software License Agreement with Summus, dated February 18, 2000
(Exhibit 10.02 to our on Form 10-1 dated as of March 31, 2000)
10.03* Software Maintenance Agreement with Summus, dated February 18, 2000
(Exhibit 10.03 to our Form 10-1 dated as of March 31, 2000)
10.04* Revenue Sharing Agreement with Summus, dated February 18, 2000 (Exhibit
10.04 to our Form 10-Q dated as of March 31, 2000)
10.05* Equity Compensation Plan, effective January 31, 2000 (Exhibit 10.05 to
our Form 10-Q dated as of March 31, 2000)
</TABLE>
II-11
<PAGE> 147
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
10.06+ Amendment to Equity Compensation Plan, effective May 1, 2000
10.07* Employment Offer Letter with Andrew L. Fox, dated January 20, 2000
(Exhibit 10.06 to our Form 10-Q dated as of March 31, 2000)
10.08* Stock Option Award Agreement with Andrew L. Fox, dated August 25, 1999
(Exhibit 10.07 to our Form 10-Q dated as of March 31, 2000)
10.09* Employment Offer Letter with Alan R. Kleinmaier, dated February 7, 2000
(Exhibit 10.08 to our Form 10-Q dated as of March 31, 2000)
10.10* Stock Option Award Agreement with Alan R. Kleinmaier , dated August 25,
1999 (Exhibit 10.09 to our Form 10-Q dated as of March 31, 2000)
10.11+ Employment Offer Letter with Robert S. Lowrey, dated March 29, 2000
10.12+ Stock Option Award Agreement with Robert S. Lowrey, dated June 1, 2000
10.13+ Marketing License Agreement with Summus, including Exhibit A and
Exhibit E, dated as of February 1999
10.14+ First Amendment to MLA, dated August 16, 1999
10.15+ Letter Agreement among Bradford J. Richdale, Michael M. Cimino,
President of Zzap.net, Inc., predecessor in interest to High Speed Net
Solutions, Inc., and Dr. Bjorn Jawerth, President of Summus, Ltd., and
Summus Technologies, Inc., dated January 14, 1999
10.16+ First Amendment to Letter Agreement, dated August 16, 1999
10.17+ Letter to Samsung Electronics, dated March 25, 1999
10.18+ Samsung Non-Circumvention Agreement with Summus, dated April 15, 1999
10.19+ Letter to Samsung Electronics, dated August 9, 1999
10.20+ Letter concerning Agency Agreement for Samsung negotiations, dated
March 25, 1999
10.21+ Capital Associates Lease Agreement between High Speed and Phoenix
Limited Partnership of Raleigh, dated October 15, 1999
10.22+ Stock Purchase Agreement with William R. Dunavant, dated August 13,
1999
10.23+ Amended and Restated Settlement Agreement by and among William R.
Dunavant, the Registrant and Michael Cimino
10.24+ Supplement to Agreement by and Between High Speed and William R.
Dunavant, dated August 13, 1999
10.25+ Advisory Agreement with R J Seifert Enterprises, dated February 6, 1999
10.26+ Non-Circumvention and Non-Disclosure Agreement with R J Seifert
Enterprises, dated February 6, 1999
10.27+ Settlement Agreement by and between the Registrant and Peter R. Rogina,
dated September 22, 1999
10.28+ Employment and Stock Option Agreement with Peter R. Rogina, dated March
1, 1999
10.29+ Consulting Agreement with Kyoung Park, Summus and the Registrant dated
September 24, 1999
10.30+ Confidentiality and Non-Competition Agreement with Robert S. Lowrey
10.31+ Shareholders' Agreement with Summus, Sharon Stairs, Ahmad Moradi,
Antonio Bianco, Joseph Peretta, Rich, Bahman & Berger, David Anderson,
Stephen Purkiss, Kerstin Jawerth, Ron Compton, dated August 16, 1999
</TABLE>
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<PAGE> 148
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
10.32* Letter of Intent among High Speed, Samsung Electronics of America, Inc.
and Summus, dated February 15, 2000 (Exhibit 10.10 to our Form 10-Q
dated as of March 31, 2000)
10.33* Software Escrow Agreement with Summus and Fort Knox Escrow Services,
Inc., dated February 18, 2000 (Exhibit 10.11 to our Form 10-Q dated as
of March 31, 2000)
10.34* Letter Agreement with Summus, dated March 13, 2000 (Exhibit 10.12 to
our Form 10-Q dated as of March 31, 2000)
10.35+ Lease Modification Agreement #1, dated March 23, 2000, to the Lease
dated October 15, 1999 (included as Exhibit 10.21)
10.36+ Lease Modification Agreement #2, dated June 9, 2000, to the Lease dated
October 15, 1999 (included as Exhibit 10.21)
10.38+ Form of Agreement to Terminate Registration Rights
10.39+ Form of Selling Shareholder Agreement
10.40+ Share Acquisition Agreement with Douglas May, effective July 10, 2000
10.41+ Employment Agreement with Douglas D. May dated June 30, 2000
10.42 Systems Work Agreement between HSNS and Nexgenix, Inc. dated July 27,
2000
10.43 Outsourcing Agreement between HSNS and E.piphany, Inc. dated July 31,
2000
10.44 Internet Streaming Service Agreement between HSNS and All Video
Network, Inc. dated September 18, 2000
10.45 Employment Offer Letter with Greg S. Gush, dated June 21, 2000
16.01+ Letter from Barry L. Friedman, P.C. about change in Certifying
Accountant dated June 20, 2000
23.1 Consent of Kilpatrick Stockton LLP (included as Exhibit 5.01)
23.2 Consent of Ernst & Young LLP
23.3 Consent of Bauknight Pietras & Stormer, P.A.
24.1+ Power of Attorney
27.1 Restated Financial Data Schedule year ended December 31, 1999 (for SEC
use only)
27.2 Financial Data Schedule six months ended June 30, 2000 (for SEC use
only)
</TABLE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this registration statement:
(i) To include any Prospectus required by
Section 10(a)(3) of the Securities Act of 1933.
(ii) To reflect in the Prospectus any facts or
events arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
Prospectus filed with the Commission under Rule 424(b) if, in the aggregate, the
change in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
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<PAGE> 149
(iii) To include any material information
regarding the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(b) The undersigned registrant hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report under Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report under Section 15(d) of the Securities
Exchange Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant under the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. If a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of act action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by its is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issuance.
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<PAGE> 150
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Raleigh,
State of North Carolina, on October 18, 2000.
High Speed Net Solutions, Inc.
By: /s/ Andrew L. Fox
----------------------------------------
Andrew L. Fox
President and Chief Executive Officer, and Executive
Vice President
Date: October 18, 2000
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<PAGE> 151
Pursuant to the requirements of the Securities Act of 1933, the
following persons in the capacities and on the dates indicated have signed this
Registration Statement below.
<TABLE>
<S> <C> <C>
/s/ Andrew L. Fox President and Chief Executive October 18, 2000
-------------------- Officer, Executive Vice President and
Andrew L. Fox Director (principal executive officer)
* Executive Vice President, Secretary October 18, 2000
-------------------- and Treasurer
Alan R. Kleinmaier
/s/ Robert S. Lowrey Chief Financial Officer and Vice October 18, 2000
-------------------- President of Finance (principal
Robert S. Lowrey financial officer)
* Director October 18, 2000
--------------------
Dr. Bjorn Jawerth
* Director October 18, 2000
--------------------
Richard F. Seifert
* Director October 18, 2000
--------------------
C. Cristine Wittress
Director October 18, 2000
--------------------
Herman Rush
</TABLE>
* /s/ Andrew L. Fox
--------------------
Andrew L. Fox
(Attorney-in-Fact)
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<PAGE> 152
EXHIBIT INDEX
The exhibits indicated by an asterisk (*) are incorporated by reference from
previous filings with the Commission. The exhibits indicated with a (+) were
previously filed with this Registration Statement on Form S-1
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
2.01* Agreement and Plan of Merger between High Speed Net Solutions, Inc. and
J S J Capital Corp., dated as of April 19, 2000 (Exhibit 1.1 to our
Current Report on Form 8-K dated as of April 21, 2000)
2.02* Certificate of Merger between High Speed Net Solutions, Inc. and J S J
Capital Corp., dated April 21 2000 (Exhibit 1.2 to our Current Report
on Form 8-K dated as of April 21, 2000)
3.01+ Articles of Incorporation, dated April 30, 1984
3.02+ Amendment to Articles of Incorporation, dated July 20, 1998
3.03+ Amendment to Articles of Incorporation, dated August 24, 1998
3.04+ Amendment to Articles of Incorporation, dated December 10, 1998
3.05* Restated Articles of Incorporation, filed February 28, 2000 (as
currently in effect) (Exhibit 3.01 to our Form 10-Q dated as of March
31, 2000)
3.06+ Bylaws
3.07* Amended and Restated Bylaws (Exhibit 3.02 to our Form 10-Q dated as of
March 31, 2000)
3.08* Articles of Amendment and Statement of Rights and Preferences of the 8%
Series A Convertible Preferred Stock filed March 3, 2000 (Exhibit 3.03
to our Form 10-Q dated as of March 31, 2000)
3.09* Articles of Correction filed June 23, 2000 to Articles of Amendment
filed March 2, 2000 (Exhibit 3.09 to our Form 10-Q dated as of June 30,
2000)
4.01+ Specimen Common Stock certificate
4.02+ Specimen Series A preferred stock certificate
5.01 Opinion of Kilpatrick Stockton LLP
10.01* Master Agreement with Summus, Ltd., dated February 18, 2000 (Exhibit
10.01 to our Form 10-1 dated as of March 31, 2000)
10.02* Software License Agreement with Summus, dated February 18, 2000
(Exhibit 10.02 to our on Form 10-1 dated as of March 31, 2000)
10.03* Software Maintenance Agreement with Summus, dated February 18, 2000
(Exhibit 10.03 to our Form 10-1 dated as of March 31, 2000)
10.04* Revenue Sharing Agreement with Summus, dated February 18, 2000 (Exhibit
10.04 to our Form 10-Q dated as of March 31, 2000)
10.05* Equity Compensation Plan, effective January 31, 2000 (Exhibit 10.05 to
our Form 10-Q dated as of March 31, 2000)
10.06+ Amendment to Equity Compensation Plan, effective May 1, 2000
10.07* Employment Offer Letter with Andrew L. Fox, dated January 20, 2000
(Exhibit 10.06 to our Form 10-Q dated as of March 31, 2000)
10.08* Stock Option Award Agreement with Andrew L. Fox, dated August 25, 1999
(Exhibit 10.07 to our Form 10-Q dated as of March 31, 2000)
</TABLE>
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<PAGE> 153
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
10.09* Employment Offer Letter with Alan R. Kleinmaier, dated February 7, 2000
(Exhibit 10.08 to our Form 10-Q dated as of March 31, 2000)
10.10* Stock Option Award Agreement with Alan R. Kleinmaier , dated August 25,
1999 (Exhibit 10.09 to our Form 10-Q dated as of March 31, 2000)
10.11+ Employment Offer Letter with Robert S. Lowrey, dated March 29, 2000
10.12+ Stock Option Award Agreement with Robert S. Lowrey, dated June 1, 2000
10.13+ Marketing License Agreement with Summus, including Exhibit A and
Exhibit E, dated as of February 1999
10.14+ First Amendment to MLA, dated August 16, 1999
10.15+ Letter Agreement among Bradford J. Richdale, Michael M. Cimino,
President of Zzap.net, Inc., predecessor in interest to High Speed Net
Solutions, Inc., and Dr. Bjorn Jawerth, President of Summus, Ltd., and
Summus Technologies, Inc., dated January 14, 1999
10.16+ First Amendment to Letter Agreement, dated August 16, 1999
10.17+ Letter to Samsung Electronics, dated March 25, 1999
10.18+ Samsung Non-Circumvention Agreement with Summus, dated April 15, 1999
10.19+ Letter to Samsung Electronics, dated August 9, 1999
10.20+ Letter concerning Agency Agreement for Samsung negotiations, dated
March 25, 1999
10.21+ Capital Associates Lease Agreement between High Speed and Phoenix
Limited Partnership of Raleigh, dated October 15, 1999
10.22+ Stock Purchase Agreement with William R. Dunavant, dated August 13,
1999
10.23+ Amended and Restated Settlement Agreement by and among William R.
Dunavant, the Registrant and Michael Cimino
10.24+ Supplement to Agreement by and Between High Speed and William R.
Dunavant, dated August 13, 1999
10.25+ Advisory Agreement with R J Seifert Enterprises, dated February 6, 1999
10.26+ Non-Circumvention and Non-Disclosure Agreement with R J Seifert
Enterprises, dated February 6, 1999
10.27+ Settlement Agreement by and between the Registrant and Peter R. Rogina,
dated September 22, 1999
10.28+ Employment and Stock Option Agreement with Peter R. Rogina, dated March
1, 1999
10.29+ Consulting Agreement with Kyoung Park, Summus and the Registrant dated
September 24, 1999
10.30+ Confidentiality and Non-Competition Agreement with Robert S. Lowrey
10.31+ Shareholders' Agreement with Summus, Sharon Stairs, Ahmad Moradi,
Antonio Bianco, Joseph Peretta, Rich, Bahman & Berger, David Anderson,
Stephen Purkiss, Kerstin Jawerth, Ron Compton, dated August 16, 1999
10.32* Letter of Intent among High Speed, Samsung Electronics of America, Inc.
and Summus, dated February 15, 2000 (Exhibit 10.10 to our Form 10-Q
dated as of March 31, 2000)
10.33* Software Escrow Agreement with Summus and Fort Knox Escrow Services,
Inc., dated February 18, 2000 (Exhibit 10.11 to our Form 10-Q dated as
of March 31, 2000)
10.34* Letter Agreement with Summus, dated March 13, 2000 (Exhibit 10.12 to
our Form 10-Q dated as of March 31, 2000)
</TABLE>
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<PAGE> 154
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
10.35+ Lease Modification Agreement #1, dated March 23, 2000, to the Lease
dated October 15, 1999 (included as Exhibit 10.21)
10.36+ Lease Modification Agreement #2, dated June 9, 2000, to the Lease dated
October 15, 1999 (included as Exhibit 10.21)
10.38+ Form of Agreement to Terminate Registration Rights
10.39+ Form of Selling Shareholder Agreement
10.40+ Share Acquisition Agreement with Douglas May, effective July 10, 2000
10.41+ Employment Agreement with Douglas D. May dated June 30, 2000
10.42 Systems Work Agreement between HSNS and Nexgenix, Inc. dated July 27,
2000
10.43 Outsourcing Agreement between HSNS and E.piphany, Inc. dated July 31,
2000
10.44 Internet Streaming Service Agreement between HSNS and All Video
Network, Inc. dated September 18, 2000
10.45 Employment Offer Letter with Greg S. Gush, dated June 21, 2000
16.01+ Letter from Barry L. Friedman, P.C. about change in Certifying
Accountant dated June 20, 2000
23.1 Consent of Kilpatrick Stockton LLP (included as Exhibit 5.01)
23.2 Consent of Ernst & Young LLP
23.3 Consent of Bauknight Pietras & Stormer, P.A.
24.1+ Power of Attorney
27.1 Restated Financial Data Schedule year ended December 31, 1999 (for SEC
use only)
27.2 Financial Data Schedule six months ended June 30, 2000 (for SEC use
only)
</TABLE>
II-19
