<PAGE> 1
EXHIBIT 1.4
Financial Statements
High Speed Net Solutions, Inc.
(A Development Stage Company)
Years ended December 31, 1999 and 1998
with Report of Independent Auditors
<PAGE> 2
High Speed Net Solutions, Inc.
(A Development Stage Company)
Financial Statements
Years ended December 31, 1999 and 1998
CONTENTS
Report of Independent Auditors.................................................1
Financial Statements
Balance Sheets.................................................................2
Statements of Operations.......................................................3
Statements of Stockholders' Equity (Deficit)...................................4
Statements of Cash Flows.......................................................6
Notes to Financial Statements..................................................8
<PAGE> 3
Report of Independent Auditors
The Board of Directors and Shareholders
High Speed Net Solutions, Inc.
We have audited the accompanying balance sheets of High Speed Net Solutions,
Inc. (a development stage company) as of December 31, 1999 and 1998, and the
related statements of operations, stockholders' equity (deficit), and cash flows
for the years ended December 31, 1999 and 1998 and for the period from January
2, 1998 (inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of High Speed Net Solutions, Inc.
(a development stage company) at December 31, 1999 and 1998 and the results of
its operations and its cash flows, for the years ended December 31, 1999 and
1998 and for the period from January 2, 1998 (inception) to December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that High
Speed Net Solutions, Inc. (a development stage company) will continue as a going
concern. As more fully described in Note 2, the Company has incurred operating
losses since inception and will require additional capital in 2000 to continue
operations. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
February 15, 2000, except for Note 12, as to which date is April 24, 2000
Raleigh, North Carolina
1
<PAGE> 4
High Speed Net Solutions, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1999
----------- ------------
(Restated) (Restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,609 $ 248,740
Accounts receivable 7,559 --
----------- ------------
Total current assets 26,168 248,740
Furniture and equipment, net -- 3,720
Investment in common stock of related party -- 1,894,127
Prepaid royalties -- 4,528,125
----------- ------------
Total assets $ 26,168 $ 6,674,712
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Payables to related parties $ 295,558 $ 589,815
Accounts payable and accrued expenses 8,457 99,876
Loss contingency accrual -- 800,000
----------- ------------
Total current liabilities 304,015 1,489,691
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, $.001 par value, authorized 50,000,000 shares; issued
and outstanding 16,651,700 and 21,112,149 shares 16,652 21,112
Additional paid-in capital 1,642,816 17,272,770
Deficit accumulated during the development stage (1,709,696) (11,881,242)
Treasury stock, at cost (38,500 shares) (227,619) (227,619)
----------- ------------
Total stockholders' equity (deficit) (277,847) 5,185,021
----------- ------------
$ 26,168 $ 6,674,712
=========== ============
</TABLE>
See accompanying notes.
2
<PAGE> 5
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31
1998 1999 1999
------------ ------------ ------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C>
Selling, general and administrative expenses $ 374,841 $ 7,515,797 $ 7,890,638
Interest expense -- 2,655,749 2,655,749
------------ ------------ ------------
Loss from continuing operations (374,841) (10,171,546) (10,546,387)
Loss from discontinued operations (1,334,855) -- (1,334,855)
------------ ------------ ------------
Net loss $ (1,709,696) $(10,171,546) $(11,881,242)
============ ============ ============
Per share amounts (basic and diluted):
Loss from continuing operations $ (0.03) $ (0.53) $ (0.74)
============ ============ ============
Loss from discontinued operations $ (0.11) $ -- $ (0.09)
============ ============ ============
Net loss $ (0.14) $ (0.53) $ (0.83)
============ ============ ============
Weighted average shares outstanding 11,898,867 19,080,492 14,324,778
============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 6
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
DATE OF COMMON STOCK
TRANSACTION SHARES PAR VALUE
-------------- ------------ ---------
<S> <C> <C> <C>
Balance at January 2, 1998 (inception) reflecting the
recapitalization of the Company 9,325,000 $ 9,325
Founders shares issued for no consideration Jan. 1998 100 --
Shareholders capital contributions June-July 1998 -- --
Common Stock issued to acquire net assets of Marketers World,
Inc Aug. 1998 1,000,000 1,000
Common stock sold for cash at $0.08 per share Sept. 1998 3,766,600 3,767
Common stock issued for payment of debt to a shareholder
$0.10 per share Sept. 1998 1,550,000 1,550
Treasury stock acquired for cash -- --
Common stock issued for licensing rights at $0.10 per share
(Note 5) Sept. 1998 775,000 775
Common stock issued for services at $0.10 per (Note 8) Sept. 1998 765,000 765
Net loss for the year ended December 31, 1998 -- --
Cancellation of compensatory stock Sept. 1998 (530,000) (530)
------------ --------
Balance at December 31, 1998 (Restated) 16,651,700 16,652
Compensation expense related to grant of stock option to
purchase 1,000,000 shares at no exercise price (Note 8) Feb. 1999 -- --
Common stock sold for cash at $1.08 per share March 1999 118,188 118
Common stock sold for cash at $1.00 per share April 1999 220,000 220
Compensation expense related to grant of options to purchase
825,000 shares at $.01 per share (Note 8) May 1999 -- --
Common stock issued for investment in related party at May 1999 795,001 795
$2.25 per share (Note 8)
Common stock issued for services at $1.53 per share (Note 8) July 1999 85,500 85
Common stock issued for advance royalty payment at $1.52 per
share (Note 4) July 1999 1,500,000 1,500
Common stock issued in exchange for convertible debentures at
$0.55 per share Aug. 1999 4,852,860 4,853
Beneficial conversion feature related to convertible debt Aug. 1999 -- --
(Note 6)
Common stock canceled in connection with merger between High
Speed Net Solutions, Inc. and Marketers World, Inc. in
August 1998 (Note 8) Aug. 1999 (5,161,100) (5,161)
Cancellation of compensatory stock Aug. 1999 (25,000) (25)
Stock option exercises Aug. 1999 1,825,000 1,825
Common stock issued in conjunction with subscription
agreement, 250,000 shares at $1.00 per share (Note 8) Aug. 1999 250,000 250
Compensation expense related to grant of option to purchase
240,000 shares at $.01 per share (Note 8) Sept. 1999 -- --
Net loss for the year ended December 31, 1999 -- --
------------ --------
Balance at December 31, 1999 (Restated) 21,112,149 $ 21,112
============ ========
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE
PAID-IN DEVELOPMENT TREASURY
CAPITAL STAGE STOCK TOTAL
------------- ------------ ------------ -----------
<S> <C> <C> <C>
$ (9,325) $ -- $ -- $ --
-- -- -- --
1,091,648 -- -- 1,091,648
(1,000) -- -- --
313,233 -- -- 317,000
148,270 -- -- 149,820
-- -- (227,619) (227,619)
76,725 -- -- 77,500
75,735 -- -- 76,500
-- (1,709,696) -- (1,709,696)
(52,470) -- -- (53,000)
------------- ------------ ------------ -----------
1,642,816 (1,709,696) (227,619) (277,847)
2,000,000 -- -- 2,000,000
127,382 -- -- 127,500
219,780 -- -- 220,000
1,640,000 -- -- 1,640,000
1,791,332 -- -- 1,792,127
130,729 -- -- 130,814
2,276,625 -- -- 2,278,125
2,650,896 -- -- 2,655,749
2,655,749 -- -- 2,655,749
5,161 -- -- --
(38,225) -- -- (38,250)
(1,825) -- -- --
1,094,750 -- -- 1,095,000
1,077,600 -- -- 1,077,600
- (10,171,546) -- (10,171,546)
------------- ------------ ------------ -----------
$ 17,272,770 $(11,881,242) $ (227,619) $ 5,185,021
============= ============ ============ ===========
</TABLE>
See accompanying notes.
5
<PAGE> 8
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31
1998 1999 1999
----------- ------------ ------------
(Restated) (Restated) (Restated)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Loss from continuing operations $ (374,841) $(10,171,546) $(10,546,387)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of equipment 105,748 -- 105,748
Non cash compensation and consulting charges relating to
stock awards and stock subscriptions -- 5,698,038 5,698,038
Depreciation and amortization 21,900 332 22,232
Common stock issued for services 23,500 92,564 116,064
Interest expense relating to beneficial conversion feature
of convertible debt -- 2,655,749 2,655,749
Changes in operating assets and liabilities:
Prepaid royalties -- (60,000) (60,000)
Accounts receivable (7,559) 7,559 --
Accounts payable and accrued expenses 8,457 91,419 99,876
Loss contingency -- 800,000 800,000
----------- ------------ ------------
Net cash used in operating activities from continuing operations
(291,685) (885,885) (1,177,570)
Net cash used in discontinued operations (1,334,855) -- (1,334,855)
----------- ------------ ------------
Total net cash used in operating activities (1,557,650) (885,885) (2,443,535)
INVESTING ACTIVITIES
Capital expenditures (50,148) (4,052) (54,200)
Cash investment in related party -- (102,000) (102,000)
----------- ------------ ------------
Net cash used in investing activities (50,148) (106,052) (156,200)
FINANCING ACTIVITIES
Proceeds from sale of common stock 317,000 242,062 559,062
Shareholder capital contributions 1,091,648 -- 1,091,648
Advances from stockholders 445,378 430,852 876,230
Repayments to stockholders -- (9,486) (9,486)
Proceeds from issuance of convertible debentures -- 558,640 558,640
Purchase of treasury stock (227,619) -- (227,619)
----------- ------------ ------------
Net cash provided by financing activities 1,626,407 1,222,068 2,848,475
----------- ------------ ------------
Net increase in cash and cash equivalents 18,609 230,131 248,740
Cash and cash equivalents at beginning of year -- 18,609 --
----------- ------------ ------------
Cash and cash equivalents at end of year $ 18,609 $ 248,740 $ 248,740
=========== ============ ============
</TABLE>
6
<PAGE> 9
High Speed Net Solutions, Inc.
(A Development Stage Company)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 2, 1998
(INCEPTION) TO
YEAR ENDED DECEMBER 31 DECEMBER 31
1998 1999 1999
--------- ---------- ----------
<S> <C> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES
Common shares issued for investment in related party $ -- $1,792,127 $1,792,127
========= ========== ==========
Common stock issued in exchange for convertible debentures $ -- $2,665,749 $2,665,749
========= ========== ==========
Common stock issued for prepaid royalties $ -- $2,278,125 $2,278,125
========= ========== ==========
Debentures issued for shareholder advances on behalf of company $ -- $2,097,109 $2,097,109
========= ========== ==========
Common stock issued for payment of debt to stockholder $ 149,820 $ -- $ 149,000
========= ========== ==========
Common stock issued for stockholder advances on behalf of Company $ -- $ 220,000 $ 220,000
========= ========== ==========
</TABLE>
See accompanying notes.
7
<PAGE> 10
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
DECEMBER 31, 1999
1. BUSINESS, ORGANIZATION AND DEVELOPMENT STAGE COMPANY
High Speed Net Solutions, Inc. ("the Company" or "HSNS") was incorporated in
1984 and was inactive until it merged with Marketers World, Inc. ("MWI") on
August 24, 1998. Prior to the merger, HSNS was a non-operating public shell and
MWI was a private operating company. In legal form, this merger was effected by
HSNS issuing its shares in exchange for the net assets of MWI. Total outstanding
shares of HSNS common stock subsequent to the merger were 10,275,000, which
consisted of the 1,000,000 shares outstanding prior to the merger and the
9,275,000 shares issued to acquire the net assets of MWI. At the time of the
merger, HSNS had no assets or liabilities, and accordingly, the transaction was
accounted for as a recapitalization of HSNS, and the outstanding shares are
recorded accordingly.
MWI was incorporated in January 1998 and its planned principal operations were
to lease computer systems to businesses and to distribute Internet oriented
products and perform related services. For the period prior to August 24, 1998
the historical amounts are those of MWI. During 1998, MWI was not able to
execute its planned activities, other than the sale of pilot products and
services, and consequently ceased all operating activities in December 1998. MWI
was subsequently legally dissolved in September 1999. Accordingly, the operating
results of MWI have been presented as discontinued operations for the year ended
December 31, 1998. Revenues of MWI during the year ended December 31, 1998 were
approximately $1,335,300, and the loss totaled $1,334,855. As of December 31,
1998, the Company had completed its disposal of the discontinued operations of
MWI. There were no remaining assets or liabilities related to MWI at December
31, 1998. Results for the year ended December 31, 1999 represent solely the
activity of HSNS which primarily related to raising capital and establishing
strategic relationships. Since the Company has not yet commenced its planned
principal operations and since MWI also never commenced its planned principal
operations, the accompanying financial statements are presented as those of a
development stage company.
In 1984, the Company was incorporated under the name EMN Enterprises, Inc. The
Company was inactive from the time of its incorporation in 1984 until the time
of the MWI transaction in 1998. In September 1998, in conjunction with the MWI
merger, the Company changed its name to ZZAP.NET, Inc. and in January 1999 the
name changed to High Speed Net Solutions, Inc.
8
<PAGE> 11
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. BUSINESS, ORGANIZATION AND DEVELOPMENT STAGE COMPANY (CONTINUED)
In August 1999, Summus Ltd. ("Summus") acquired 51% of the outstanding common
stock of the Company. Subsequently, Summus sold certain of the shares it
acquired and at December 31, 1999, Summus owned 40.7% of the Company's
outstanding common stock. The Company's operating and business strategy is
dependent on the development of Summus' technology and products under the terms
of various agreements between both parties. Summus is developing media
compression and delivery software that the Company intends to use to deliver its
services to its customers.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the basis that High
Speed Net Solutions, Inc. will continue as a going concern. The Company has
incurred operating losses since inception and has experienced negative cash
flows and expects these losses and negative cash flow to continue into the
foreseeable future. The Company's ability to continue operations as a going
concern is predicated on its ability to continue to raise capital, including
significant new capital in 2000, the successful completion of its operational
plan and, ultimately, upon achieving profitable operations.
The accompanying financial statements have been restated to reflect the
write-off of previously capitalized licensing rights at December 31, 1998 as
part of the loss on discontinued operations for that year and to remove the
related amortization expense previously associated with those capitalized
licensing rights from the 1999 statement of operations. The effect of these
changes was to reduce assets and increase the loss from discontinued operations
in 1998 by $68,890 and to reduce selling, general and administrative expenses by
$25,830 in 1999.
3. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
EQUIPMENT AND FURNITURE
Equipment and furniture is stated at cost. Depreciation, as recorded by MWI, was
computed using the straight-line method over the estimated useful lives of the
assets beginning when assets were placed in service. Depreciation expense
amounted to $13,290 for the year ended
9
<PAGE> 12
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 31, 1998. Based on the discontinuance of MWI's operations in 1998,
along with no future alternative use, the net book value of MWI's equipment and
furniture at December 31, 1998, totaling $36,858, was written off.
PREPAID ROYALTIES
Prepaid royalties represent prepayments made to Summus under various agreements
further described in Note 4. As future revenues from services subject to the
provisions of these agreements are earned, the prepaid royalties will be charged
to royalty expense. Credits earned under the SLA (see description in Note 4)
will be applied directly to reduce the prepaid balances and the remaining amount
will be amortized over the term of the agreements.
Management will assess, on a going forward basis, the need for any impairment
charges related to the realization of these amounts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of unrestricted cash accounts and highly
liquid investments with an original maturity of three months or less when
purchased.
STOCK BASED COMPENSATION
The Company accounts for stock based compensation under the provisions of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related interpretations. In accordance with APB 25,
the Company has valued employee stock awards and stock issued to employees for
services performed based on the traded value of the Company's common stock, or
its estimated fair value prior to it becoming traded, at the measurement date of
the stock options and awards.
INCOME TAXES
Income taxes are accounted for using the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes
(See Note 10).
LOSS PER SHARE
Loss per share has been calculated in accordance with Statement of Financial
Accounting Standards No. 128 "Earnings per Share." The Company has potential
common stock equivalents
10
<PAGE> 13
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
related to its outstanding stock options. These potential common stock
equivalents were not included in loss per share for all periods because the
effect would have been antidilutive.
INVESTMENT IN COMMON STOCK OF RELATED PARTY
Investment in common stock of related party represents the Company's 14.0%
ownership interest in Summus (see Note 8). The Company accounts for its
investment in Summus using the cost method. Under this method, the investment is
recorded at its historical cost. Although the market value of this investment is
not readily determinable, management believes its fair value is not less than
its carrying amount.
REVENUE RECOGNITION
Revenue was recognized by MWI when products were shipped and services were
performed. Operating activity for MWI has been presented as discontinued
operations for the year ended December 31, 1998. To date, no revenues have been
generated by HSNS. On a prospective basis, the Company expects to generate
revenue from the sale of services such as design and execution of email
marketing campaigns and advertising design. Revenue from such services will
include upfront fees and a fee based on the number of emails delivered. Revenue
will be recognized when each campaign is completed and there are no significant
remaining obligations, and collection of the fee is probable. Advertising design
revenues will be recognized at the time the services are rendered based upon the
terms of individual contracts.
The Company is entitled to receive a percentage of revenues Summus earns from
third party licenses of its products for rich media distribution as well as
revenue sharing with respect to sales to a potential customer (See Note 4).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, The Financial Accounting Standards Board issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which is required to be adopted in years beginning after June 15, 2000. Because
of the Company's minimal use of derivatives, management does not anticipate that
the adoption of the new statement will have a significant effect on operations
or the financial position of the Company.
11
<PAGE> 14
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
MWI expensed advertising costs as incurred. Advertising expense was
approximately $128,000 for the year ended December 31, 1998. To date, High Speed
Net Solutions has not incurred any advertising expense.
4. PREPAID ROYALTIES
In February 1999, the Company entered into a Marketing and Licensing Agreement
("MLA") with Summus. As consideration for this agreement, the Company prepaid
royalty payments to Summus. The amount of prepaid royalties consists of cash
payments of $2,250,000 ($2,190,000 of which was made by a stockholder on behalf
of the Company) and the issuance of 1,500,000 shares of the Company's common
stock valued at $2,278,125, for a total aggregate value of $4,528,125. The value
assigned to the 1,500,000 common shares was based on the traded value of the
Company's common stock on the date of the transaction. This amount is presented
as a non-current asset in the accompanying balance sheet as of December 31,
1999.
The Shareholder of the Company who made the cash payments to Summus on behalf of
the Company controlled a trust which owned 8.2% of Summus Technologies, Inc. On
August 16, 1999, Summus Technologies, Inc. and Summus, Ltd. merged (see note 8).
The Company recorded a payable to the shareholder which was subsequently offset
by debentures issued to the shareholder (see Note 6).
In January 2000, the Company and Summus entered into a Master Agreement, which
includes a Software License Agreement ("SLA"), a Software Maintenance Agreement
("SMA") and an Agency and a Revenue Sharing Agreement ("RSA") (collectively with
the Master License Agreement, the "New Agreements"). The New Agreements entirely
replace the MLA entered in February 1999.
The SLA gives the Company the right to license Summus' current and future
products for digital content management solutions for rich media distribution.
Additionally, the SLA gives the Company non-exclusive rights to distribute
wavelet encoded content over the Internet or over private network environments
for the purposes of advertising or content delivery. The Company will be
credited for the $1.0 million upfront license fee due under the SLA from the
prepayments made under the MLA. Upon commencement of the SLA, this $ 1.0 million
will be amortized on a straight-line basis over the six-year term of the SLA.
The remaining amount of the Prepaid Royalties will be charged to royalty expense
on a systematic basis, as revenues are earned, over the term of the agreement.
The Company is also required to make ongoing payments equal to 10% of revenues
generated from use of the Summus' products, as defined in the agreement. The
12
<PAGE> 15
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. PREPAID ROYALTIES (CONTINUED)
Company was granted a $1.0 million credit, from the prepayments made under the
MLA, for such payments. The Company has been granted other rights under the SLA
which are defined in the agreement. The SLA has a term of six years.
The RSA entitles the Company to receive 20% of all revenues that Summus receives
from third party licenses of its products for rich media distribution. For all
customers that the Company refers to Summus for technology licensing, consulting
or other product or services sales, the Company will receive 15% of the first
year revenue earned by Summus. The RSA also provides for revenue sharing with
respect to sales to a potential customer by either the Company or Summus.
Revenue earned from this customer in the first two years by either the Company
or Summus will be shared equally between both parties. Beginning in the third
year, 40% of revenue earned by the Company will be remitted to Summus decreasing
to 20% in the final two years. Conversely, 40% of revenue earned by Summus in
the third year and 20% of revenue earned by Summus in years four, five and six
will be shared with the Company.
Under the new agreements discussed above, the Company is required to make annual
payments to Summus for approximately $ 180,000 in return for software
maintenance and upgrades. The payment for the first year beginning February 2000
has been waived. The Company will recognize the aggregate amount of the annual
fees on a straight-line basis over the entire six-year term of the agreements.
5. LICENSING RIGHTS
In September 1998, the Company issued 775,000 shares of its common stock, valued
at $77,500 for all of the issued and outstanding common stock of Brad Richdale
Direct, Inc. ("BRD"). The primary purpose of this transaction was to obtain
certain licensing and marketing rights held by BRD for certain products to be
developed by Summus. Since BRD had nominal assets and operations, this
transaction was accounted for as an acquisition of licensing rights, rather than
as a business combination. The value of this transaction was based on recent
transactions in the Company's common stock on the date of the transaction. The
products to be delivered by Summus under these licensing rights were to be used
in the planned operations of MWI. Since these products were not completed by the
end of 1998 and in connection with the discontinuance of MWI operations, the
Company abandoned its rights to these yet-to-be delivered products. Accordingly
the net book value of these costs of $68,890 was written off at December 31,
1998 and is included as part of the loss on discontinued operations.
13
<PAGE> 16
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. CONVERTIBLE DEBENTURES
During 1999, the Company issued $2,655,749 in convertible debentures (the
"debentures") to officers, stockholders and third parties. These debentures were
issued in exchange for both cash of $558,640 and in partial satisfaction of
advances of $2,097,109 from a stockholder of the Company. The remaining amounts
owed to the stockholder are included in Payables to Related Parties in the
Company's balance sheet. The debentures were convertible into the Company's
common stock at conversion prices ranging from $0.25 to $1.33 per share (all of
which were substantially "in-the-money" at date of issuance).
Shortly after the issuance of the debentures, the debenture holders exercised
the conversion feature and converted all outstanding debentures into 4,852,860
shares of the Company's common stock. The debentures were convertible at the
date of issuance. Since the conversion price of the debentures was below the
fair market value of the common stock, the Company recorded a $2,655,749
beneficial conversion feature as debt discount and additional paid-in-capital on
the date the debentures were issued. The resulting interest expense was
immediately recognized because the debentures were convertible upon issuance.
As of December 31, 1999, all debentures had been converted.
7. RELATED PARTY TRANSACTIONS
As of December 31, 1999 Summus holds a 40.7% ownership interest in the Company.
The Company's operating and business strategy is dependent on the development of
Summus' technology and products under the New Agreements. Summus is developing
media compression and delivery software that the Company has rights to use to
deliver services to its customers under its various agreements with Summus.
During 1999, Summus funded certain expenses of the Company. For the year ended
December 31, 1999, Summus paid $154,000 of operating expenses on behalf of the
Company. This amount is owed to Summus and is included in Payables to Related
Parties in the accompanying balance sheet at December 31, 1999.
Payables to related parties, also includes advances made to the Company from a
former majority shareholder during 1998 and 1999. These amounts are unsecured
and are payable on demand.
8. STOCKHOLDERS' EQUITY
On June 20, 1998, the Company amended its articles of incorporation to increase
the number of authorized shares of its $.001 par value common stock to
50,000,000 and to effect a 200 for one stock split thereby increasing its issued
and outstanding shares to 1,000,000. The Company has
14
<PAGE> 17
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
5,000,000 authorized shares of $.001 par value preferred stock. No preferred
shares have ever been issued and outstanding as of December 31, 1999.
During the year ended December 31, 1998 the Company issued 765,000 shares of its
stock to employees for services rendered. These shares were valued at $76,500
based on the estimated fair value of the common stock, as determined by a recent
sale of the Company's common stock. At that time, the Company's common stock was
not publicly traded. During the year ended December 31, 1999, the Company issued
85,500 shares of common stock to employees for services rendered. These shares
were valued at $130,814 based on the traded value of the common stock.
During 1998, the Company acquired 38,500 shares of its common stock for $227,619
in cash and currently holds these shares as treasury stock.
In August 1999, the Company issued 795,001 shares of its common stock valued at
$1,792,127, along with a cash payment of $102,000, to acquire 1,000,182 shares
of common stock, or 19%, of Summus Technologies Inc. The value assigned to these
shares was based on the traded value of the Company's common stock.
Subsequently, Summus Technologies, Inc. and Summus Ltd. merged. Summus Ltd. was
the surviving entity. The Company's ownership in Summus Ltd. after the merger
was 16.7% and as of December 31, 1999 is 14.0%. The Company's shares of Summus
Ltd. are subject to a shareholder agreement, which restricts the Company's
ability to transfer or sell its shares without first granting Summus Ltd. the
opportunity to purchase them.
In August 1999, former management of the Company entered into a stock
subscription agreement with a related party. The agreement provided for the
Company to sell 250,000 shares of its common stock for $1.00 per share. Since
the subscription price was below the fair market value of the underlying stock
on the date of the agreement, $845,000 of expense related to this transaction
has been charged to the statement of operations in 1999.
Stock Options
During 1999, the Company granted to certain employees and directors 2,520,000
stock options that had exercise prices below the fair value of the underlying
common stock. Compensation expense of $4,717,600 has been recognized based upon
the difference between the exercise price and the traded value of the common
stock on the date of grant. These options vested immediately upon issuance and
1,825,000 of these options were exercised during 1999. Unexercised options
expire between 5 and 10 years from date of grant.
15
<PAGE> 18
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
In connection with a 200,000 stock option grant, the optionee received
protection from potential dilution resulting from future issuances of the
Company's securities, as defined. The maximum number of common shares issuable
under this agreement is 400,000.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123; "Accounting for Stock-Based
Compensation." As permitted by the provisions of SFAS No. 123, the Company
continues to follow Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations for its stock-based
awards.
A summary of the Company's stock option activity is as follows:
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
Outstanding - December 31, 1998 -- $ --
Granted 2,520,000 1.21
Exercised (1,825,000) 0.06
---------- --------
Outstanding - December 31, 1999 695,000 2.29
========== ========
The following table summarizes information about stock options outstanding at
December 31, 1999:
OPTIONS OUTSTANDING
------------------------------------------------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE
---------------- ----------- ---------------- ----------------
$ .01 240,000 5 years $ .01
2.00 - 4.38 295,000 6.9 years 3.45
10.00 - 13.00 160,000 7 years 13.00
-----------
695,000 6.4 years 5.70
===========
OPTIONS EXERCISABLE
-------------------------------
RANGE OF NUMBER WEIGHTED AVERAGE
EXERCISE PRICES EXERCISABLE EXERCISE PRICE
---------------- ----------- ----------------
$ .01 240,000 $ .01
2.00 - 4.38 165,000 4.00
10.00 - 13.00 -- --
-----------
405,000 1.18
===========
16
<PAGE> 19
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
In accordance with SFAS 123, the fair value of each option grant was determined
by using the Black-Scholes option pricing model with the following weighted
average assumptions for the twelve month period ended December 31, 1999:
dividend yield of 0%; volatility of 2.054; risk free interest rate of 4.25% and
expected option lives of 5 years. The weighted average fair value at the date of
grant was $2.29 per option. Had the compensation expense for the Company's stock
options been determined based on the fair value at the date of grant consistent
with the provisions of SFAS 123, the Company's net loss and net loss per share
would have been $13.5 million and $.71 for the twelve months ended December 31,
1999.
During August 1999, the Company negotiated and Board of Directors approved the
cancellation of 5,161,100 shares of its common stock which were originally
issued in connection with the merger between the Company and MWI. This
cancellation was a result of MWI ceasing its operations in 1998. Both the
majority holder of these shares and the Company agreed that the initial purchase
price was over valued and accordingly, the shares were voluntary returned to the
Company and the Company then canceled the shares. Since no value was ascribed to
the initial shares issued in connection with the MWI merger, no value was
ascribed to the subsequent cancellation. Also during 1999, the Company executed
the cancellation of 555,000 shares of its common stock, 530,000 of which were
originally issued in 1998 and 25,000 issued in 1999 for services rendered by an
employee for a total value of $91,250. During 1999, it was determined that these
services had not been performed satisfactorily and therefore the common stock
was voluntarily returned to the Company and canceled.
9. LEASES
During 1999, the Company established it headquarters in Raleigh, North Carolina
and entered into a noncancelable lease for office space and certain office
equipment. Rent expense incurred during the twelve months ended December 31,
1999 was $11,375.
The following is a schedule of future minimum lease payments for operating
leases:
2000 $ 32,973
2001 32,973
2002 32,973
2003 32,973
2004 32,973
----------
$ 164,865
==========
17
<PAGE> 20
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
9. LEASES (CONTINUED)
During 1998, MWI leased its office facility and certain office equipment under
noncancelable operating leases, all which were terminated in 1998. Total rent
expense incurred in 1998 by MWI was approximately $40,000.
10. INCOME TAXES
No provision for income taxes has been recorded during the current year due to
the Company's significant losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are as follows:
DECEMBER 31 DECEMBER 31
1998 1999
----------- -----------
Deferred tax assets:
Net operating loss carryforwards $ 57,000 $ 224,000
Start-up expenses 134,000 100,500
Related party expenses 178,000 234,000
Other deductible temporary differences 79,000 79,000
----------- -----------
Total deferred tax assets 448,000 637,500
Deferred tax asset valuation allowance (448,000) (637,500)
----------- -----------
Net deferred taxes $ -- $ --
=========== ===========
Management has determined that a 100% valuation allowance for existing deferred
tax assets is appropriate given uncertainty regarding the ultimate realization
of any such assets.
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $560,000 for income tax purposes. The tax benefit
of these carryforwards are reflected in the above table of deferred tax assets.
If not used, these carryforwards begin to expire in 2018 for federal tax
purposes and in 2003 for state tax purposes. U. S. tax rules impose limitations
on the use of net operating losses following certain changes in ownership. If
such a change occurs, the limitation could reduce the amount of these benefits
that would be available to offset future taxable income each year, starting with
the year of ownership change.
18
<PAGE> 21
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
11. COMMITMENTS
In December 1999, the Company entered into a consulting agreement whereby the
consulting firm received options rights to purchase, up to 200,000 shares of the
Company's common stock at an exercise price of $10.00 per share. The options
vest and become exercisable in increments of 50,000 shares based on the
achievement of certain levels of revenue earned by the Company. As of December
31, 1999, no options were vested under this agreement. These options will be
accounted for under the provisions of FAS 123.
In October 1999, the Company entered into a consulting agreement whereby the
consultant will receive the rights to purchase 2,000 shares of the Company's
common stock based on the achievement of revenue, as defined, from a potential
customer of the Company and Summus. The Company is also obligated to pay the
consultant 4% of all revenue the Company earns from this potential customer. As
revenues earned from this potential customer increase, the consultant has the
right to proportionally receive more shares based on the higher levels of
revenues earned. As of December 31, 1999, no amounts have been earned under this
agreement. As options are granted, they will be accounted for under the
provisions of FAS 123.
All non-employee and non-director stock option grants will be valued on the
appropriate measurement date using the Black Scholes option-pricing model. The
weighted average assumptions to be used in this option-pricing model include the
dividend yield, volatility, risk free interest rate and the expected option
life.
12. SUBSEQUENT EVENTS
In January 2000, a former shareholder of Summus Technologies, Inc., who received
350,000 shares of HSNS common stock and $100,000 in cash in exchange for his
shares of Summus Technologies, Inc. stock (see Note 8) has filed a lawsuit
against the Company seeking damages of $13.3 million resulting from the
Company's alleged failure to register such shares under the Securities Act of
1933 (the "Act"). Under an agreement between the former shareholder and the
Company, the Company is required to issue and include in a registration
statement under the Act additional 25,000 shares of the Company's common stock
for each additional month that passes subsequent to the Company's initial
deadline date to register the 350,000 shares. Management is attempting to settle
this matter out-of-court. The Company as accrued $800,000 for settlement of this
matter, representing management's best estimate of the ultimate outcome.
However, the ultimate exposure could be more or less, depending on the outcome
of settlement discussions the length of time that passes prior to the
effectiveness of a registration statement covering shares of the Company held by
the plaintiff and the ultimate value of the Company's shares on the date of
settlement. Because the matter is expected to be resolved by issuing additional
shares, the
19
<PAGE> 22
High Speed Net Solutions, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
12. SUBSEQUENT EVENTS (CONTINUED)
ultimate outcome is not expected to have an adverse impact on the Company's
liquidity or cash flow.
On April 24, 2000, the Company acquired 100% of the issued and outstanding
shares of common stock of JSJ Capital Corp., a Nevada Corporation ("JSJ"), in
exchange for 50,000 shares of 144 restricted common stock of the Company. As a
result of HSNS's 100% ownership of JSJ, the Board of Directors of HSNS approved
the merger of JSJ into HSNS whereby HSNS will be the surviving corporation. The
acquisition was accounted for as an issuance of HSNS common stock in exchange
for the net monetary assets of JSJ, accompanied by a recapitalization.
The 50,000 shares issued by the Company in connection with the acquisition of
JSJ are considered a nominal issuance to effect the acquisition. All shares and
per share data presented herein have been restated to reflect the issuance of
these shares. The pro forma impact of the JSJ acquisition is a $400,000 charge
to retained earnings on the Company's balance sheet, representing cash legal
fees paid in excess of the net assets acquired.
This charge was recognized in earnings upon consummation of the acquisition.
Subsequent to year-end, the Company entered into a settlement agreement with
William Dunavant and Michael Cimino to resolve a litigation suit filed in
Florida. The settlement agreement provides, among other things, that the Company
register 350,000 shares of common stock with the Securities and Exchange
Commission.
20
