<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 000-29625
HIGH SPEED NET SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0185306
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
<TABLE>
<S> <C>
Two Hannover Square, Suite 2120, 434 Fayetteville Street Mall, Raleigh, NC 27601
-------------------------------------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(919) 645-2610
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
The number of shares outstanding of the registrant's common stock, par
value $0.001 per share, as of November 10, 2000 were 23,685,231.
1
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HIGH SPEED NET SOLUTIONS, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
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<CAPTION>
PAGE NO.
--------
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Balance Sheets as of December 31, 1999 and September 30, 2000
(Unaudited) 3
Statements of Operations for the three months ended September 30,
1999 and 2000 (Unaudited) 4
Statements of Operations for the nine months ended September 30,
1999 and 2000 (Unaudited) 5
Statements of Cash Flows for the nine months ended September 30,
1999 and 2000 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition and 15
Results of Operations
Item 3. Quantitative And Qualitative Disclosures About Market Risk 41
PART II. OTHER INFORMATION
Item 2. Changes in Securities 42
Item 6. Exhibits and Reports on Form 8-K 43
Signatures 44
Index to Exhibits 45
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
High Speed Net Solutions, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ ------------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 753,708 $ 248,740
Accounts receivable 287,244 --
Other current assets 80,596 --
------------ ------------
Total current assets 1,121,548 248,740
Equipment, software and furniture, net 851,613 3,720
Investment in common stock of related party 1,894,127 1,894,127
Prepaid royalties, net 4,311,465 4,528,125
Other assets 100,000 --
Note receivable from related party 500,000 --
Goodwill, net 1,116,312 --
------------ ------------
Total assets $ 9,895,065 $ 6,674,712
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Payables to related parties $ 489,593 $ 589,815
Accounts payable and accrued expenses 1,568,891 99,876
Loss contingency accrual 9,198,987 800,000
------------ ------------
Total current liabilities 11,257,471 1,489,691
Redeemable common stock (133,070 shares) 876,000 --
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;
22,102,621 shares issued and outstanding at September 30, 2000 and
21,112,149 shares issued and outstanding at December 31, 1999
22,103 21,112
Additional paid-in capital 22,543,309 17,272,770
Accumulated deficit (26,076,199) (11,881,242)
Common stock subscription receivable (500,000) --
Treasury stock, at cost (38,500 shares) (227,619) (227,619)
------------ ------------
Total stockholders' equity (deficit) (2,238,406) 5,185,021
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 9,895,065 $ 6,674,712
============ ============
</TABLE>
See accompanying notes.
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High Speed Net Solutions, Inc.
Consolidated Statements of Operations (Unaudited)
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<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999
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<S> <C> <C>
Revenue $ 441,709 $ --
Costs of revenue 402,925 --
------------ ------------
Gross Profit 38,784 --
Selling, general and administrative expenses 1,746,568 2,467,822
Loss contingency 826,850 --
Interest expense (income), net (10,656) 2,655,749
------------ ------------
Net loss ($ 2,523,978) ($ 5,123,571)
============ ============
Net loss applicable to common shareholders:
Net loss ($ 2,523,978) ($ 5,123,571)
Preferred stock dividends (40,000) --
------------ ------------
Net loss applicable to common shareholders ($ 2,563,978) ($ 5,123,571)
============ ============
Loss per share (basic and diluted) ($ 0.12) ($ 0.26)
============ ============
Weighted average shares outstanding 21,956,007 19,970,353
============ ============
</TABLE>
See accompanying notes.
4
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High Speed Net Solutions, Inc.
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999
------------ ------------
<S> <C> <C>
Revenue $ 441,709 $ --
Costs of revenue 402,925 --
------------ ------------
Gross profit 38,784 --
Selling, general and administrative expenses 3,879,391 6,513,139
Loss contingency 9,993,725 --
Interest expense (income), net (27,608) 2,655,749
------------ ------------
Net loss ($13,806,724) ($ 9,168,888)
============ ============
Net loss applicable to common shareholders:
Net loss ($13,806,724) ($ 9,168,888)
Beneficial conversion feature of preferred stock (294,900) --
Preferred stock dividends (93,333) --
------------ ------------
Net loss applicable to common shareholders ($14,194,957) ($ 9,168,888)
============ ============
Loss per share (basic and diluted): ($ 0.66) ($ 0.51)
============ ============
Weighted average shares outstanding 21,411,063 18,001,474
============ ============
</TABLE>
See accompanying notes.
5
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High Speed Net Solutions, Inc.
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss ($13,806,724) ($ 9,168,888)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non cash compensation and consulting charges relating to
stock awards and stock subscriptions 51,090 5,905,164
Depreciation and amortization 249,252 19,593
Common stock issued for services -- 92,564
Interest expense relating to beneficial conversion
feature of convertible debt -- 2,655,749
Changes in operating assets and liabilities, net of
acquisition:
Prepaid royalties -- (60,000)
Accounts receivable and other current assets (367,840) 7,559
Increase in other assets (100,000) --
Accounts payable and accrued expenses 1,469,015 154,670
Loss contingency 9,942,725 --
------------ ------------
Net cash used in operating activities (2,562,482) (393,589)
INVESTING ACTIVITIES
Capital expenditures, net of acquisition (683,280) (3,152)
Cash investment in related party -- (102,000)
------------ ------------
Net cash used in investing activities (683,280) (105,152)
FINANCING ACTIVITIES
Net proceeds from sale of preferred stock 1,850,952 --
Proceeds from sale of common stock 2,500,000 242,062
Increase in note receivable - related party (500,000) --
Advances from stockholders -- 430,852
Increase (decrease) in amounts due related parties (100,222) 140,514
Proceeds from issuance of convertible debentures -- 558,640
------------ ------------
Net cash provided by financing activities 3,750,730 1,372,068
------------ ------------
Net increase in cash and cash equivalents 504,968 873,327
Cash and cash equivalents at beginning of period 248,740 18,609
------------ ------------
Cash and cash equivalents at end of period $ 753,708 $ 891,936
============ ============
</TABLE>
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High Speed Net Solutions, Inc.
Consolidated Statements of Cash Flows (Unaudited) (continued)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
2000 1999
------------ ----------
<S> <C> <C>
Noncash investing and financing activities:
Common shares issued for investment in related party -- $1,792,127
============ ==========
Common stock issued in exchange for convertible debentures
-- $2,665,749
============ ==========
Common stock issued for prepaid royalties -- $2,278,125
============ ==========
Prepaid royalties paid by shareholder on behalf of Company
-- $1,500,000
============ ==========
Debentures issued for shareholder advances on behalf of Company -- $2,097,109
============ ==========
Common stock issued in partial settlement of loss contingency $ 1,543,563 --
============ ==========
Accrual of preferred stock dividends $ 93,333 --
============ ==========
Common stock issued in connection with the acquisition of
Douglas May & Co., Inc. $ 500,000 --
============ ==========
Redeemable common stock issued in connection with the
acquisition of Douglas May & Co., Inc. $ 876,000 --
============ ==========
</TABLE>
See accompanying notes.
7
<PAGE> 8
High Speed Net Solutions, Inc.
Notes to Financial Statements
1. BUSINESS AND ORGANIZATION
High Speed Net Solutions, Inc. ("the Company" or "HSNS") was incorporated in
1984 and is headquartered in Raleigh, North Carolina. The Company was a
development stage company during 1998, 1999 and for the first six months of
2000. HSNS ceased being a development stage company in the third quarter of 2000
through it acquisition of Douglas May & Co., Inc. ("DMC") on July 10, 2000.
HSNS is an Internet services company focused on creating and transmitting
advertising and other video commercial content over the Internet. The Company
specializes in handling "rich media", which is content containing one or more of
the following types of data: audio, video, images, or animation. HSNS is
offering two major categories of services, media creation and media
distribution. The Company is currently providing media creation services to
customers through its wholly owned and fully operational subsidiary, Douglas May
& Co., Inc. These services include creative design assistance and commercial
content development, including audio and video images and animation, as well as
website design and construction. HSNS plans to provide rich media distribution,
embedded inside e-mail services, as well as customer targeting and tracking
services for applications such as permissive marketing, corporate communications
and customer service.
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 unaudited condensed consolidated 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 nine-month periods ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000.
8
<PAGE> 9
High Speed Net Solutions, Inc.
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
EQUIPMENT AND FURNITURE
Equipment and furniture is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets beginning
when assets were placed in service.
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 complete its delivery of
technology to HSNS, an impairment to these prepaid amounts would need to be
recognized. Additionally, the Company must complete its testing of the
capabilities and functionality of the products it receives from Summus. Based
upon the results of these testing procedures, the Company may need to record an
impairment charge related to these prepaid 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
9
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High Speed Net Solutions, Inc.
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICES (CONTINUED)
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".
REVENUE RECOGNITION
Revenue from media creation services, which includes creative design assistance
and commercial development is being recognized at the time the services are
rendered and billed based upon the terms of individual contracts. On a
prospective basis, the Company expects to generate revenue from the sale of
services relating to the design and execution of e-mail marketing campaigns.
Revenue from such services will be recognized when each e-mail campaign is
completed and there are no significant remaining obligations, and collection of
the fee is probable.
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.
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 for fiscal years beginning after June 15, 2000.
The Company will adopt this statement in its first quarter of 2001. 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.
10
<PAGE> 11
High Speed Net Solutions, Inc.
Notes to Financial Statements (continued)
4. BUSINESS COMBINATION
On July 10, 2000, the Company acquired all of the issued and outstanding capital
stock of Douglas May & Co., Inc. ("DMC") by issuing 183,070 shares of common
stock to its sole shareholder Douglas May, valued at $1,376,000 in a business
combination accounted for as a purchase. Under the terms of the acquisition
agreement, the 183,070 shares of stock were issued in three allotments. The
first allotment corresponded to $500,000 of value and the Company issued 50,000
shares of common stock coupled with a guarantee that if the OTCBB trading price
of the common stock one year from the close of the transaction is less than
$10.00 per share then the Company will issue additional shares of common stock
to make up the difference in value. The issuance of shares of the 50,000 shares
has been 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 DMC. The second allotment corresponded to
$576,000 of value and the Company issued 87,498 shares of common stock coupled
with contractual obligations that (i) the Company would publicly register these
shares in a registration statement filed with the SEC and (ii) if the
registration is not effective by January 1, 2001 then Mr. May has the right to
cause the Company to repurchase these shares from him by making six cash
installment payments totaling $576,000 to Mr. May. The third allotment
corresponded to $300,000 of value and the Company issued 45,572 shares of common
stock coupled with contractual obligations that (i) the Company would register
these shares in a registration statement filed with the SEC 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 the Company 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 DMC, that have been
collected in the amount of $300,000 subsequent to the acquisition date. Mr. May
has not yet elected to have the Company repurchase these shares. Until the time
these contingencies are 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.
The Company recorded goodwill in the amount of $1,174,437 and is amortizing this
amount on a straight-line basis over five years.
5. CONVERTIBLE DEBENTURES
During 1999, 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 1999 because the debentures were convertible upon issuance.
11
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High Speed Net Solutions, Inc.
Notes to Financial Statements (continued)
6. COMMON STOCK
In July 2000, the Company issued 541,677 shares of its 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 Company also entered into a subscription
agreement for the sale of 108,335 shares of unregistered common stock and issued
warrants to purchase an additional 216,670 shares of common stock for gross
proceeds of $500,000. The subscription receivable was collected in full in
October 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 32,500 shares of common stock as a
placement fee.
7. 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 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 September 30, 2000 cumulative dividends accrued were $93,333.
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 nine month period ended September 30, 2000, for
purposes of computing the net loss applicable to common shareholders.
8. LOSS 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.
12
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High Speed Net Solutions, Inc.
Notes to Financial Statements (continued)
8. LOSS CONTINGENCY (CONTINUED)
In June 2000, we entered into a settlement agreement with Dunavant to resolve
the lawsuit. The settlement agreement provided, among other things, that we
register 350,000 shares of common stock owned by Mr. Dunavant with the
Securities and Exchange Commission. Under the settlement agreement, we issued
175,000 new shares of our common stock to Dunavant on the execution date of the
settlement agreement. In addition, the settlement called 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 was not
effective on or before January 1, 2001, 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 to him each month. We also agreed to
register all shares delivered under these monthly allotments. Finally, we agreed
to issue and register an allotment of our common stock, which was to be
determined by a calculation that depended on the date upon which the
registration statement became 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
$9,993,725 of expense during the nine months ended September 30, 2000,
representing management's best estimate of the ultimate outcome of the
settlement. Of this amount, $826,850 was accrued during the three months ended
September 30, 2000. The most significant component of this 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 accrual recorded
as of September 30, 2000 was calculated using the closing traded price of our
common stock on September 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.
On October 26, 2000, the Company entered into a Second Amended and Restated
Settlement Agreement (the "New Agreement") with Dunavant. The terms of the New
Agreement supercede the terms in the prior settlement agreement entered in June
2000, unless the acquisition of Summus, as described in Note 9, is not
consummated within 120 days from October 26, 2000. If the acquisition of Summus
does not occur within this time period, the New Agreement will become null and
void and the rights and obligations of both parties will be governed by the
initial settlement agreement. Under the terms of New Agreement, the Company
issued 1,425,000 new shares of common stock to Dunavant on the execution date of
the agreement, bringing the total number of shares owned by him to 2.0 million.
In addition, the Company will issue 25,000 shares per month until the necessary
funding to close the acquisition with Summus has been obtained. The Company will
also pay $25,000 per month until at least 1.0 million shares held by Dunavant
become freely tradable.
13
<PAGE> 14
High Speed Net Solutions, Inc.
Notes to Financial Statements (continued)
8. LOSS CONTINGENCY (CONTINUED)
Since the implementation of the New Agreement is dependent on contingent future
events, the value of the loss contingency accrual as of September 30, 2000 was
determined based the terms of the original settlement agreement. If the New
Agreement was not contingent, the Company would have realized a reduction in the
recorded amount of the loss contingency reserve of approximately $5.4 million at
September 30, 2000. In the event the acquisition of Summus does occur within 120
days from October 26, 2000, management believes the Company will realize a
similar reduction in the loss contingency reserve.
9. SUBSEQUENT EVENT
On October 30, 2000, the Company entered into an asset purchase agreement with
Summus, whereby the Company will issue 20,235,083 new shares of its common stock
for all of Summus' assets, including Summus' technology and intellectual
property rights. Summus currently owns 8,239,360 shares of High Speed common
stock. These shares will be acquired by High Speed, along with the other assets
of Summus, and subsequent to the closing of the asset purchase agreement, these
shares will be retired by the Company. Upon the closing of this transaction and
prior to the funding necessary to close the transaction, both High Speed and
Summus will share equal ownership in the combined company, on a fully diluted
basis.
The Company will assume certain liabilities of Summus, currently expected to be
approximately $1.8 million. In addition to the shares to be issued to acquire
the assets, the Company will issue stock options to the Summus option holders,
to replace stock options in Summus that will be cancelled at closing. The
Company will also issue warrants for 500,000 shares of High Speed Stock to
Summus shareholders, other than the Company and Bjorn Jawerth. The closing of
this transaction is contingent upon the raising of $7.5 million in additional
equity capital by the Company within 60 days from October 30, 2000. The Boards
of Directors of both companies have approved the asset purchase agreement.
In connection with the asset purchase agreement, the Company has agreed to
provide interim financing to Summus prior to closing to sustain Summus
operations. On August 31, 2000, the Company loaned to Summus $500,000. Under the
terms of the loan agreement, Summus is required to provide security for
repayment, in the form of High Speed common stock owned by Summus. This loan
will be cancelled by High Speed at closing. As consideration for canceling this
loan, High Speed will receive from Summus shares of High Speed owned by Summus
in value equal to the principal value of the loan, plus accrued interest.
Additionally, the Company has agreed to provide Summus $235,000 on October 30,
2000, and every two weeks thereafter, until the earlier of the closing date of
the merger or sixty days after October 30, 2000. Management believes the funds
necessary to make these commitments will be provided from private sales of its
common stock. Each advance of interim financing to Summus, will be
collateralized by High Speed common stock owned by Summus.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the financial
statements and accompanying notes, which appear elsewhere in this document. It
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those
discussed below and elsewhere in this document, particularly under the heading
"Factors Effecting Future Results."
OVERVIEW
High Speed was a development stage company during 1998, 1999, and for the first
six months of 2000. The Company ceased being a development stage company in the
third quarter of 2000 in connection with the acquisition of Douglas May & Co.,
Inc.
The Company anticipates that its 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).
The Company has and will continue to 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. The Company
anticipates having revenue sharing agreements with resellers and it has two
potential resellers.
You should consider our prospects in light of our limited operating history. The
Company faces 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, the Company 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
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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 Direct SM media distribution service:
and
- Establish our ability to resell our services through third-party
reseller channels.
SIGNIFICANT CONTRACTUAL RELATIONSHIPS
Since June 30, 2000, the Company has achieved the following key milestones that
are important to its business and its ability to generate revenue.
The Company has entered into a contract with Learnkey for the delivery of media
advertisements through Rich Media Direct 1.0 (TM) for Learnkey's e-commerce
campaigns. To date, the Company has generated no revenue from this agreement.
The Company 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, the Company has generated $4,000 in revenue
from this campaign.
The Company has 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 the Company has
engaged NexGenix, Inc., a professional systems integration firm, to customize
E.piphany's software for us. The Company recently received additional computers
and other hardware that it purchased from Hewlett-Packard, Inc. and the Company
entered into an agreement with Inflow, Inc., a commercial hosting services
company (or "server farm"), to store our content on their computers and deliver
it to our clients' designated recipients.
SECURITIES ISSUANCES
In July 2000, the Company issued 541,677 shares of its 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 Company also entered into a
subscription agreement for the sale of 108,335 shares of unregistered common
stock and issued warrants to purchase an additional 216,670 shares of common
stock for gross proceeds of $500,000. The subscription receivable was collected
in full in October 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 32,500 shares of
common stock as a placement fee.
ACQUISITION OF DOUGLAS MAY & CO., INC.
Effective July 10, 2000, the Company acquired a marketing and advertising
company, Douglas May & Co., Inc., a Texas corporation ("DMC"), in exchange for
shares of our common stock. The Company is holding and operating DMC as a
wholly-owned subsidiary. Mr. Douglas May,
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DMC's sole shareholder, joined the Company as an employee and is currently a
Executive Vice President and Chief Creative Officer. Before this transaction,
Mr. May was not a shareholder and had no relation with High Speed Net Solutions.
In exchange for his conveying to us of all of DMC's outstanding capital stock,
High Speed issued a total of 183,070 shares of common stock to Mr. May in three
installments as follows:
- The Company 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, the Company 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 Bulleting Board (R), the market value of
these shares was $318,750 on July 10, 2000.
- The Company issued 45,572 shares of common stock, coupled with contractual
obligations requiring the Company to register these shares. Since the
Company did not register these shares by September 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. As of the date of this
document, Mr. May has not elected to have the Company repurchase his
shares; and
- The Company issued 87,498 shares of common stock, coupled with contractual
obligations requiring us to register these shares under the Securities Act
of 1933. If the Company does not register these shares by January 1, 2001,
the Company 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.
RECENT DEVELOPMENTS - ASSET PURCHASE AGREEMENT WITH SUMMUS, LTD.
On October 30, 2000, the Company entered into an asset purchase agreement with
Summus, whereby the Company will issue 20,235,083 new shares of its common stock
for all of Summus' assets, including Summus' technology and intellectual
property rights. Summus currently owns 8,239,360 shares of High Speed common
stock. These shares will be acquired by High Speed, along with the other assets
of Summus, and subsequent to the closing of the asset purchase agreement, these
shares will be retired by the Company. Upon the closing of this transaction and
prior to the funding necessary to close the transaction, both High Speed and
Summus will share equal ownership in the combined company, on a fully diluted
basis. The Company will assume certain liabilities of Summus of approximately
$1.8 million. In addition to the shares to be issued to acquire the assets, the
Company will issue stock options to the Summus option holders, to replace stock
options in Summus that will be cancelled at closing. The closing of this
transaction is contingent upon the raising of $7.5 million by the Company, by
December 29, 2000. The Boards of Directors of both companies have approved the
asset purchase agreement.
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In connection will this merger, the Company has agreed to provide interim
financing to Summus. On August 31, 2000, the Company loaned to Summus $500,000.
Under the terms of the loan agreement, Summus is required to provide security
for repayment, in the form of High Speed common stock owned by Summus, This loan
will be cancelled by High Speed at closing. As consideration for canceling this
loan, High Speed will receive from Summus shares of High Speed owned by Summus
in value equal to the principal value of the loan, plus accrued interest.
Additionally the Company has agreed to provide Summus $235,000 on October 30,
2000 and every two weeks thereafter until the earlier of the closing date or
three months after October 30, 2000. Management believes the funds necessary to
make these commitments will be provided from private sales of its common stock.
Each of these interim financings will be collateralized by High Speed common
stock owned by Summus equal to 2.5 times the value of the amount interim
financing.
OTHER SIGNIFICANT EVENTS
On October 24, 2000 the Company received notification from a hearing panel of
the NASD Board of Governors that the Company's request for continued quotation
of its common stock on the OTC Bulletin Board was denied. The Company's common
stock is now quoted in the "Pink Sheets", a quotation services operated by the
National Quotation Bureau, LLC, a paper quotation medium printed weekly and
distributed to broker/dealers.
The hearing panel's decision, which followed the appearance of the Company's
management at an oral hearing on October 19, 2000, noted that the Company had
not yet cleared the comments issued by the staff of the Securities and Exchange
Commission ("SEC") with respect to certain of the Company's SEC filings. The
Company expects that upon obtaining clearance from the SEC with respect to these
comments, it will take the necessary steps to resume quotation of its common
stock on the OTC Bulletin Board.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUE AND COSTS OF REVENUE
Revenue and costs of revenue for the three months ended September 30, 2000
represent revenue earned and costs of revenue incurred by the Company's
wholly-owned subsidiary, Douglas May & Co., Inc. ("DMC"). High Speed acquired
DMC on July 10, 2000. During the three months ended September 30, 1999, High
Speed generated no revenues, as the Company had neither products to sell, nor
the capacity to provide services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the three months ended
September 30, 2000 were $1,746,568 compared to $2,467,822 for the three months
ended September 30, 1999. Selling, general and administrative expenses for the
three months ended September 30, 2000 includes $400,000 in legal and accounting
fees associated with Securities and Exchange Commission reporting matters and
other general corporate activities; $178,756 in depreciation
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and amortization of intangible assets, including goodwill resulting from the DMC
acquisition and $194,500 associated with the operations of DMC. The remaining
balance is attributable to salaries and other operating costs. Selling, general
and administrative expenses for the three months ended September 30, 1999
included non-cash compensation and consulting costs of $2,265,164 related to the
granting of stock options and stock awards to acquire 325,500 shares of common
stock and the execution of stock subscription agreements to acquire 240,000
shares of common stock with per share selling prices below the traded value of
the common stock. The stock options and stock awards vested upon issuance and
had nominal exercise prices. The remaining balance is attributable to salaries
and other operating costs.
LOSS CONTINGENCY
The loss contingency expense relates to the settlement agreement the Company
entered into with Mr. Dunavant in June 2000. A more complete description of this
settlement has been provided in Note 8 to the financial statements included in
this document. Additionally, the Company has entered into a Second Amended and
Restated Settlement with Mr. Dunavant on October 26, 2000. A more complete
description of this agreement is also provided in Note 8 to the financial
statements included in this document.
During the three months ended September 30, 2000, the Company recognized
$826,850 of additional costs based on the terms of the initial settlement
agreement. The amount of this additional cost was calculated using the closing
price of our common stock on September 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.
INTEREST EXPENSE (INCOME)
Interest Income for the three months ended September 30, 2000 represents
interest earnings on cash balances in demand deposit accounts. During the three
months ended September 30, 1999, the Company incurred non-cash interest expense
of $2,655,749 relating to the issuance of convertible debentures 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 debentures' conversion prices and the fair market value of the
traded common stock, has been recorded as non-cash interest expense.
NET LOSS
As a result of the factors discussed above, our net loss for the three months
ended September 30, 2000 and 1999 was $2,523,978 and $5,123,571, respectively.
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NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
REVENUE AND COST OF REVENUE
Revenue and cost of revenue for the nine months ended September 30, 2000
represent revenue earned and costs of revenue incurred by DMC, the Company's
wholly-owned subsidiary. High Speed acquired DMC on July 10, 2000. During the
nine months ended September 30, 1999, High Speed generated no revenues as the
company had neither products to sell, nor the capacity to provide services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the nine months ended September
30, 2000 were $3,879,391 compared to $6,513,139 for the nine months ended
September 30, 1999. Selling, general and administrative expenses for the nine
months ended September 30, 2000 include $1,268,938 in 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. Of the total amount $249,252 represents depreciation and amortization
of intangible assets, including goodwill resulting from the DMC acquisition and
$194,500 associated with the operations of DMC. The remaining balance is
attributable to salaries and other operating costs. Selling, general and
administrative expenses for the nine months ended September 30, 1999 included
non-cash compensation and consulting costs of $5,905,164 related to the granting
of stock options and stock awards to acquire 2,150,000 shares of common stock
and the execution of stock subscription agreements to acquire 240,000 shares of
common stock with per share selling prices below the traded value of the common
stock. The stock options and stock awards vested upon issuance and had nominal
exercise prices. The remaining balance is attributable to salaries and other
operating costs
LOSS CONTINGENCY
The loss contingency expense relates to the settlement agreement the Company
entered into with Mr. Dunavant in June 2000. A more complete description of this
settlement has been provided in Note 8 to the financial statements included in
this document.
During the nine months ended September 30, 2000, the Company recognized
$9,993,725 of expense based on the terms of the settlement agreement. 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 calculated this
loss accrual using the closing price of our common stock on September 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.
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INTEREST EXPENSE (INCOME)
Interest income for the nine months ended September 30, 2000 represents interest
earnings on cash balances in demand deposit accounts. During the nine months
ended September 30, 1999, the Company incurred non-cash interest expense of
$2,655,749 relating to the issuance of convertible debentures 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 debentures' conversion prices and the fair market value of the
traded common stock, has been recorded as non-cash interest expense.
NET LOSS
As a result of the factors discussed above, our net loss for the nine months
ended September 30, 2000 and 1999 was $13,806,724 and $9,168,888, respectively.
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
September 2000 we had cash and cash equivalents of $753,708, and other current
assets of $367,840 and current liabilities of $11,257,471 resulting in a working
capital deficiency of $8,773,517.
Net cash used in operating activities of $2,562,482 during the nine months ended
September 30, 2000 represents cash paid for salaries and other operating
expenses.
Net cash used in investing activities during the nine months ended September 30,
2000 represents expenditures for computer equipment, software and related
services.
Net cash provided by financing activities of $3,750,730 during the nine months
ended September 30, 2000 resulted from the net proceeds of the sale of our
preferred stock of $1,850,952, proceeds of $2,500,000 from the sale of our
common stock, a net of a reduction in the amounts due to related parties of
$100,222 and the $500,000 loan made to Summus.
Net cash used in operating activities from operations during the nine months
ended September 30, 1999 of $393,589, resulted from the payment of salaries and
other operating expenses. Net cash provided by financing activities for the nine
months ended September 30, 1999 resulted from the sale of common stock and
advances from related parties.
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. We also entered into a
subscription agreement for the sale of 108,335
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shares of common stock and issued warrants to purchase an additional 216,670
shares of common stock for gross proceeds of $500,000. The proceeds from these
issuances will not be sufficient to fund operations for the next 12 months.
Prior to the interim financing we agreed to provide to Summus from October 30,
2000 through the closing of the asset purchase agreement, we had enough cash to
fund our operations through December 2000. This additional commitment increases
our need to raise additional funds through the private sale of our equity
securities during November and December of 2000. Additionally, we anticipate
that our existing cash resources, as well as future sales of debt or equity
securities, plus the proceeds 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.
Subsequent to the closing of the asset purchase agreement with Summus,
management believes 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 first quarter of 2001 and beyond. Cash from these operations is
estimated to generate positive cash flow for periods subsequent to December 31,
2001, however we cannot be certain these plans will materialize and thus we may
need to raise additional equity capital. 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.
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.
The closing of the asset purchase agreement with Summus is contingent upon
management's ability to raise the necessary funds to provide Summus with interim
financing through the closing of the transaction. In addition to the interim
financing, management needs to raise additional funding that, when added to the
interim financing, equals $7.5 million in order to close the asset purchase
agreement. Management believes the funding necessary to close the transaction
with Summus will be provided through private sales of its equity securities.
Subsequent to the closing of the transaction with Summus, 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.
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
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intended use of the derivative instrument. The initial application of SFAS 133
will be reported as the effect of a change in accounting principle. SFAS 133 is
effective for all fiscal years beginning after June 15, 2000. We have not yet
determined the effect that the adoption of SFAS 133 will have on our
consolidated financial statements.
FACTORS EFFECTING FUTURE RESULTS
Forward-Looking Statements in this Quarterly Report on Form 10-Q are made
pursuant to the Safe Harbor Provisions of Section 21E of the Securities Exchange
Act of 1934. Investors are cautioned that statements in this Quarterly Report on
Form 10-Q that are not strictly historical statements, including, without
limitation, statements regarding current or future financial performance,
management's plans and objectives for future operations, product plans and
performance, management's assessment of market factors, and statements regarding
the plans of High Speed and it strategic partners, constitute forward-looking
statements. These forward-looking statements are not guarantees of High Speed's
future performance and are subject to a number of risks and uncertainties that
could cause our actual results in the future materially to differ from the
forward-looking statements. These risks and uncertainties include, without
limitation, the risks detailed below and in High Speed's other filings with the
Securities and Exchange Commission, copies of which may be accessed through the
SEC's Web Site at http://www.sec.gov.
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 use to 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.
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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).
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, Inflow, 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.
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CONFLICTS OF INTEREST WITH SUMMUS MAY LIMIT OUR OPPORTUNITIES AND HARM OUR
ABILITY TO GENERATE REVENUE.
As of November 10, 2000, Summus held 8,389,360 shares, or 35.4%, of our common
stock (30.9% on a fully diluted basis). Summus also has the right to vote an
additional 1,279,667 shares of our common stock under voting agreements with,
and/or proxies from, 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 November 10, 2000, Dr. Jawerth, the
Chairman of our Board of Directors, beneficially owned 35.4% (30.9% 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 40.8%, OF OUR COMMON STOCK.
As of November 10, 2000, Summus, our largest shareholder and an important
third-party software and technology supplier, owned 8,389,360 shares, (35.4%),
of our common stock (30.9% 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, (35.4%) of our outstanding common stock (30.9%
on a fully diluted basis).
Summus can also vote an additional 1,279,667 shares of our common stock under
voting agreements with and/or proxies from other shareholders. Summus' and Dr.
Jawerth's total voting power is 9,669,027 shares (40.8%), of our outstanding
common stock (35.6 % on a fully diluted basis). As a result, Summus and Dr.
Jawerth will have the power to:
o Elect, or defeat the election of, our Directors;
o Amend, or prevent amendment of, our Articles of Incorporation
or bylaws;
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o Effect, or prevent, a merger, sale of assets or other
corporate transaction; and
o 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 November 10, 2000, Summus owns 8,389,360 shares, or 35.4%, of our common
stock. (30.9% 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) HAS CEASED QUOTING OUR COMMON STOCK, WHICH COULD
RESULT IN A SEVERE LOSS OF LIQUIDITY AND VALUE.
Our common stock was quoted on the OTC Bulletin Board(R) under the symbol
"HSNSE" through October 23, 2000. 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.
Beginning on October 24, 2000, our common stock is now quoted on the "Pink
Sheets," a quotation services operated by the National Quotation Bureau, LLC, a
paper quotation medium printed weekly and distributed to brokers/dealers.
On October 24, 2000, the Company received notification from a hearing panel of
the NASD Board of Governors that the Company's request for continued quotation
of its common stock on the OTC Bulletin Board was denied. The hearing panel's
decision, which followed the appearance of the Company's management at an oral
hearing on October 19, 2000, noted that the Company had not yet cleared the
comments issued by the staff of the Securities and Exchange Commission ("SEC")
with respect to certain of the Company's SEC filings.
We have now filed amendments to our SEC filings in an effort to clear the issued
comments. Although we cannot guarantee that the SEC will not have additional
comments, we believe that our amendments substantially address all of the SEC's
prior comments about these documents. The Company expects that upon obtaining
clearance from the SEC with respect to these comments, it will take the
necessary steps to resume quotation of its common stock on the OTC Bulletin
Board; however, we cannot guarantee when this will occur.
THE VALUE OF OUR STOCK MAY BE VOLATILE DUE TO MARKET AND INDUSTRY RELATED
FACTORS AND OUR PRESENCE ON THE PINK SHEETS.
The stock market in general, the Pink Sheets, and the market for Internet and
technology companies' securities in particular, have experienced extreme price
and volume fluctuations that
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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 Pink Sheets is a quotation service operated by the National Quotation
Bureau, LLC, a paper quotation medium printed weekly and distributed to
brokers/dealers. The Pink Sheets 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 Pink Sheets 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 Pink Sheets 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 Pink Sheets.
Furthermore, as our common stock is traded on the Pink Sheets, 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, 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 Pink Sheets,
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 November 10, 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 November 10, 2000. We are not aware
of any reason related to our business for the changes in the price of our stock.
Our stock price could be subject to wide fluctuations in response to factors
such as:
o Actual or anticipated variations in our quarterly operating
results;
o Announcements of technological innovations, new products or
services by us or our competitors;
o Changes in our financial estimates or recommendations by
securities analysts;
o Conditions or trends in e-mail video commercial delivery over
the Internet;
o Changes in the market valuations of similar companies;
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o Additions or departures of key personnel; and
o 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:
o 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;
o We have no brand name recognition;
o 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
o 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.
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Some of the many factors that may influence our operating results are beyond our
control, including:
o The demand for Internet e-mail advertising;
o The emergence and success of new and existing competitors; and
o The cost of obtaining capital.
Other factors influencing our operating results may be within our control, such
as:
o How and when we introduce new services and enhance these
services;
o The timing and success of our brand building and marketing
campaigns;
o Our ability to establish and maintain strategic relationships;
o Our ability to attract, train, and retain key personnel;
o 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
o 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 $26.1
million. In 1999 and 1998, we lost $10.2 million and $1.7 million, respectively.
For the nine months ended September 30, 2000, we lost $13.8 million.
We may continue to incur additional operating losses for an extended period of
time as we continue to develop services.
WE LACK SUFFICIENT FINANCIAL RESOURCES TO IMPLEMENT OUR BUSINESS PLAN.
On September 30, 2000, we had approximately $754,000 of cash. Prior to the
interim financing we agreed to provide Summus from October 30, 2000 through the
closing of the asset purchase agreement, we had enough cash to continue our
operations until December 2000. This additional commitment increases our need to
raise additional funds through the private sale of our equity securities during
November and 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
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be forced to sell shares of our common stock at prices below the market price as
quoted on the "Pink Sheets". 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.
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.
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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 our common stock is traded on
the Pink Sheets, 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 Inflow. 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
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content providers. If we 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 entrusted 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 Direct(SM). 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
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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
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,
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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 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.
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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.
RISKS RELATED TO THE ASSET PURCHASE OF SUMMUS
THE VALUE OF OUR COMMON STOCK MAY FLUCTUATE
The number of shares of our common stock that we are issuing in connection with
the purchase of Summus' assets is fixed. However, the market price of our common
stock when the asset purchase is completed may vary from the market price as of
the date of this document. For example, during the 12-month period ended on
September 30, 2000, the most recent date prior to the filing of this quarterly
report, the closing price of our common stock varied from a low of $2.625 to a
high of $31.875 and ended that period at $5.437
These variations may be the result of various factors including:
o Changes in the business, operations or prospects of High
Speed, Summus or the combined company;
o Governmental and/or litigation developments and/or regulatory
considerations;
o Market assessments as to whether and when the asset purchase
will be consummated;
o The timing of the asset purchase;
o General market and economic conditions.
The asset purchase may not be completed until a significant period of time has
passed after the Summus shareholder meeting. At the time of the Summus
shareholder meeting, Summus shareholders will not know the exact value of the
High Speed common stock that we will issue in connection with the asset
purchase.
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WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE OUR OPERATIONS AND REALIZE THE FULL
COST SAVINGS THAT WE ANTICIPATE
The asset purchase involves integrating two companies that have previously
operated independently. The process of integrating operations could cause an
interruption of, or loss of momentum in, the activities of one or more of the
combined company's businesses and the loss of key personnel. The diversion of
management's attention and delays or difficulties encountered in connection with
the asset purchase and the integration of the two companies' operations could
have an adverse effect on the business, results of operations, financial
condition or prospects of the combined company after the asset purchase.
Among the factors that Summus' and our Boards of Directors considered in
connection with their respective approvals of the asset purchase agreement were
the opportunities for operating efficiencies and expanded offerings of services
and products to the same customers that could result from the asset purchase. We
cannot guarantee that we will realize these savings within the contemplated
times periods or even if we will realize any savings at all.
IF HIGH SPEED AND SUMMUS DO NOT INTEGRATE THEIR PRODUCTS AND TECHNOLOGIES
QUICKLY AND EFFECTIVELY, MANY OF THE POTENTIAL BENEFITS OF THE ASSET PURCHASE
MAY NOT BE REALIZED
High Speed and Summus will need to integrate their media creation and media
distribution services operations, technologies and products. Successful
integration of Summus' technologies with High Speed's media creation and media
distribution services also requires coordination of different development and
engineering teams, as well as sales and marketing efforts and personnel. This
may be difficult and unpredictable because of possible differences between High
Speed's and Summus' corporate cultures and organizations, as well as different
decisions regarding services, products and technologies. In addition, this
integration may take longer than expected, and the companies may be required to
expend more resources on integration than anticipated. The need to expend
additional resources on integration would reduce the resources that would
otherwise be spent on developing each companies' own pursuits. If the companies
cannot successfully integrate their services and technologies, or if this
integration takes longer than anticipated, the combined company may not be able
to operate efficiently or realize the expected benefits of the asset purchase.
WE WILL INCUR SIGNIFICANT EXPENSES AND RESTRUCTURING CHARGES IN CONNECTION WITH
THE ASSET PURCHASE
High Speed and Summus expect to incur pre-tax charges to operations to reflect
costs associated with combining the operations of the two companies, transaction
fees and other costs related to the asset purchase. The majority of these costs
will be recorded after the consummation of the asset purchase. We may incur
additional unanticipated costs in the course of integrating Summus' business
with ours. Although Summus and we expect that the elimination of duplicative
costs, as well as the realization of other efficiencies related to the
integration of the businesses, may offset additional expenses over time, we
cannot guarantee that we will achieve this net benefit in the near term, or at
all.
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THE ASSET PURCHASE IS CONDITIONED UPON RAISING $7.5 MILLION DOLLARS
Closing the asset purchase with Summus is conditioned upon raising $7.5 million,
which (1) may not occur; and 2) will cause substantial dilution to High Speed's
existing shareholders.
A DROP IN THE PRICE OF HIGH SPEED'S COMMON STOCK WILL REDUCE THE VALUE OF THE
CONSIDERATION THAT SUMMUS SHAREHOLDERS RECEIVE IN THE ASSET PURCHASE
The asset purchase agreement provides that if the asset purchase is completed,
Summus shareholders will receive, in the aggregate, up to 20,235,083 shares of
High Speed's common stock. Resale of these shares by Summus shareholders may
decrease the market price of High Speed's common stock.
THE COMBINED COMPANY MAY NEED ADDITIONAL FINANCING THAT MAY NOT BE AVAILABLE
The combined company may need to raise additional funds to finance growth that
may not be available on acceptable terms, if at all. The asset purchase and the
integration of the companies' operations may further strain the financial
resources of the combined company. If the combined company cannot obtain
additional financing on commercially acceptable terms, or at all, the combined
company may be harmed.
IF HIGH SPEED DOES NOT SUCCESSFULLY INTEGRATE THE OPERATIONS AND PERSONNEL OF
SUMMUS IN A TIMELY MANNER, THIS WILL DISRUPT THE COMBINED COMPANY'S BUSINESS AND
COULD NEGATIVELY AFFECT ITS OPERATING RESULTS.
High Speed's acquisition of Summus involves risks related to the integration and
management of Summus' operations and personnel. The integration of High Speed
and Summus will be a complex, time consuming and expensive process and may
disrupt the businesses of both companies if not completed in a timely and
efficient manner. After the asset purchase, High Speed must operate as a
combined organization utilizing common information and communication systems,
operating procedures, financial controls and human resources practices.
High Speed and Summus may encounter substantial difficulties, costs and delays
involved in integrating their operations, including:
o Potential incompatibility of business cultures;
o Perceived adverse changes in business focus;
o Potential conflicts in distribution, marketing or other
important relationships; and
o Loss of key employees and diversion of the attention of
management from other ongoing business concerns.
Failure to complete the integration successfully could result in the loss of key
personnel and customers. High Speed and Summus will need to devote significant
resources to the integration of the acquired operations and personnel, and if
unsuccessful, the business of the combined company will suffer. In addition, the
attention and effort devoted to the integration of the two
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companies will significantly divert management's attention from other important
issues, which could negatively affect the business and operating results of the
combined company.
PARTNERS AND CUSTOMERS OF BOTH COMPANIES MAY REACT UNFAVORABLY TO THE ASSET
PURCHASE.
Both High Speed and Summus have entered into relationships with other technology
companies, including software and services firms, to deliver their media
creation and media distribution services to customers. Some of these other
companies may feel that the combined company poses new competitive threats to
their businesses and as a result may terminate their relationships with High
Speed or Summus, or reduce their level of activity on behalf of the combined
company. In addition, High Speed will need to educate its sales channels
regarding Summus' technology, and these sales channels may not market Summus'
technology effectively or at all.
The asset purchase may also have the effect of disrupting customer
relationships. High Speed and Summus customers may not continue their current
buying patterns during the pendency of, and following, the asset purchase.
Customers may defer purchasing decisions as they evaluate the likelihood of
successful integration of High Speed's and Summus' media creation and media
distribution services and technologies and the combined company's future
strategy. Also, because of the broader media creation and media distribution
services and technology offering that High Speed will offer after the asset
purchase, some customers of High Speed or Summus may view the combined company
as more of a direct competitor than either High Speed or Summus as an
independent company, and may therefore cancel or fail to place additional orders
after the asset purchase. Any significant delay or reduction in orders for High
Speed's or Summus' media creation and media distribution services or technology
could have a material, negative impact on the combined company's operating
results after the asset purchase.
FAILURE TO COMPLETE THE ASSET PURCHASE COULD HARM HIGH SPEED'S STOCK PRICE AND
EACH COMPANY'S FUTURE BUSINESS AND OPERATIONS.
The asset purchase is subject to several closing conditions, including approval
by Summus' shareholders, and we cannot assure you that the asset purchase will
be successfully completed. The announcement of the proposed asset purchase may
have a negative impact on either company's ability to sell its media creation
and media distribution services and technology, attract and retain employees and
clients, and maintain strategic relationships with third parties in the future.
If the asset purchase is not completed, either company may not be able to
restore the status of its business as it existed prior to the announcement of
the asset purchase. Furthermore, if the asset purchase is not completed and High
Speed's Board of Directors determines to seek another asset purchase or business
combination, it may not be able to find a partner with comparable technology,
services or business.
HIGH SPEED AND SUMMUS HAVE INCURRED LOSSES SINCE INCEPTION, AND WE EXPECT THE
COMBINED COMPANY TO INCUR LOSSES FOR THE FORESEEABLE FUTURE.
Both High Speed and Summus incurred net losses and losses from operations for
each period from inception through the first nine months of 2000. As of
September 30, 2000, High Speed had accumulated net losses of approximately $25.6
Million, and as of September 30, 2000, Summus had accumulated net losses of
approximately $18.6 Million. Neither company has achieved profitability to date,
and we expect the combined company to continue to incur
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substantial losses for the foreseeable future. We expect to incur increasing
sales and marketing, research and development and general and administrative
expenses. As a result, we will need to significantly increase our revenue to
achieve profitability. Even if we do achieve profitability, we may not be able
to sustain or increase profitability on a quarterly or annual basis in the
future.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED
The asset purchase will combine two companies that have limited operating
histories. Because each of the companies is still in the early stages of its
development, we will be subject to the risks, expenses and uncertainties
frequently encountered by young companies. It is difficult to predict whether
our media creation and media distribution services will be accepted by the
market, which is evolving rapidly, and the level of revenues we can expect to
derive from sales of our media creation and media distribution services.
Furthermore, several members of our management team have been with us for only a
short period of time. Because of our limited operating histories and evolving
offerings, we have limited insights into trends that may emerge and affect our
business.
WE MAY ASSUME UNKNOWN LIABILITIES
Although we have attempted to contractually limit our liabilities in connection
with the assets we are acquiring from Summus, we cannot guarantee that we will
not be subject to unknown liabilities in connection with our acquisition of
these assets.
FORWARD LOOKING STATEMENTS
We have made forward-looking statements in this document, all of which are
subject to risks and uncertainties. These forward-looking statements have been
made pursuant to the provisions of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements are based on current expectations,
estimates and projections about High Speed's industry, management's beliefs, and
certain assumptions made by management. Forward-looking statements include
information concerning our possible or assumed future business success or
financial results. Such forward-looking statements include, but are not limited
to, statements as to our expectations regarding:
- the future development and growth of, and opportunities for
video commercial e-mail advertising and content distribution
services, the Internet and the on-line media delivery market;
- the future adoption of our planned future services and
technologies;
- future revenue opportunities;
- the establishment and future growth of our customer base;
- our ability to successfully develop and introduce future
services;
- future international revenues;
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- future expense levels (including cost of revenues, research
and development, sales and marketing and general and
administrative expenses);
- future sales and marketing efforts;
- future capital needs;
- the future of our relationships with Summus and other
companies;
- the effect of past and future acquisitions;
- the future effectiveness of our intellectual property rights
should we acquire any such rights;
- the effect of any litigation in which we would become
involved; and
- the effect of the Year 2000 situation.
When we use words such as "believe," "expect," "plan," "intend," "assume,"
"seek," "estimate" and "anticipate" or similar words, we are making
forward-looking statements.
High Speed undertakes no obligation to update publicly any forward-looking
statements as a result of new information, future events or otherwise, unless
required by law. Readers should, however, carefully review the risk factors
included herein or in other reports or documents to be filed by High Speed from
time to time with the Securities and Exchange Commission, particularly the
Quarterly Report on Form 10-Q and any Current Reports on Form 8-K.
We believe that it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. Before you invest in our
common stock, you should be aware that the occurrence of the events described in
this "Factors Effecting Future Results" section and elsewhere in this Form 10-Q
could materially and adversely affect our business, financial condition and
operating results.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. This
discussion contains forward-looking statements that are subject to risks and
uncertainties. Actual results could vary materially as a result of a number of
factors including those set forth in the section entitled "Risk Factors."
We do not use any derivative financial instruments for hedging, speculative or
trading purposes. We do not own any equity investments other than the shares of
Summus. 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 publicly traded.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(c) During the three month period ended September 30, 2000, we have issued
the following securities as described below.
(1) On July 10, 2000, the Company acquired all of the issued and
outstanding capital stock of Douglas May & Co., Inc. ("May &
Co.") by issuing 183,070 shares of common stock to its sole
shareholder Douglas May, valued at $1,376,000. Under the terms
of the acquisition agreement, the 183,070 shares of stock were
issued in three allotments. Under the terms of the
acquisition, the Company issued three allotments of common
stock. The first allotment corresponded to $500,000 of value
and the Company issued 50,000 shares of common stock coupled
with a guarantee that if the OTCBB trading price of the common
stock one year from the close of the transaction is less than
$10.00 per share then the Company will issue additional shares
of common stock to make up the difference in value. The
issuance of shares of the 50,000 shares has been 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 May &
Co. The second allotment corresponded to $576,000 of value and
the Company issued 87,498 shares of common stock coupled with
contractual obligations that (i) the Company 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 the Company to repurchase these shares from him by
making six cash installment payments totaling $576,000 to Mr.
May. The third allotment corresponded to $300,000 of value and
the Company issued 45,572 shares of 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 the Company 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 May & Co., that have been
collected in the amount of $300,000 subsequent to the
acquisition date. Mr. May has not yet elected to have the
Company repurchase these shares. Until the time these
contingencies are 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.
The value of this transaction as recorded for financial
purposes was based on the traded value of our common stock,
which produced a valuation of $1,376,000.
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(2) In July 2000, the Company issued 541,677 shares of its
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 Company also entered into a subscription
agreement for the sale of 108,335 shares of unregistered
common stock and issued warrants to purchase an additional
216,670 shares of common stock for gross proceeds of $500,000.
The subscription receivable was collected in full in October
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 32,500 shares of common stock as a placement
fee.
(3) In July, August and September of 2000, we issued 25,000 shares
of common stock each month pursuant to a settlement agreement
with Mr. Dunavant, which resolved a litigation suit filed in
Florida. The settlement call for the payment of $12,750 per
month and 25,000 share of common stock per month until the
registration of Mr. Dunavant's shares becomes effective.
The sales and issuances of securities in the above transactions were
made in reliance on the exemptions from registration under the Securities Act of
1933, as amended (the "Securities Act"), provided by Section 4(2) thereof,
and/or Regulation D and/or Rule 701 thereunder.
The purchasers of the restricted securities described above represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof. Appropriate legends were affixed to the stock
certificates issued in such transactions. We believe that all recipients of
restricted securities had adequate access, through employment or other
relationships, to information about High Speed to make an informed investment
decision.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: See Index to Exhibit on page 45 for a descriptive
response to this item.
(b) Reports on Form 8-K.
(1) On July 25, 2000, we filed a report on Form 8-K
reporting the acquisition of Douglas May & Co., Inc.
(2) On September 5, 2000 we filed a report on Form 8-K
reporting the letter of intent with Summus, Ltd.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
High Speed Net Solutions, Inc.
By: /s/ Andrew L. Fox
-------------------------------------
Date: November 14, 2000 Andrew L. Fox
----------------- President and Chief Executive Officer
By: /s/ Robert S. Lowrey
-------------------------------------
Date: November 14, 2000 Robert S. Lowrey
----------------- Chief Financial Officer
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EXHIBIT INDEX
The exhibits indicated by an asterisk (*) are incorporated by reference from
previous filings with the Commission.
Exhibit
Number Exhibit Description
------- -------------------
10.1* Share Acquisition Agreement between High Speed Net Solutions,
Inc. and Douglas May (excluding schedules, which will be
supplied to the Commission upon request), effective July 10,
2000 (Exhibit 10.40 to the Company's Registration Statement on
Form S-1 dated July 19, 2000)
10.2* Employment Agreement between High Speed Net Solutions, Inc. and
Douglas May, effective July 10, 2000 (Exhibit 10.41 to the
Company's Registration Statement on Form S-1 dated July 19,
2000)
10.3* Form of License Agreement among Douglas May & Co., Inc., High
Speed Net Solutions, Inc. and Douglas May, effective July 10,
2000 (Exhibit 10.42 to the Company's Current Report on Form 8-K
dated July 25, 2000)
10.4* Form of Escrow Agreement among Douglas May & Co., Inc., High
Speed Net Solutions, Inc. and Douglas May, effective July 10,
2000 (Exhibit 10.43 to the Company's Current Report on Form 8-K
dated July 25, 2000)
10.5* Form of Subscription Agreement between High Speed Net Solutions,
Inc. and AAA Trust and van Ernst Jakobs, dated July 27, 2000
(Exhibit 10.50 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000)
10.6* Form of Selling Shareholder Agreement, dated July 27, 2000
(Exhibit 10.51 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000)
10.7* Form of Warrant to Purchase Shares of Common Stock between High
Speed Net Solutions, Inc. and AAA Trust and van Ernst Jakobs,
dated July 27, 2000 (Exhibit 10.52 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000)
10.8* Systems Work Agreement between HSNS and Nexgenix, Inc. dated
July 27, 2000 (Exhibit 10.42 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 dated October 18, 2000)
10.9* Outsourcing Agreement between HSNS and E.piphany, Inc. dated
July 31, 2000 (Exhibit 10.43 to Amendment No. 1 to the Company's
Registration Statement on Form S-1 dated October 18, 2000)
10.10* Internet Streaming Service Agreement between HSNS and All Video
Network, Inc. dated September 18, 2000 (Exhibit 10.44 to
Amendment No. 1 to the Company's Registration Statement on Form
S-1 dated October 18, 2000)
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Exhibit
Number Exhibit Description
------- -------------------
10.11 Form of Asset Purchase Agreement by and among High Speed Net
Solutions, Inc. and Summus, Ltd., dated October 30, 2000.
27 Financial Data Schedule
46
