10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ---------- (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2000. [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ___________ to ___________. COMMISSION FILE NUMBER 000-26153 ---------- HIGH SPEED ACCESS CORP. (Exact name of Registrant as specified in its charter) DELAWARE 61-1324009 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 4100 EAST MISSISSIPPI AVENUE DENVER, COLORADO 80246 (Address of principal executive offices, including zip code) 303/256-2000 (Registrant's telephone number, including area code) FORMER NAME, FORMER ADDRESS, AND FORMER YEAR, IF CHANGED SINCE LAST REPORT: NOT APPLICABLE ---------- 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. YES [X] NO [ ] Number of shares of Common Stock outstanding as of August 3, 2000. . .55,690,559 2 Index
PAGE Part I - Financial Information Item 1 - Condensed Consolidated Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 1999 3 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2000 and 1999 (Unaudited) 4 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 (Unaudited) 5 Notes to Condensed Consolidated Financial Statements (Unaudited) 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3 - Quantitative and Qualitative Disclosures About Market Risk 24 Part II - Other Information Item 1 - Legal Proceedings 24 Item 2 - Changes in Securities and Use of Proceeds 24 Item 3 - Defaults upon Senior Securities 24 Item 4 - Submission of Matters to a Vote of Security Holders 25 Item 5 - Other Information 25 Item 6 - Exhibits and Reports on Form 8-K 25 Signatures 26
2 3 Part I. Financial Information Item 1. Financial Statements HIGH SPEED ACCESS CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, DECEMBER 31, 2000 1999 ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 56,070 $ 53,310 Short term investments 67,439 125,420 Accounts receivable, net of allowance for doubtful accounts of $165 and $63, respectively 854 393 Prepaid expenses and other current assets 4,096 4,308 ------------ ------------ Total current assets 128,459 183,431 Property, equipment and improvements, net 54,541 39,308 Intangible assets, net 2,748 3,300 Deferred distribution agreement costs, net 9,484 4,042 Other assets 1,540 345 ------------ ------------ Total assets $ 196,772 $ 230,426 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 9,716 $ 10,226 Accrued compensation and related expenses 3,850 3,842 Other current liabilities 8,198 3,916 Long-term debt, current portion 2,486 1,527 Capital lease obligations, current portion 4,385 3,176 ------------ ------------ Total current liabilities 28,635 22,687 Long-term debt 3,417 4,035 Capital lease obligations 6,961 7,574 ------------ ------------ Total liabilities 39,013 34,296 ------------ ------------ Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued and outstanding Common stock, $.01 par value, 400,000,000 shares authorized, 55,688,234 and 54,276,130 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively 557 543 Class A common stock, 100,000,000 shares authorized, none issued and outstanding Additional paid-in-capital 635,955 618,823 Deferred compensation (240) (288) Accumulated deficit (479,035) (422,807) Accumulated other comprehensive income (loss) 522 (141) ------------ ------------ Total stockholders' equity 157,759 196,130 ------------ ------------ Total liabilities and stockholders' equity $ 196,772 $ 230,426 ============ ============
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 4 HIGH SPEED ACCESS CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED --------------------------- --------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Net revenue $ 2,757 $ 641 $ 4,751 $ 940 Costs and expenses: Operating 14,844 4,027 30,790 6,150 Engineering 5,479 2,071 10,391 3,556 Sales and marketing 6,249 3,619 12,465 5,657 General and administrative (excluding non-cash compensation expense from stock options) 5,107 2,361 9,140 3,647 Non-cash compensation expense from stock options 24 1,157 48 2,680 Amortization of distribution agreement costs 891 3,305 1,116 3,305 ------------ ------------ ------------ ------------ Total costs and expenses 32,594 16,540 63,950 24,995 ------------ ------------ ------------ ------------ Loss from operations (29,837) (15,899) (59,199) (24,055) Investment income 1,866 647 3,991 766 Interest expense (530) (1,020) ------------ ------------ ------------ ------------ Net loss (28,501) (15,252) (56,228) (23,289) Mandatorily redeemable convertible preferred stock dividends -- (604) -- (1,122) Accretion to redemption value of mandatorily redeemable convertible preferred stock -- (123,916) -- (229,148) ------------ ------------ ------------ ------------ Net loss available to common stockholders $ (28,501) $ (139,772) $ (56,228) $ (253,559) ============ ============ ============ ============ Basic and diluted net loss available to common stockholders per share $ (0.52) $ (7.47) $ (1.03) $ (20.30) ============ ============ ============ ============ Weighted average shares used in computation of basic and diluted net loss available to common stockholders per share 55,232,317 18,711,305 54,780,674 12,490,214
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 5 HIGH SPEED ACCESS CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (DOLLARS IN THOUSANDS) (UNAUDITED)
2000 1999 --------- --------- OPERATING ACTIVITIES Net loss $ (56,228) $ (23,289) Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 7,599 2,237 Non-cash compensation expense from stock options 48 2,680 Amortization of distribution agreement costs 1,116 3,305 Changes in operating assets and liabilities excluding the effects of acquisitions: Accounts receivable (461) (380) Prepaid expenses and other current assets 212 (1,328) Other non-current assets (1,195) (656) Accounts payable 309 2,904 Accrued compensation and related expenses 8 396 Other current liabilities 4,282 1,539 --------- --------- Net cash used in operating activities (44,310) (12,592) --------- --------- INVESTING ACTIVITIES Purchases of short-term investments (65,883) -- Sales and maturities of short-term investments 124,527 -- Purchase of property, equipment and improvements, net of leases (19,525) (11,612) Purchase of customer base -- (290) --------- --------- Net cash provided by (used in) investing activities 39,119 (11,902) --------- --------- FINANCING ACTIVITIES Net proceeds from issuance of common stock 10,000 197,754 Net proceeds from issuance of mandatorily redeemable convertible preferred stock -- 24,987 Payments on capital lease obligations (2,978) (73) Proceeds from long-term debt 1,213 1,682 Payments on long-term debt (872) (104) Proceeds from exercise of stock options 588 -- Other -- 560 --------- --------- Net cash provided by financing activities 7,951 224,806 --------- --------- Net change in cash and cash equivalents 2,760 200,312 Cash and cash equivalents, beginning of period 53,310 17,888 --------- --------- Cash and cash equivalents, end of period $ 56,070 $ 218,200 ========= ========= SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment acquired under capital leases $ 3,574 $ 1,780 Property and equipment purchases payable $ 2,547 $ 3,006 Distribution of Darwin Networks, Inc. subsidiary to shareholders $ -- $ 923 Warrants issued in connection with acquisitions $ -- $ 208 Warrants issued in connection with Microsoft Corp. agreements $ -- $ 3,235 Warrants earned in connection with distribution agreements $ 6,558 $ 684
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 6 Item 1 - Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 - The Company and Basis of Presentation The Company High Speed Access Corp. and Subsidiaries (hereinafter referred to as the Company, we, us, or our) provides high speed Internet access via cable modem to residential and commercial customers primarily in exurban areas. The Company enters into long-term exclusive contracts with cable system operators to provide them with a comprehensive "turnkey" service. That service enables a cable system's customers to receive high speed Internet access. In exchange for providing the Company with access to its customers, the Company pays the cable operator a portion of the monthly fees received from an end user that subscribes to the services. The Company also offers to our cable partners a partial turnkey or "Network Services" solution. In a partial turnkey solution, the Company delivers fewer services and incurs lower costs than in a full turnkey solution but also earns a smaller percentage of the subscription revenue or a fixed fee on a per subscriber basis. The Company's cable partners will typically bill the end user and remit the Company's percentage of the revenue or the fixed fee. The Company anticipates that partial turnkey solutions will become a more significant part of its business mix. The Company also provides standard Internet access through traditional dial-up service to residential and commercial customers. We are also expanding our offering of services to include digital subscriber line ("DSL") Internet access on a reseller basis, as well as expanded web site hosting and a range of other value-added and ongoing support services, all primarily for commercial customers. We recently entered into an agreement to acquire Digital Chainsaw, Inc., d/b/a NetPerformance ("NetPerformance"), a one-stop provider of strategic Internet services primarily to small and medium sized enterprises, including web hosting, web site and creative design, legacy systems integration and overall strategic consulting. Moreover, we are conducting technical and customer trials for voice-over-Internet-Protocol ("VoIP") telephone service in collaboration with Lucent Technologies ("Lucent") and other major vendors. We also intend to continue expanding our suite of core connectivity and related value-added services as broadband technology proliferates and additional services become viable. Basis of Presentation The unaudited condensed consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly present the Company's financial position, results of operations and cash flows for the periods presented. Certain information and footnote disclosures normally included in audited financial information prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission's rules and regulations. The results of operations for the period ended June 30, 2000 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2000. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported results of operations during the reporting period. Actual results could differ from those estimates. Note 2 - Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging Activities" (SFAS 133), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133, as amended by SFAS 137 and 138, is effective for the Company's year ending December 31, 2001. As the Company does not currently engage in or plan to engage in derivative, or hedging transactions, there will be no impact on the Company's results of operations, financial position or cash flows upon the adoption of SFAS 133. 6 7 In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements". SAB 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles to revenue recognition. All registrants are expected to apply the accounting and disclosure requirements that are described in SAB 101, as amended, no later than the fourth quarter of the fiscal year beginning after December 15, 1999. Management of the Company is currently analyzing the impact of SAB 101 but anticipates that the adoption of SAB 101 will not have a material effect on the Company's results of operations or financial position. Note 3 - Net Loss Per Share The Company computes net loss per share under the provisions of SFAS No. 128 "Earnings per Share" (SFAS 128) and SEC Staff Accounting Bulletin No. 98 (SAB 98). Under the provisions of SFAS 128, basic and diluted net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share excludes potential common shares if the effect is antidilutive. Basic and diluted net loss available to common stockholders per share for the three months ended June 30, 2000 and 1999, were $0.52 and $7.47 based on weighted average shares outstanding of 55,232,317 and 18,711,305, respectively. For the six months ended June 30, 2000 and 1999, basic and diluted net loss available to common stockholders were $1.03 and $20.30 based on weighted average shares outstanding of 54,780,674 and 12,490,214, respectively. Diluted earnings per share is determined in the same manner as basic earnings per share except that the number of shares is increased assuming exercise of dilutive stock options and warrants using the treasury stock method and assuming conversion of the Company's preferred stock. In addition, income or loss is adjusted for dividends and other transactions relating to preferred shares for which conversion is assumed. The diluted earnings per share amount equals basic earnings per share because the Company has a net loss, thus the impact of the assumed exercise of the stock options and the assumed preferred stock conversion is antidilutive. Options and issued warrants to purchase 5,387,718 shares of common stock at June 30, 2000 were excluded from the calculation above because they are antidilutive. In addition, there is a potential to issue additional warrants pursuant to the agreements set forth in Note 5. These potential warrants have been excluded from the calculation above because they are not currently measurable and would be antidilutive. In the future, the Company also may issue additional stock or warrants to purchase its common stock in connection with its efforts to expand the distribution of its services. Stockholders could face additional dilution from these possible future transactions. Note 4 - Comprehensive Loss Comprehensive loss, comprised of net loss before mandatorily redeemable convertible preferred stock dividends and accretion to redemption value of mandatorily redeemable convertible preferred stock and net unrealized holding gains and losses on investments, totaled $27.3 million and $55.6 million for the three and six months ended June 30, 2000, respectively, and $15.3 million and $23.3 million for the three and six months ended June 30, 1999, respectively. Note 5 - Distribution Agreements As an inducement to certain cable partners to commit systems to the Company, the Company issues warrants to purchase its common stock in connection with network service agreements and other agreements, collectively referred to as distribution agreements. The Company values warrants to purchase its common stock using an accepted options pricing model based on the value of the stock when the warrants are earned. The Company recognizes an addition to equity for the fair value of any warrants issued, and recognizes the related expense over the term of the agreement with the cable system to which the warrants relate, generally five years, in accordance with Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments that are Issued to other than Employees for Acquiring or in Conjunction with Selling, Goods or Services." In May 2000, the Company entered into a network services agreement with Charter Communications (Charter). Under this agreement, Charter committed to provide the Company exclusive right to provide network services related to the delivery of Internet access to homes passed in certain cable systems. The Company will provide partial turnkey services or "Network Services", including system monitoring and 7 8 security as well as call center support. Charter will receive the warrants described in the following paragraph as an incentive to provide the Company additional homes passed, although it is not obligated to do so. Charter can terminate these exclusivity rights, on a system-by-system basis, if the Company fails to meet performance specifications or otherwise breaches the agreement. The agreement has an initial term of five years and may be renewed at Charter's option for additional successive five-year terms. In connection with the network services agreement, the Company and Charter entered into an amended and restated warrant to purchase up to 12,000,000 shares of our common stock at an exercise price of $3.23 per share and terminated two warrants that had been issued to Charter in November 1998. The new warrant becomes exercisable at the rate of 1.55 shares for each home passed committed to us by Charter under the network services agreement entered into by Charter and us in November 1998. The warrant also becomes exercisable at the rate of .775 shares for each home passed committed to us by Charter under the network services agreement entered into in May 2000 up to 5,000,000 homes passed, and at a rate of 1.55 shares for each home passed in excess of 5,000,000. Charter also has the opportunity to earn additional warrants to purchase shares of our common stock upon any renewal of the May 2000 agreement. Such a renewal warrant will have an exercise price of $10 per share and will be exercisable to purchase one-half of a share for each home passed in the systems for which the May 2000 agreement is renewed. With respect to each home passed launched or intended to be launched on or before the second anniversary date of the second network services agreement, the Company will pay Charter, at Charter's option, a launch fee of $3.00 per home passed committed. As of June 30, 2000, Charter had requested payment of approximately $2.7 million of launch fees related to systems to be deployed in the near future. As of June 30, 2000, various cable partners had earned 1,215,623 warrants under distribution agreements of which 1,016,879 of these warrants were earned at a cost of $6.6 million in the three months ended June 30, 2000. Deferred distribution agreement costs of $9.4 million, net of accumulated amortization of $1.6 million were recorded in conjunction with these warrants at June 30, 2000. Amortization of distribution agreement costs of $0.9 million and $1.1 million was recognized in the statement of operations for the three and six months ended June 30, 2000. Additional deferred distribution agreement costs may be recorded and amortized in future periods should the cable partners earn the right to purchase additional common shares based on the number of homes passed committed to the Company. At June 30, 2000 there were 16.6 million additional warrants available to be earned under distribution agreements. Note 6 - Commitments and Contingencies The Company is not a party to any material legal proceedings. In the opinion of management, the amount of ultimate liability with respect to any known actions will not materially affect the financial position of the Company. Note 7 - Business Developments In May 2000, Lucent Technologies (Lucent) purchased 1,250,000 shares of the Company's common stock at fair value for total proceeds to the Company of $10.0 million. In addition, Lucent and the Company entered into a general agreement whereby Lucent will provide equipment and services to the Company with an initial purchase commitment by the Company of $5.0 million. In June 2000, the Company entered into an agreement to acquire Digital Chainsaw, Inc. (Digital), a Florida-based web hosting and systems integration company doing business as NetPerformance. The Company expects to issue approximately 3.1 million shares of common stock in connection with this transaction in exchange for all of the outstanding shares of Digital. Up to $25.0 million of additional purchase price consideration in the form of the Company's common stock may be issued to Digital shareholders if certain performance targets are met by Digital during 2000 and 2001. The transaction is expected to close in the third quarter of 2000, subject to the approval of Digital's shareholders. The transaction will be accounted for under the purchase method of accounting. Note 8 - Subsequent Event In August 2000 we announced an agreement in principle with Vulcan and Charter, under which Vulcan and Charter would make an aggregate preferred equity investment of $75 million. Under the agreement in principle Vulcan and Charter will invest approximately equal amounts. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations This Quarterly Report on Form 10-Q contains certain statements of a forward-looking nature relating to future events or the future financial performance of the Company. Such statements are only predictions, involve risks and uncertainties, and actual events or results may differ materially from the results discussed in the forward-looking statements. Factors that could cause or contribute to such differences include those discussed below under the heading "Risk Factors" as well as those discussed in other filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. Overview We are a leading provider of high speed Internet access to residential and commercial end users primarily using cable modem 8 9 technology. We primarily focus on residential and commercial end users in exurban areas although we have recently begun to provide broadband services in some urban markets. In our full turnkey solution, we generate revenue primarily from the monthly fees we receive from end users for our cable modem-based Internet access service and for the traditional dial-up services we offer as part of our end user acquisition strategy. In our full turnkey solution we generally bill the end user directly and pay our cable partners a portion of the monthly fee we receive; in these instances we report our revenues net of the percentage split we pay to our cable partners. In some instances we receive a flat fee per subscriber from our cable partners. For promotional purposes, we often provide new end users with 30 days of free Internet access when they subscribe to our services. As a result, our revenue does not reflect new end users until the end of the promotional period. We also receive revenues from renting cable modems to end users. We also offer to our cable partners a partial turnkey solution. In a partial turnkey solution, we deliver fewer services and incur lower costs than in a full turnkey solution but will also earn a smaller percentage of the subscription revenue or a fixed fee on a per subscriber basis. Our cable partners typically will bill the end user and remit to us our percentage of the revenue or the fixed fee. We anticipate that partial turnkey solutions will become a more significant part of our business mix. In May 2000, the Company entered into a second network services agreement with Charter in which the Company has agreed to provide partial turnkey services. We also provide certain services, primarily engineering services related to design and installation of data network hardware and software necessary to offer Internet service via cable modems, on a fee for service basis. Our revenue from dial up services currently is a significant part of our total revenue. However, we expect dial up revenue, as a percentage of total revenue, to decline over time as our high speed business and other service revenue grows. Moreover, although we expect cable modem rentals to be a significant part of our revenue during the next few years, we expect our cable modem rental income to decline as cable modems become commercially available at lower costs through retail stores and as they become standard features of personal computers. However, we will save the cost of purchasing and installing cable modems for end users. In the future we expect to earn revenues from additional services such as Internet telephony, and to a lesser extent, from local content. We are also expanding our offering of services to include DSL Internet access on a reseller basis. Currently, we receive no revenue from the provision of high speed internet access in DSL but we expect to provide service via DSL to commercial customers in the future. We offer DSL service as a reseller for Northpoint Communications on a limited basis. We anticipate that our business will become more dependent upon providing DSL service to commercial customers in the future. We recently entered into an agreement to acquire NetPerformance, a one-stop provider of strategic Internet services primarily to small- and medium-sized enterprises, including web hosting, web site and creative design, legacy systems integration and overall strategic consulting. Moreover, we are conducting technical and customer trials for VoIP telephone service in collaboration with Lucent and other major vendors, and plan to introduce second-line VoIP services late this year. We also intend to continue expanding our suite of core connectivity and related value-added services as broadband technology proliferates and additional services become viable. Our expenses consist of the following: o Operating costs, which consist primarily of salaries for help desk and network operations center employees; telecommunications expenses, including charges for Internet backbone and telecommunications circuitry; allocated cost of facilities; costs of installing cable modems for our end users; and depreciation and maintenance of equipment. In one-way cable systems, where the end user transmits data back to the cable headend via a standard telephone line, we must support the telephone return path from the local telephone company's central office to the cable headend. Accordingly, we incur greater telecommunications costs in a one-way system than we incur in a two-way system. Consequently, the rate at which our cable partners upgrade their systems to two-way capability will affect our operating margins. We expect our operating costs to grow significantly as we roll out services in new systems. We may also incur significant fees if we cancel our telecommunications contracts in advance of the expiration of the term of the contract. Many of our operating costs are relatively fixed in the short term. However, as we add new end users we hope to be able to spread these costs over a larger revenue base, and, accordingly, decrease our costs per subscriber and improve our operating margins. o Engineering expenses, which consist primarily of salaries and related costs for network design and installation of the telecommunications and data network hardware and software; system testing and project management expenses; the development and support of our information systems; allocated cost of facilities; and depreciation and maintenance on the equipment used in our engineering processes. We expect our engineering expenses to grow significantly as we introduce our services in new markets and expand our network. 9 10 o Sales and marketing expenses, which consist primarily of salaries, commissions and related personnel expenses and costs associated with the development of sales and marketing materials, database market analytics, direct mail and telemarketing. We expect that our sales and marketing expenses will increase significantly as we pursue our growth strategy. o General and administrative expenses, which consist primarily of salaries for our executive, administrative, finance and human resource personnel; amortization of goodwill; and fees for professional services. o Non-cash compensation expense from stock options, which equals the excess of the fair market value of our stock at the time of grant over the exercise price of the stock options granted to employees and directors amortized over the vesting period. o Amortization of distribution agreement costs, which relates to warrants issued to cable and strategic partners in connection with network services and other distribution related agreements, collectively referred to as distribution agreements. We measure the cost of warrants issued to cable and strategic partners based on the fair values of the warrants when earned by those partners. Because the fair value of the warrant is dependent to a large extent on the price of our common stock, the cost of warrants earned in the future may vary significantly. Costs of warrants granted in connection with distribution agreements are amortized over the term of the underlying agreement. Warrants not directly associated with long-term distribution agreements are expensed as earned. Our operating results have varied on a quarterly basis during our short operating history and may fluctuate significantly in the future due to a variety of factors, many of which are outside our control. In addition, the results of any quarter do not indicate the results to be expected for a full fiscal year. The factors that may contribute to fluctuations in our operations are set forth generally under the caption "Risk Factors" and particularly in that section under the heading "Our quarterly operating results are likely to fluctuate significantly and may be below the expectations of analysts and investors". As a result of the foregoing factors, our annual or quarterly results of operations may be below the expectations of public market analysts or investors, in which case the market price of the common stock could be materially and adversely affected. Results Of Operations For The Three and Six Months Ended June 30, 2000 Compared With The Three and Six Months Ended June 30, 1999 Revenues Net revenue consists primarily of net monthly subscription fees for cable modem based and traditional dial-up Internet services, cable modem rental income, fees for engineering services provided to cable partners and installation fees and other up front fees from end users. Total net revenue for the three months ended June 30, 2000 and 1999 was $2.8 million and $0.6 million respectively, an increase of $2.2 million. For the quarters ended June 30, 2000 and 1999, cable modem based subscription fees contributed approximately 51% and 33% of the net revenue, traditional dial up service fees contributed 16% and 47%, cable modem rental fees contributed 22% and 16%, engineering services provided to cable partners contributed 4% and 0%, and other fees from end users contributed 7% and 4%, respectively. Total net revenue for the six months ended June 30, 2000 and 1999 was $4.8 million and $0.9 million respectively, an increase of $3.9 million. For the six months ended June 30, 2000 and 1999, cable modem based subscription fees contributed approximately 51% and 47% of the net revenue, traditional dial up service fees contributed 18% and 32%, cable modem rental fees contributed 23% and 16%, engineering services provided to cable partners contributed 3% and 0%, and other fees from end users contributed 5% and 5%, respectively Costs and Expenses Operating. Operating costs for the three months ended June 30, 2000 and 1999 were $14.8 million and $4.0 million respectively, an increase of $10.8 million. Operating costs for the six months ended June 30, 2000 and 1999 were $30.8 million and $6.2 million respectively, an increase of $24.6 million. The increase in operating costs resulted primarily from an increase in personnel and personnel related costs for additional staff in our network operations centers, help desk and field technical support departments, an increase in telecommunications expense from the rollout of our service to new markets, our larger subscriber base, depreciation of capital equipment from the expansion of our network and the installation of cable modems for additional subscribers. 10 11 Engineering. Engineering expenses for the three months ended June 30, 2000 and 1999 were $5.5 million and $2.1 million respectively, an increase of $3.4 million. Engineering expenses for the six months ended June 30, 2000 and 1999 were $10.4 million and $3.6 million respectively, an increase of $6.8 million. The increase in engineering expenses resulted from continued network design, system testing, development and support of information systems and project management, for the evaluation of new equipment and possible new product offerings, including the offering of service via DSL, and from personnel and personnel related costs for additional technical staff to support the installation of cable headend hardware and software in our cable partners' systems. Sales and Marketing. Sales and marketing expenses for the three months ended June 30, 2000 and 1999 were $6.2 million and $3.6 million respectively, an increase of $2.6 million. Sales and marketing expenses for the six months ended June 30, 2000 and 1999 were $12.5 million and $5.7 million respectively, an increase of $6.8 million. The increase in sales and marketing expenses resulted primarily from an increase in personnel and personnel related costs to expand our residential and commercial end user sales force, new cable partner sales force and telemarketing sales force, as well as an increase in direct marketing and advertising expenses, as we expanded into more geographic markets. General and Administrative. General and administrative expenses, excluding non-cash compensation expense from stock options and amortization of distribution agreement costs, for the three months ended June 30, 2000 and 1999 were $5.1 million and $2.4 million respectively, an increase of $2.7 million. General and administrative expenses, excluding non-cash compensation expense from stock options and amortization of distribution agreement costs, for the six months ended June 30, 2000 and 1999 were $9.1 million and $3.6 million respectively, an increase of $5.5 million. The increase in general and administrative expenses resulted from additional personnel and personnel related costs as we hired personnel to implement procedures and controls to support our planned expansion and to administer finance, legal and human resource functions. Non-cash compensation expense from stock options. Non-cash compensation expense from stock options for the three months ended June 30, 2000 and 1999 was $24,000 and $1.2 million respectively, a decrease of approximately $1.1 million. Non-cash compensation expense from stock options for the six months ended June 30, 2000 and 1999 was $48,000 and $2.7 million respectively, a decrease of approximately $2.6 million. These expenses represent the excess of the fair market value of our common stock over the exercise price of the stock options granted to employees and directors amortized over the vesting period. The 1999 expense is principally related to a charge for 189,875 compensatory options issued to our directors which vested upon grant and 227,695 options issued under the 1998 stock option plan that vested upon execution of the initial public offering. Amortization of distribution agreement costs. Amortization of distribution agreement costs for the three months ended June 30, 2000 and 1999 was $0.9 million and $3.3 million, respectively, a decrease of $2.4 million. Included in the second quarter of 1999 was $3.2 million of amortization expense related to 387,500 warrants issued to Microsoft. Amortization of distribution agreement costs for the six months ended June 30, 2000 and 1999 was $1.2 million and $3.3 million, respectively, a decrease of $2.1 million. The costs consist of the amortization of the value of 1,215,623 warrants earned under distribution agreements for commitments of homes passed. We expect to incur additional material non-cash charges related to further issuance of common stock purchase warrants to our cable and strategic partners in the future. We will recognize an addition to equity for the fair value of any warrants issued, and will recognize the related expense over the term of the service agreement with the cable or strategic partner to which the warrants relate. The amount of any such charges is not determinable until the related warrants are earned. The use of warrants in these and similar transactions may increase the volatility of our earnings in the future. In May 2000, the Company and Charter entered into an amended and restated warrant to purchase up to 12,000,000 shares of our common stock at an exercise price of $3.23 per share. The restated warrant becomes exercisable at the rate of 1.55 shares for each home passed committed to us by Charter under the network services agreement entered into by Charter and us in November 1998. The warrant also becomes exercisable at the rate of .775 shares for each home passed committed to us by Charter under the second network services agreement entered into in May 2000 up to 5,000,000 homes passed and at a rate of 1.55 shares for each home passed in excess of 5,000,000. Charter also has the opportunity to earn additional warrants to purchase shares of our common stock upon any renewal of the May 2000 agreement. Such a renewal warrant will have an exercise price of $10 per share and will be exercisable to purchase one-half of a share for each home passed in the systems for which the May 2000 agreement is renewed. Net Investment Income. Net investment income for the three months ended June 30, 2000 and 1999 was $1.3 million and $0.6 million, respectively. Net investment income for the six months ended June 30, 2000 and 1999 was $3.0 million and $0.8 million, respectively. Net investment income represents interest earned on cash, cash equivalents and short term investments. The increase in investment income is the result of interest on investments purchased using the net proceeds of our initial public offering in June of 1999. 11 12 Income Taxes. At December 31, 1999, we had accumulated net operating loss carryforwards for federal and state tax purposes of approximately $63.6 million, which will expire beginning in 2018. At December 31, 1999, we had net deferred tax assets of $26.5 million, relating principally to our accumulated net operating losses. Our ability to realize the value of our deferred tax assets depends on our future earnings, if any, the timing and amount of which are uncertain. We have recorded a valuation allowance for the entire net deferred tax asset as a result of those uncertainties. Accordingly, we did not record any income tax benefit for net losses incurred for the year ended December 31, 1999 or for the quarter and six months ended June 30, 2000. Liquidity and Capital Resources At June 30, 2000, we had cash, cash equivalents and short-term investments of $123.5 million, compared with $178.7 million of cash, cash equivalents and short-term investments at December 31, 1999. We had significant negative cash flow from operating activities for the six months ended June 30, 2000. Cash used in operating activities for the six months ended June 30, 2000 was $44.3 million, caused primarily by a net loss of $56.2 million offset by depreciation and amortization of $7.6 million and an increase in other current liabilities of $4.3 million. Cash provided by investing activities for the six months ended June 30, 2000 was $39.1 million, the result of sales and maturities of short term investments of $124.5 million, offset by the purchase of short term investments of $65.9 million. Also, cash paid for capital expenditures totaled $19.5 million for the six months ended June 30, 2000. The principal capital expenditures incurred during this period were for the purchase of headend data network hardware and software, billing and customer care systems and furniture and telephone and computer equipment for new leased customer care and corporate headquarters facilities, cable modems and central network hardware and software, reflecting our expansion into new markets. Cash provided by financing activities for the six months ended June 30, 2000 was $8.0 million, comprised primarily of $10.0 million in proceeds from issuance of common stock to Lucent, partially offset by net payments on capital lease obligations and long-term debt. We expect to experience substantial negative cash flow from operating activities and negative cash flow from investing activities for at least the next several years due to continued deployment of our services into new markets and the enhancement of our network and operations. Our future cash requirements will depend on a number of factors including: o The pace of the rollout of our service to our cable partners, including the impact of substantial capital expenditures and related operating expenses; o The rate at which we enter into contracts with cable operators for additional systems; o The rate at which end users subscribe to our cable modem and DSL connectivity and web hosting services; o Changes in revenue splits with our cable partners; o The terms under which we contract for and resell DSL; o Price competition in the Internet, telephony and cable industries; o The mix of services offered by us, including DSL, web hosting, legacy systems and e-commerce integration, and whether we provide our cable modem services on a full or partial turnkey basis; o Capital expenditures and costs related to infrastructure expansion; o The rate at which our cable partners convert their systems from one-way to two-way systems; o End user turnover rates; o Our ability to protect our systems from telecommunications failures, power loss and software-related system failures; 12 13 o Changes in our operating expenses including, in particular, personnel expenses; o The introduction of new products or services by us or our competitors including our initiatives into DSL reseller services, VoIP, web hosting and other value added services; o Our ability to enter into strategic alliances with application service providers and other content providers; and o Economic conditions specific to the Internet and cable industries, as well as general economic and market conditions. Investment Portfolio. Cash equivalents are highly liquid investments with insignificant interest rate risk and original maturities of 90 days or less and are stated at amounts that approximate fair value based on quoted market prices. Cash equivalents consist principally of investments in interest-bearing money market accounts with financial institutions and highly liquid investment-grade debt securities of corporations and the United States government. Short term investments are classified as available-for-sale and, as a result, are stated at fair value. Short term investments are principally comprised of highly liquid debt securities of corporations and the U.S. government. We record changes in the fair market value of securities held for short term investment as an equal adjustment to the carrying value and equity. Loan and Lease Facilities. The Company has approximately $16 million in unused lease facilities at June 30, 2000. We expect to incur approximately $45 million of capital expenditures in 2000 principally related to the installation of headend data network hardware and software, cable modems, central network hardware and software for e-mail, network monitoring, provisioning, web hosting, billing and customer care systems and furniture and telephone and computer equipment for new leased customer care and corporate headquarters facilities. Actual capital expenditures will be significantly affected by the rate at which end users subscribe to our cable modem internet access services, which requires us to purchase a cable modem for each new end user where we provide full turnkey services, as well as the pace of the rollout of our systems, which requires us to purchase headend data network hardware and software. Additionally, the amount of capital expenditures will be affected by the number of systems deployed under the partial turnkey services model, where the investment in equipment is significantly less than those choosing full turnkey services. Since inception, we have financed our operations primarily through a combination of private and public sales of equity securities, capital equipment leases and debt. In May 2000 we entered into an agreement with Lucent under which we will purchase equipment and services in connection with our deployment of IP telephony services. Our minimum commitment under this agreement is $5 million. In addition, Lucent has agreed to assist us in arranging third party equipment financing. The development of our business may require significant additional capital in the future to fund our operations, to finance the substantial investments in equipment and corporate infrastructure needed for our planned expansion, to enhance and expand the range of services we offer and to respond to competitive pressures and perceived opportunities, such as investment, acquisition and international expansion activities. To date, our cash flow from operations has been insufficient to cover our expenses and capital needs. We believe our current cash, cash equivalents and short term investments, together with the proceeds from unused loan facilities totaling $1.3 million, and $18.4 million of available lease financing through various facilities, as well as additional loan and lease financing facilities will be sufficient to meet our working capital requirements, including operating losses, and capital expenditure requirements into 2001, assuming we achieve our business plan. We will require additional equity and/or debt financing in 2000 or early 2001. We cannot assure you that additional financing will be available on terms favorable to us, or at all. Moreover, the Company may not complete the proposed $75 million financing announced in August with Vulcan or Charter on acceptable definitive terms, or at all. The sale of additional equity or convertible debt securities may result in additional dilution to our current stockholders. In addition, these newly issued equity securities may have rights, preferences or privileges senior to those of the existing holders of our common stock. If additional funds are raised through the issuance of debt securities, these securities would have rights, preferences and privileges senior to those of the existing holders of our common stock and the terms of such debt could impose restrictions on our operations. If adequate funds are not available on acceptable terms, we may be forced to curtail our operations. Moreover, even if we are able to continue our operations, the failure to obtain additional financing could have a material and adverse effect on our business and financial results and we may need to delay the deployment of our services. Charter can require any lender with liens on our equipment placed in Charter head ends to deliver to Charter a non-disturbance agreement as a condition to such financings. We can offer no assurance that we will be able to obtain additional secured equipment financing for Charter systems subject to such a condition or that a potential lender will be able to negotiate acceptable terms of non-disturbance with Charter. 13 14 Recently Issued Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivatives and Hedging Activities (SFAS 133), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. SFAS 133, as amended by SFAS 137 and 138, is effective for our year ending December 31, 2001. As we do not currently engage in or plan to engage in derivatives, or hedging transactions there will be no impact on our results of operations, financial position or cash flows upon the adoption of SFAS 133. On December 3, 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 summarizes some of the staff's interpretations of the application of generally accepted accounting principles to revenue recognition. All registrants are expected to apply the accounting and disclosure requirements that are described in SAB 101, as amended, no later than the fourth quarter of the fiscal year beginning after December 15, 1999. Management of the Company is currently analyzing the impact of SAB 101 but anticipates that the adoption of SAB 101 will not have a material effect on the Company's results of operations or financial position. Risk Factors You should carefully consider the following factors and other information in this Form 10-Q and other filings we make with the Securities and Exchange Commission before trading in our common stock. If any of the following risks actually occur, our business and financial results could be materially and adversely affected. In that case, the trading price of our common stock could decline and you could lose all or part of your investment. Risks Related To Our Operations Our Business Is Difficult To Evaluate Because We Have A Limited Operating History. Our predecessor companies began offering services to cable operators in October 1997. Most of our cable modem deployments occurred within the last twelve months. We do not consider any of the markets in which we operate to be mature. We have recognized limited revenues since our inception. In addition, our senior management team and other employees have worked together at our company for only a short period of time. Consequently, we have a limited operating history upon which our business can be evaluated. We Have Not Been Profitable And Expect Future Losses. Since our founding, we have not been profitable. We have incurred substantial costs to create and introduce our broadband Internet access services, to operate these services, and to grow our business. We incurred net losses of approximately $127.1 million from April 3, 1998 (Inception) through June 30, 2000. Our limited operating history, the dynamic nature of our industry and our ambitious growth plans make predicting our operating results, including operating expenses, difficult. We expect to incur substantial losses and experience substantial negative cash flow from operations for at least the next several years as we expand our business. The principal costs of expanding our business will include: o Substantial direct and indirect selling, marketing and promotional costs; o System operational expenses, including the lease of our Internet backbone, which has a traffic capacity in excess of our current needs; o Costs incurred in connection with higher staffing levels to meet our growth; o The acquisition and installation of the equipment, software and telecommunications circuits necessary to enable our cable partners to offer our services; and o Costs in connection with acquisitions, divestitures, business alliances or changing technologies. If any of these costs or expenses is not accompanied by an increase in revenues, then our business and financial results could be materially and adversely affected. 14 15 We Cannot Predict Our Success Because Our Business Model Is Unproven, Has Changed In The Past And May Continue To Change. Our success depends on continued growth in the use of the Internet and high speed access services. Although Internet usage and popularity have grown rapidly, we cannot be certain that this growth will continue in its present form, or at all. Critical issues concerning the increased use of the Internet--including security, reliability, cost, ease of access, ease of installation and customer acquisition and quality of service--remain unresolved and are likely to affect the development of the market for our services. We do not believe any cable-based internet access services currently offered by cable companies have been profitable. Moreover, many industry analysts believe that Internet access providers will become increasingly reliant upon advertising, barter and subscription-based revenues from content due to competitive pressures to provide low cost or even free Internet access. The success of our business ultimately will depend upon the acceptance of our services by end users, who in our comprehensive turnkey service will purchase or rent a cable modem from us and pay both monthly service and installation fees. As of June 30, 2000 we deployed our services in only 129 cable systems and we have approximately 41,000 residential cable modem end users. We began offering our services on a partial turnkey basis in the third quarter of 1999. As of the June 30, 2000, we had initiated partial turnkey services in 16 systems. In our partial turnkey solution, we deliver fewer services and incur lower costs than in a full turnkey solution but will also earn a smaller percentage of the subscription revenue or a fixed fee on a per subscriber basis. As a result of our network services agreement with Charter, we anticipate that partial turnkey services will become a more significant part of our business mix, affecting our future revenues and profitability per subscriber. Although our primary service offering is high bandwidth Internet access, we currently derive a substantial portion of our revenues from standard dial-up Internet access, which we offer as a feeder for our high speed offerings. We cannot predict whether demand for our high speed Internet access services will develop, particularly at the volume or prices we need to become profitable. Nor can we predict whether we can adequately supply services to satisfy that demand if it develops. We may also not be able to acquire and install customers quickly enough to meet demand, and the bandwidth we provide may prove to be inadequate. Additionally, we believe that partial turnkey services will become an increasingly important part of our business. Under the partial turnkey arrangements, such as the one we signed with Charter in May 2000, covering a minimum of five million homes passed, we will earn less revenue and absorb less operating expense per customer than under a full turnkey arrangement. We have begun to offer DSL on a limited basis, as a reseller for NorthPoint Communications. We expect to rollout DSL connectivity and related services on a bundled basis, and will absorb significant operating losses in doing so. In this effort, the Company intends to target markets in which it has existing DSL re-seller arrangements and/or existing infrastructure or facilities. We anticipate that our business will become more dependent upon providing DSL service to commercial customers in the future. We recently entered into an agreement to acquire NetPerformance, a one-stop provider of strategic Internet services primarily to small and medium sized enterprises, including web hosting, web site and creative design, legacy systems integration and overall strategic consulting. We have also initiated technical trials of IP Telephony in collaboration with Charter and Lucent, as additional services for our cable partners to offer their customers. We do not know whether these services will become significant to our business or whether we will continue to offer them at all. Moreover, we may continue to introduce new services or to make changes to our product offerings to meet our customer demands or to respond to changes in our evolving industry. Consequently, our business model is likely to continue to change. We Will Need Additional Capital In The Future And It May Not Be Available On Acceptable Terms. The development of our business will require significant additional capital in the future to fund our operations, to finance the substantial investments in equipment and corporate infrastructure needed for our planned expansion, to enhance and expand the range of services we offer and to respond to competitive pressures and perceived opportunities, such as investment, acquisition and international expansion activities. To date, our cash flow from operations has been insufficient to cover our expenses and capital needs. We believe our current cash, cash equivalents and short term investments, together with the proceeds from unused loan facilities and lease financing through various facilities, as well as additional loan and lease financing facilities will be sufficient to meet our working capital requirements, including operating losses, and capital expenditure requirements into 2001, assuming we achieve our business plan. At such time, or sooner if we do not achieve our business plan, we will require additional equity and/or debt financing. There can be no assurance that additional financing will be available on terms favorable to us, or at all. Moreover, the Company may not complete the proposed $75 million financing announced in August with Vulcan or Charter on acceptable definitive terms, or at all. The sale of additional equity or convertible debt securities may result in additional dilution. If adequate funds are not available on acceptable 15 16 terms, we may be forced to curtail our operations. Moreover, even if we are able to continue our operations, the failure to obtain additional financing could have a material and adverse effect on our business and financial results and we may need to delay the deployment of our services. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Our Ability To Attract And Retain End Users Depends On Many Factors We Cannot Control. Our ability to increase the number of our end users, and our ability to retain end users, will depend on a number of factors, many of which are beyond our control. These factors include: o Our ability to enter into and retain agreements with cable operators and DSL wholesalers; o The speed at which we are able to deploy our services, particularly if we cannot obtain on a timely basis the telecommunications circuitry necessary to connect our DSL customers and cable headend equipment to the Internet; o Our success in marketing our connectivity, web hosting and other advanced services to new and existing end users; o Competition, including new entrants advertising free or lower priced Internet access and/or alternative access technologies; o Whether our cable partners maintain their cable systems or upgrade their systems from one-way to two-way service; o Whether our DSL wholesalers and incumbent local exchange carriers maintain and upgrade their loops to support DSL services; o The quality of the customer and technical support we provide; and o The quality of the content we offer. In addition, our service is currently priced at a premium to many other online services and many end users may not be willing to pay a premium for our service. Because of these factors, our actual revenues or the rate at which we will add new end users may differ from past increases, the forecasts of industry analysts, or a level that meets the expectations of investors. Our Quarterly Operating Results Are Likely To Fluctuate Significantly And May Be Below The Expectations Of Analysts And Investors. Our revenues and expenses, and in particular our quarterly revenues, expenses and operating results have varied in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. These factors include: o The pace of the rollout of our DSL services to end users and our cable modem service to our cable partners, including the impact of substantial capital expenditures and related operating expenses; o Whether and the rate at which we enter into contracts with cable operators for additional systems; o The rate at which new end users subscribe to our services, the rate at which these customers are installed and provisioned for service, and the rate at which we retain these customers net of customers who disconnect; o Changes in revenue splits with our cable partners; o Price competition in the Internet, Telephony and cable industries; o The extent to which we provide partial, rather than full turnkey access; o Capital expenditures and costs related to infrastructure expansion; 16 17 o The rate at which our cable partners convert their systems from one-way to two-way systems; o Our ability to protect our systems from telecommunications failures, power loss and software-related system failures; o Changes in our operating expenses including, in particular, personnel expenses; o The introduction of new products or services by us or our competitors; o Our ability to enter into strategic alliances with content providers; and o Economic conditions specific to the Internet and cable industries, as well as general economic and market conditions. In addition, our operating expenses are based on our expectations of the future demand for our services and are relatively fixed in the short term. We may be unable to adjust spending quickly enough to offset any unexpected demand surge or shortfall in demand. A shortfall in revenues in relation to our expenses could have a material and adverse effect on our business and financial results. The quarter-to-quarter comparisons of our results of operations should not be relied upon as an indication of future performance. It is possible that in some future periods our results of operations may be below the expectations of public market analysts and investors. In that event, the price of our common stock is likely to fall. We May Not Be Able To Establish Or Maintain Acceptable Relationships With Cable Operators. Our success depends, in part, on our ability to gain access to cable customers. We gain that access through our agreements with cable operators. There can be no assurance that we will be able to establish or maintain relationships with cable operators. Even if we are able to establish and maintain those relationships, there can be no assurance that we will be able to do so on terms favorable to us or in the quantities we need to become profitable. If we fail to form partnerships rapidly with a large number of cable operators, we can be effectively excluded from providing our services in the systems owned by those operators. Not only can other cable-based broadband service providers compete against us for an exclusive contract, the cable operator may decide to offer cable-based Internet services directly without assistance from us or our competitors. Delays in forming relationships and deploying our cable-based services also create windows of time for alternative broadband access providers to enter the market and acquire customers. Furthermore, in order to rapidly deploy our services within a market, we typically begin installation of our equipment and related telecommunications circuits prior to the execution of final documentation. If we are unable to finalize our contractual relationship with a cable operator, if the exclusive relationship between us and our cable partners, or between our cable partners and their cable customers, is impaired, or if we do not become affiliated with a sufficient number of cable operators, our business and financial results could be materially and adversely affected. Our Largest Cable Partner Can Terminate Its Contract With Us. Our largest cable partner is Charter. Charter is an affiliate of Vulcan, which owns 36.3% of our outstanding common stock as of June 30, 2000. We have entered into several agreements with Charter, including two network services agreements. The first network services agreement was entered into in November 1998 and the second in May 2000. Under both agreements, Charter committed to provide the Company exclusive rights to provide network services related to the delivery of Internet access to homes passed in certain cable systems. Under the May 2000 agreement, the Company will provide partial turnkey services, including call center support for cable modem customers as well as network monitoring, troubleshooting and security services. The agreement has an initial term of five years and may be renewed at Charter's option for additional successive five-year terms. In a partial turnkey solution, we deliver fewer services and incur lower costs than in full turnkey solutions, but will also earn a smaller percentage of the subscription revenue based on a fixed fee per subscriber. Under the November 1998 agreement the Company has primarily provided comprehensive turnkey services. Subject to the provisions of the network service agreements, Charter can terminate our exclusivity rights, on a system-by-system basis, if we fail to meet performance specifications or otherwise breach our, agreement. Moreover, Charter can terminate the November 1998 agreement, for any reason, as long as it purchases the associated cable headend equipment and modems at book value and pays us a termination fee based on the net present value of the revenues we otherwise would earn for the remaining term of the 17 18 agreement from those end users subscribing to our services as of the date of termination. There can be no assurances we will meet the benchmarks related to our customer penetration rates or that Charter will not decide to terminate either agreement for any other reason. If Charter were to terminate either agreement, in whole or for any material system, regardless of any termination fee we may receive, our business and financial results would be materially and adversely affected. Our Agreements With Vulcan Ventures Could Constrain Our Ability To Generate Revenues From Providing Content And Future Services Our End Users May Demand. Under our programming content agreement with Vulcan, Vulcan has the right to require us to carry, on an exclusive basis in all cable systems we serve, content it designates. Vulcan content may include start-up and related web pages, electronic programming guides, other multimedia information and telephony services. We will not share in any revenues Vulcan may earn through the content or telephony services it provides. We must provide all equipment necessary for the delivery of Vulcan content, although Vulcan will reimburse us for any costs we incur in excess of $3,000 per cable headend. Vulcan cannot charge us for any Vulcan content through November 2008; after that date we will be obligated to pay Vulcan for this content at the lowest fee charged to any Internet service provider who subscribes to Vulcan content. Vulcan has the right to prohibit us from providing content or telephony services that compete with Vulcan content in Vulcan's discretion and can require us to remove competing content. Many industry analysts believe that Internet access will become increasingly reliant upon revenues from content due to competitive pressures to provide low cost or even free Internet access. If Vulcan were to require us to remove our content or substitute its telephony services for any we might provide, we could lose a source of additional revenues and might not recover all related costs of providing our content or telephony services. Vulcan's ability to prohibit us from providing content and telephony services means that Vulcan's interests are not necessarily aligned with those of our other stockholders. Investors May Suffer Substantial Dilution From Other Transactions. As an inducement to cause Charter to commit additional systems to us in connection with network services agreements entered into in November 1998 and May 2000, we have granted Charter warrants to purchase up to 12,000,000 shares of our common stock at an exercise price of $3.23 per share. These warrants become exercisable, in respect of full turnkey systems at the rate of 1.55 shares for each home passed in excess of 750,000, and partial turnkey systems at the rate of .775 shares for each home passed for up to 5,000,000 homes passed; and at a rate of 1.55 shares for each additional home passed in excess of 5,000,000. To the extent that Charter becomes eligible to exercise all or a significant portion of these warrants, the Company's stockholders will experience substantial dilution. In addition, we have granted Microsoft a warrant to purchase 387,500 shares of our common stock at an exercise price of $16.25, with additional warrants issuable for homes passed above 2,500,000 homes passed committed to us by Comcast. Our agreement with ServiceCo LLC provides for granting of warrants to purchase one share of our common stock at a price of $5 per share up to a maximum of 5 million shares. The Company has also granted Classic Cable, Inc. and CMA Associates, both cable operators, a warrant to purchase 600,000 and 200,000 shares at an exercise price of $13, respectively, in connection with the distribution of our services. We have issued and may in the future issue additional stock or warrants to purchase our common stock in connection with our efforts to expand the distribution of our services and retain various consulting services. Stockholders could face additional dilution from these possible future transactions. One-Way Cable Systems Increase Our Operating Costs And May Not Provide The Quality Necessary To Attract Customers. Although our service can operate in one-way cable systems, where data can be transmitted at high speeds from the cable headend to the end user, the end user in a one-way system can only transmit data back to the cable headend via a standard phone line. Because we must support the telephone return component of the system, we incur higher operating costs in one-way systems. Presently only one-third of the systems where we are or will soon operate our services are two-way systems. Over time, however, we expect most, if not all, of our cable partners to upgrade and or rebuild their plants to provide increased bandwidth and two-way capabilities. We believe faster uploads and the elimination of phone line return costs make our service more valuable and may lead to higher customer penetration rates, which in turn benefits the cable operator through higher revenue. However, upgrading a cable system can be expensive and time-consuming for the cable operator. Delays in upgrading one-way cable plants also makes our services vulnerable to competition from alternative broadband technologies, and may make our cable partner vulnerable to overbuilds by competitors. 18 19 Moreover, we do not require our cable partners to make these upgrades and they have no legal obligation to do so. Consequently, if our cable partners do not upgrade to two-way capability at the rate we anticipate, our financial results may be negatively affected. We May Have Difficulty Managing Our Growth Plans. To manage our anticipated growth, we must continue to implement and improve our operational, financial and management information systems; hire, train and retain additional qualified personnel; continue to expand and upgrade core technologies; and effectively manage our relationships with our end users, suppliers and other third parties. Our expansion could place a significant strain on our services and support operations, sales and administrative personnel, and other resources. While we believe that we generally have adequate controls and procedures in place for our current operations, our billing software is not adequate to meet our growth plans. We are in the process of replacing our billing software with an integrated billing and customer care software system that we believe is capable of meeting our planned future needs, but can offer no assurances that it will successfully achieve such replacement, or if it does achieve such replacement that it will do so within a time frame that will permit it to achieve its growth objectives. We could also experience difficulties meeting demand for our products and services. Additionally, if we are unable to provide training and support for our products, the implementation process will be longer and customer satisfaction may be lower. Our growth plan may include acquisitions. If we acquire a company, we could have difficulty assimilating its operations, or assimilating and retaining its key personnel. In addition if the demand for our service exceeds our ability to provide our services on a timely basis, we may lose customers. There can be no assurance that our systems, procedures or controls will be adequate to support our operations or that our management will be capable of exploiting fully the market for our products and services. The failure to manage our growth effectively could have a material adverse effect on our business and financial results. The Market For Internet Services Is Highly Competitive. We face competition from many competitors with significantly greater financial, sales and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships with advertisers, content and application providers and/or other strategic partners than we have. We expect the level of this competition in cable and DSL Internet access markets to intensify in the future. We face competition from both cable modem service providers and from providers of other types of data, IP telephony and Internet services for end users. Due to this intense competition, there may be a time-limited market opportunity for our cable-based high speed access and IP telephony services. There can be no assurance that we will be successful in achieving widespread acceptance of our services before competitors offer services similar to our current offerings, which might preclude or delay purchasing decisions by potential customers. Our competitors in the cable-based Internet access and IP Telephony markets are those companies that have developed their own cable-based services and market those services to cable system operators. Other competitors in the cable-based Internet access and IP telephony access markets are those companies seeking to establish distribution arrangements with cable system operators in exurban markets and/or provide one-way system capability. In addition, other cable system operators have launched their own cable-based Internet services that could limit the market for our services. Our agreement with Charter and other operators provides us exclusive rights to provide high speed Internet access to the customer's personal computer. However, Charter and other online service providers may deploy TV-based Internet access services through set-top boxes or other devices. Widespread commercial acceptance of any of these competitors' products could significantly reduce the potential customer base for our services, which could have a material adverse effect on our business and financial results. We also compete with traditional Internet service providers and other competing broadband technologies including ISDNs, DSLs, wireless and satellite data services. Moreover, our competitors include long distance inter-exchange carriers, regional Bell operating companies and other local exchange carriers. Many of these carriers are offering diversified packages of telecommunications services, including Internet access, and could bundle these services together, putting us at a competitive disadvantage. Widespread commercial acceptance of any of these competing technologies or competitors' products could significantly reduce the potential customer base for our services, which could have a material adverse effect on our business and financial results. Our Ability To Increase The Capacity And Maintain The Speed Of Our Network Is Unproven. We may not be able to increase the transmission capacity of our network to meet expected end user levels while maintaining superior performance. While peak downstream data transmission speeds across the cable infrastructure approach 10 Mbps in each 6 megahertz (Mhz) channel, actual downstream data transmission speeds are almost always significantly slower depending on a variety of factors. These factors include our intentional throttling of data traffic flowing through the local network out in order to optimize the use our network capacity and to sell tiered price-service packages, bandwidth capacity constraints between the cable headend and the Internet backbone, the type and location of content, Internet traffic, the number of active end users on a given cable network node, the 19 20 number of 6 Mhz channels allocated to us by our cable partner, the capabilities of the cable modems used and the service quality of the cable operators' fiber-coax facilities. The actual data delivery speed that an end user realizes also will depend on the end user's hardware, operating system and software configurations. There can be no assurance that we will be able to achieve or maintain a speed of data transmission sufficiently high to enable us to attract and retain our planned number of end users, especially as the number of the end users grows. Because end users will share the available capacity on a cable network node, we may underestimate the capacity we need to provide in order to maintain peak transmission speeds. A perceived or actual failure to achieve or maintain sufficiently high speed data transmission could significantly reduce end user demand for our services or increase costs associated with customer complaints and have a material adverse effect on our business and financial results. Our Network May Be Vulnerable To Security Risks. Despite our implementation of industry-standard security measures the networks we operate may be vulnerable to unauthorized access, computer viruses and other disruptive problems. Internet and online service providers in the past have experienced, and in the future may experience, interruptions in service as a result of the accidental or intentional actions of Internet users. Because the cable infrastructure is a shared medium, it is inherently more vulnerable to security risks than dedicated telephony technologies such as digital subscriber lines. Moreover, we have no control over the security measures that our cable partners and end users adopt. Unauthorized access could also potentially jeopardize the security of confidential information stored in the computer systems maintained by us and our end users. These events may result in liability to us or harm to our end users. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to our end users, which could have a material adverse effect on our business and financial results. In addition, the threat of these and other security risks may deter potential end users from purchasing our services, which could have a material adverse effect on our business and financial results. We May Become Subject To Risks Of International Operations. We are currently at the early stages of evaluating international expansion opportunities. If we expand internationally or enters into joint venture arrangements to pursue international business opportunities, we would become subject to the risks of conducting business internationally, including: o Foreign currency fluctuations, which could result in reduced revenues or increased operating expenses; o Inability to locate qualified local partners and suppliers; o The burdens of complying with a variety of foreign laws and trade standards; o Tariffs and trade barriers; o Difficulty in accounts receivable collection; o Potentially longer payment cycles; o Foreign taxes; o Unexpected changes in regulatory requirements including the regulation of Internet access; and o Uncertainty regarding liability for information retrieved and replicated in foreign countries. If we expand internationally, we will also be subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships. There can be no assurance that the risks associated with our proposed international operations will not materially and adversely affect our business and financial results. We Have Recently Made Acquisitions And Expect To Make Future Acquisitions Where Advisable And Acquisitions Involve Numerous Risks. Our growth is dependent upon market growth, our ability to enhance our existing products and our ability to introduce new products on a timely basis. One of the ways we have addressed and will continue to address the need to develop new products is 20 21 through acquisitions of other companies. In particular, we recently agreed to acquire Digital Chainsaw, Inc. in order to allow us to offer additional services to our customers, including web hosting, web site and creative design, legacy systems integration and overall strategic consulting. Acquisitions involve numerous risks, including the following: o difficulties in integration of the operations, technologies, and products of the acquired companies; o the risk of diverting management's attention from normal daily operations of the business; o potential difficulties in completing projects associated with purchased in-process research and development; o risks of entering markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions; and o the potential loss of key employees of the acquired company. Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results or financial condition. We must also maintain our ability to manage any such growth effectively. Failure to manage growth effectively and successfully integrate acquisitions we made could harm our business and operating results. Risks Related To The Market For High Speed Internet Access Our Cable Partners Could Sell Their Systems Or Be Acquired. In recent years, the cable television industry has undergone substantial consolidation. If one of our cable partners is acquired by a cable operator that already has a relationship with one of our competitors or that does not enter into a contract with us, we could lose the ability to offer our cable modem access services in the systems formerly served by our cable partner, which could have a material and adverse effect on our business and financial results. Many of the cable operators with whom we have contracts operate multiple systems, thus increasing the risk to us if they are acquired. Moreover, it is common in the cable industry for operators to swap systems, which could cause us to lose our contract for a swapped system. Even though many of our contracts obligate our cable partners to pay us a termination fee if they sell their system to another operator who does not assume our contract, the potential termination fee may not be adequate to ensure that the successor operator assumes our contract, or to compensate us fully for the loss of future business in that system. Our Cable Partners Could Lose Their Franchises. Cable television companies operate under franchises granted by local or state authorities that are subject to renewal and renegotiation from time to time. A franchise is generally granted for a fixed term ranging from five to 15 years, although in many cases the franchise is terminable if the franchisee fails to comply with the material provisions of its franchise agreement. No assurance can be given that the cable operators that have contracts with us will be able to retain or renew their franchises. The non-renewal or termination of any of these franchises would result in the termination of our contract with the applicable cable operator. Moreover, cable television operators are sometimes subject to overbuilding by competing operators who offer competing video and Internet access services. Moreover, many direct broadcast satellite (DBS) operators can compete with cable operators and provide Internet access services to their subscribers. Any such dilution of our cable operator market base can adversely affect our potential market base. Our Market Is Characterized By Rapid Technological Change And Our Services Could Become Obsolete Or Fail To Gain Market Acceptance. The market for our services is characterized by rapid technological advances, evolving industry standards, changes in end user requirements and frequent new service introductions and enhancements. For example, the North American cable industry has adopted a set of interface specifications, known as "DOCSIS," for hardware and software to support cable-based data delivery using cable modems. Our ability to adapt to rapidly changing technology and industry standards, such as DOCSIS, and to develop and introduce new and enhanced products and service offerings will be significant factors in maintaining or improving our competitive position 21 22 reducing our costs, and our prospects for growth. If technologies or standards applicable to our services become obsolete or fail to gain widespread consumer acceptance, then our business and financial results will be materially and adversely affected. We currently anticipate that we will use a significant portion of our working capital to acquire headend, cable modem and other related capital equipment. The technology underlying that equipment is continuing to evolve. It is possible that the equipment we acquire could become obsolete prior to the time we would otherwise intend to replace it, which could have a material adverse effect on our business and financial results. We Depend On A Data Transmission Infrastructure Largely Maintained By Third Parties Or Subject To Disruption By Events Outside Our Control. Our success will depend upon the capacity, reliability and security of the infrastructure used to carry data between our end users and the Internet. A significant portion of that infrastructure is owned by third parties. Accordingly, we have no control over its quality and maintenance. For example, we rely on our cable partners to maintain their cable infrastructures. We also rely on other third parties to provide a connection from the cable infrastructure to the Internet. Currently, we have transit agreements with UUNet, a division of MCI WorldCom, and others to support the exchange of traffic between our data servers, the cable infrastructure and the Internet. Our operations also depend on our ability to avoid damages from fires, earthquakes, floods, power losses, telecommunications failures, network software flaws, transmission cable cuts, Year 2000 problems and similar events. The occurrence of any of these events could interrupt our services. The failure of the Internet backbone, our servers, or any other link in the delivery chain, whether from operational disruption, natural disaster or otherwise, resulting in an interruption in our operations could have a material adverse effect on our business and financial results. We May Be Held Liable For Defamatory Or Indecent Content, As Well As Information Retrieved Or Replicated. In part, our business involves supplying information and entertainment to customers over the cable systems of our cable system partners. Accordingly we face the same types of risks that apply to all businesses that publish or distribute information, such as potential liability for defamation, libel, invasion of privacy and similar claims, as well as copyright or trademark infringement and similar claims. A number of third parties have claimed that they hold patents covering various forms of online transactions or online technologies. In addition, our errors and omissions and liability insurance may not cover potential patent or copyright infringement claims and may not adequately indemnify us for any liability that may be imposed. The law relating to the liability of Internet and online service providers for information carried or disseminated through their networks is unsettled. There are some federal laws regarding the distribution of obscene or indecent material over the Internet under which we are subject to potential liability. These risks are mitigated by two federal laws. One, passed in 1996, immunizes Internet service providers from liability for defamation and similar claims for materials the Internet service provider did not create, but merely distributed. The other, passed in 1998, creates a "safe harbor" from copyright infringement liability for Internet service providers who comply with its requirements, which we intend to do. These laws apply only in the United States; if we expand our operations to other countries, our potential liability under the laws of those countries could be greater. We May Become Subject To Burdensome Government Regulation Or "Open Access" Competition. The regulatory climate impacting our business is uncertain at this time, and we may become subject to burdensome governmental regulation in the future. Historically, the Company and its cable partners believed that for regulatory purposes we would be considered a cable service provider, or an unregulated information service provider. However, a federal appeals court (AT&T v. City of Portland, 9th Cir. 6/22/00) recently concluded that a cable operator's provision of transmission facilities in some instances is a telecommunications service under the Communications Act. This classification could subject our cable partners, and possibly HSA, to federal and state regulation as "telecommunications carriers." If HSA or its cable partners were classified as telecommunications common carriers, or otherwise subject to common carrier-like access and non-discrimination requirements in the provision of our Internet over cable service, the Company or its cable partners could be subject to burdensome governmental regulations. In particular, the government might seek to regulate us and our cable partners with respect to the terms, conditions and prices for Internet connection services and interconnections with the public switched telephone network, and require that we make contributions to the universal service support fund. The Internet telephony services over cable, or Voice over IP, we expect to offer and deploy may also be regulated as a common carrier telecommunications service. Accordingly, the Company or its cable partners might then have to get a "telecommunications franchise" or a license to operate as a "competitive local exchange carrier" from some states or localities, which might not be available on reasonable terms, or at all. 22 23 In addition, some local cable franchising authorities seek to impose "non-discrimination" or "open access" obligations on our cable partners. Other local franchising authorities might claim that our cable partners need a separate franchise to offer our cable service. This franchise may not be obtainable on reasonable terms, or at all. A consortium of dial-up Internet service providers and large telephone companies are encouraging local franchising authorities and the Federal Communications Commission to ban the type of exclusive ISP-cable operator arrangements that HSA has with its cable partners that make it the exclusive supplier of high speed data on the cable systems where our service is offered. If such arrangements are banned, the Company could face additional competition from other Internet access providers using the cable system to connect to their customers, which could have a material adverse effect on our business and financial results. Both AOL-Time Warner and AT&T-Mindspring have announced plans to open their networks to competing Internet service providers in the coming years, and AT&T and Time Warner Cable have initiated "open-access" trials with selected ISPs in several markets. Other ISPs are petitioning the FCC and various large cable operators for access to cable plants. The Company cannot predict the degree to which such voluntary or involuntary "open access" will affect its business. In addition, regulatory decisions that make DSL technology services easier for competing telephone companies to deploy over normal telephone lines and less expensive for customers to buy, could negatively affect the Company's business. The Federal Communications Commission issued a line-sharing ruling in December 1999 that allows DSL providers to simply lease the data spectrum of the customer's local loop from the incumbent carrier. This obviates the need for the customers to lease a secondary DSL-provisioned loop from the incumbent carrier in order to obtain high speed DSL data service, which in turn could make DSL service a more cost-competitive alternative to our services. Finally, firms controlling digital broadcast spectrum have announced plans to utilize a portion of that spectrum to offer consumers high-bandwidth data delivery via broadcast. Some direct broadcast satellite video companies are also deploying higher-bandwidth data delivery products. The Company cannot predict when or whether these services will be offered, but if offered they could present material competition to our services and could materially and adversely affect our success in the marketplace. We Depend On Our Key Personnel And May Have Difficulty Attracting And Retaining The Skilled Employees We Need To Execute Our Growth Plan. Our future success depends on the continued service of our key personnel, especially our Chief Executive Officer ("CEO") and Chief Operating Officer ("COO'). We do not carry key person life insurance on most of our personnel. Given our early stage and plans for rapid expansion, the loss of the services of any of our executive officers or the loss of the services of other key employees could have a material adverse effect on our business and financial results. Our future success also depends on our ability to attract, retain and motivate highly skilled employees, particularly engineering and technical personnel. Competition for employees in our industry is intense. We may not be able to retain our key employees or attract, assimilate or retain other highly qualified employees in the future. From time to time we have experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly skilled employees. Risk Related To Trading In Our Stock Because Of Our Relationship With Vulcan Ventures, New Investors Will Have Little Influence Over Management Decisions. Vulcan owns 36.3% of our outstanding stock. Vulcan's affiliate, Charter, also has a warrant to purchase up to 12,000,000 shares of our common stock at an exercise price of $3.23 per share. Accordingly, Vulcan will be able to significantly influence and possibly exercise control over most matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control. In addition, conflicts of interest may arise as a consequence of Vulcan's control relationship with us, including: o Conflicts between Vulcan, as our controlling stockholder, and our other stockholders, whose interests may differ with respect to, among other things, our strategic direction or significant corporate transactions, o conflicts related to corporate opportunities that could be pursued by us, on the one hand, or by Vulcan, on the other hand, or o conflicts related to existing or new contractual relationships between us, on the one hand, and Vulcan and its other affiliates, on the other hand. 23 24 In particular, Vulcan is affiliated with Charter, currently our largest cable partner. Additionally, Vulcan has the exclusive right to provide or designate the first page our end users see when they log on to our service and, if it provides that first page, will be entitled to all of the related revenues. Moreover, Vulcan can prohibit us from providing content that competes with content it chooses to provide, and can prohibit us from providing telephony service if it chooses to provide those services. The Future Sale Of Shares May Hurt Our Market Price. A substantial number of shares of our common stock are available for resale. If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. These sales also might make it more difficult for us to sell equity securities in the future at times and prices that we deem appropriate. Our Stock Price Is Likely To Be Highly Volatile. The stock market has experienced extreme price and volume fluctuations. In particular, the market prices of the securities of Internet-related companies have been especially volatile. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of our management's attention and resources. We Have Anti-Takeover Provisions. Certain provisions of our certificate of incorporation, our bylaws and Delaware law, in addition to the concentration of ownership in Vulcan, could make it difficult for a third party to acquire us, even if doing so might be beneficial to our other stockholders. Item 3 - Quantitative and Qualitative Disclosures About Market Risk Our exposure to market risk is limited to interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates. Our cash equivalents are invested with high-quality issuers and limit the amount of credit exposure to any one issuer. Due to the short-term nature of our cash equivalents, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency hedging or other derivative financial instruments. Part II - Other Information Item 1 - Legal Proceedings. None. Item 2 - Changes in Securities and Use of Proceeds. a. In May 2000, Lucent purchased 1,250,000 shares of the Company's common stock for $10.0 million. This common stock was sold in reliance on the exemption from registration provided by section 4(2) of the Securities Act. b. In June 1999, we completed our initial public offering of Common Stock. Concurrent with the initial public offering, we sold Common Stock to Cisco Systems, Com21 and Microsoft under stock purchase agreements. The initial proceeds to the Company after deducting underwriting discounts and commissions of $13,081,250 were $199,768,750. Through June 30, 2000 the gross proceeds of the offering have been applied as follows: Direct or Indirect payment to others for: Underwriting discounts and commissions $13,081,250 Other offering expenses $ 1,828,854 Working Capital $74,430,896
None of such payments were direct or indirect payments to investors or officers or 10% stockholders of the Company. The remainder of the proceeds is invested in short term, interest bearing investment grade securities. Item 3 - Defaults upon Senior Securities. None. 24 25 Item 4 - Submission of Matters to a Vote of Security Holders. The Corporations' Annual Meeting of Shareholders was held on June 6, 2000. Matters submitted to, and approved by, shareholders are listed below, as is a tabulation of voting. (1) The following persons nominated as Directors were elected:
Class I For Withheld ------- --- -------- Irving W. Bailey, II 46,703,677 42,520 Stephen E. Silva 45,346,997 1,399,200
Other Directors continuing in office are as follows: Michael E. Gellert, David A. Jones, Jr. Jerald L Kent, Robert S. Saunders and William D. Savoy. There were no broker nonvotes. (2) An amendment to the Corporation's 1999 Stock Option Plan to increase the number of shares of Common Stock authorized for issuance under the Plan was approved by the following vote.
For Withheld Abstain Broker Nonvotes --- -------- ------- --------------- 30,537,533 344,348 6,337 15,957,979
Item 5 - Other Information. None. Item 6 - Exhibits and Reports on Form 8-K. (a) Exhibits See attached exhibit index. (b) Reports on Form 8-K No such reports were filed during the quarter ended June 30, 2000. 25 26 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934 as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. High Speed Access Corp. Date August 14, 2000 By /s/ Daniel J. O'Brien --------------- --------------------- Daniel J. O'Brien President Date August 14, 2000 By /s/ George Willett ---------------- --------------------- George Willett Chief Financial Officer 26 27 INDEX TO EXHIBITS
Exhibit Number Description ------ ----------- 10.1 NetPerformance Agreement and Plan of Merger dated June 23, 2000 27 Financial Data Schedule