Back to GetFilings.com
================================================================================
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 March 31, 2003.
[ ] 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
incorporation or organization) Identification Number)
9900 CORPORATE CAMPUS DRIVE, SUITE 3000
LOUISVILLE, KENTUCKY 40223
(Address of principal executive offices, including zip code)
502/657-6340
(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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
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 April 18, 2003... 40,294,783
1
INDEX
PAGE
------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Statements of Net Assets in Liquidation as of March 31,
2003 and December 31, 2002 3
Condensed Consolidated Statement of Changes in Net Assets in Liquidation for the
three months ended March 31, 2003 4
Condensed Consolidated Statement of Operations (Going Concern Basis) for the
three months ended March 31, 2002 5
Condensed Consolidated Statement of Cash Flows (Going Concern Basis) for the
three months ended March 31, 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 20
Item 4 - Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 20
Item 2 - Changes in Securities and Use of Proceeds 21
Item 3 - Defaults upon Senior Securities 22
Item 4 - Submission of Matters to a Vote of Security Holders 22
Item 5 - Other Information 22
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 23
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENTS OF NET ASSETS IN LIQUIDATION
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
------------ ------------
ASSETS
Cash and cash equivalents $ 64,256 $ 63,640
Short-term investments 1,250 1,237
Interest receivable 260 392
Charter holdback 1,053 2,092
Furniture and fixtures 112 113
------------ -----------
Total assets 66,931 67,474
------------ -----------
LIABILITIES
Accounts payable and accrued liabilities 2,096 2,571
Estimated costs to be incurred during the liquidation period 1,016 1,089
------------ -----------
Total liabilities 3,112 3,660
------------ -----------
Net assets in liquidation 63,819 63,814
Less: Contingency reserve 2,000 2,000
------------ -----------
Net assets available for distribution to stockholders $ 61,819 $ 61,814
============ ===========
Net assets in liquidation per share $ 1.58 $ 1.58
Net assets available for distribution to stockholders per share $ 1.53 $ 1.53
Outstanding shares used in computing per share amounts 40,294,783 40,294,783
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS)
(UNAUDITED)
Net assets in liquidation at December 31, 2002 $ 63,814
Adjust assets and liabilities to fair value 61
Accrue additional estimated costs during liquidation (56)
----------
Net assets in liquidation at March 31, 2003 $ 63,819
==========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (GOING CONCERN BASIS)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
General and administrative operating expenses:
General and administrative expenses $ 3,210
Non-cash compensation expense from restricted stock 326
--------------
Total general and administrative operating expenses 3,536
--------------
Loss from continuing operations before other income
(expense) and discontinued operations (3,536)
Investment income 189
Interest expense (224)
---------------
Loss from continuing operations before discontinued
operations (3,571)
Discontinued operations:
Loss from discontinued operations, net (4,112)
Gain on sale of operations to Charter 40,259
--------------
Net income $ 32,576
==============
Basic and diluted net income per share:
Loss from continuing operations $ (0.07)
Loss from discontinued operations (0.07)
Gain on sale of operations to Charter 0.77
--------------
Net income $ 0.63
==============
Weighted average shares used in computation of basic and
diluted net income per share 52,018,876
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
HIGH SPEED ACCESS CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (GOING CONCERN BASIS)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
(IN THOUSANDS)
(UNAUDITED)
OPERATING ACTIVITIES
Net income $ 32,576
Adjustments to reconcile net income to cash used in operating activities
of continuing operations:
Loss from discontinued operations, net 4,112
Gain on sale of operations to Charter (40,259)
Loss on early extinguishment of debt and capital lease obligations 2,041
Non-cash compensation expense from restricted stock 326
Changes in operating assets and liabilities excluding the effect of dispositions:
Prepaid expenses (332)
Accrued compensation and related expenses (537)
-----------
Net cash used in operating activities of continuing operations (2,073)
Net cash used in operating activities of discontinued operations (4,915)
----------
Net cash used in operating activities (6,988)
----------
INVESTING ACTIVITIES
Purchases of short-term investments (30,783)
Sales and maturities of short-term investments 4,986
----------
Net cash used in investing activities of continuing operations (25,797)
Net cash provided by investing activities of discontinued operations 74,622
----------
Net cash provided by investing activities 48,825
----------
FINANCING ACTIVITIES
Repurchase of common stock (4,449)
-----------
Net cash used in financing activities of continuing operations (4,449)
Net cash used in financing activities of discontinued operations (10,697)
----------
Net cash used in financing activities (15,146)
----------
Net change in cash and cash equivalents from continuing operations (32,319)
Net change in cash and cash equivalents from discontinued operations 59,010
----------
Net change in cash and cash equivalents 26,691
Cash and cash equivalents, beginning of period 11,714
----------
Cash and cash equivalents, end of period $ 38,405
==========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchases payable $ 220
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
ITEM 1 - NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of High Speed
Access Corp. and its subsidiaries (herein referred to as the Company, we, us, or
our) included herein reflect all adjustments, consisting only of normal
recurring adjustments, which in the opinion of management are necessary to
present fairly the Company's net assets in liquidation and changes in net assets
in liquidation or 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 Board of Directors unanimously adopted a Plan of Liquidation and
Dissolution (the "Plan") on August 13, 2002. The Plan was approved by the
holders of a majority of the Company's shares on November 27, 2002. The key
features of the Plan are (1) filing a Certificate of Dissolution with the
Secretary of State of Delaware and thereafter remaining in existence as a
non-operating entity for three years; (2) winding up our affairs, including the
settlement of any then-outstanding issues with Charter (see Note 2,
"Discontinued Operations") relating to the Asset Sale, selling any remaining
non-cash assets of the Company, and taking such action as may be necessary to
preserve the value of our assets and distributing our assets in accordance with
the Plan; (3) paying our creditors; (4) terminating any of our remaining
commercial agreements, relationships or outstanding obligations; (5) resolving
our outstanding litigation; (6) establishing a Contingency Reserve for payment
of the Company's expenses and liabilities; and (7) preparing to make
distributions to our stockholders.
Under Delaware law, the Company will remain in existence as a non-operating
entity until December 4, 2005 and is required to maintain a certain level of
liquid assets and reserves to cover any remaining liabilities and pay operating
costs during the dissolution period. During the dissolution period, the Company
will attempt to convert its remaining assets to cash and settle its liabilities
as expeditiously as possible.
These financial statements should be read in conjunction with the financial
statements, notes and discussions thereto included in our Annual Report on Form
10-K for the fiscal year ended December 31, 2002 and our October 25, 2002 Proxy
Statement.
LIQUIDATION BASIS OF ACCOUNTING
The condensed consolidated financial statements for the three months ended
March 31, 2002 were prepared on the going concern basis of accounting, which
contemplates realization of assets and satisfaction of liabilities in the normal
course of business. As a result of the adoption of the Plan, the Company adopted
the liquidation basis of accounting effective November 27, 2002. Inherent in the
liquidation basis of accounting are significant management estimates and
judgments. Under the liquidation basis of accounting, assets are stated at their
estimated net realizable values and liabilities, including costs of liquidation,
are stated at their anticipated settlement amounts, all of which approximate
their estimated fair values. The estimated net realizable values of assets and
settlement amounts of liabilities represent our best estimate of the recoverable
values of the assets and settlement amounts of liabilities. There can be no
assurance, however, that we will be successful in selling the assets at their
estimated net realizable value or in settling the liabilities at their estimated
amounts. The liquidation basis of accounting requires that we accrue an estimate
for all liabilities related to expenses to be incurred during the wind up
period. While we believe our estimates are reasonable under the circumstances,
if the length of our wind up period were to change or other conditions were to
arise, actual results may differ from these estimates and those differences may
be material.
In order to record assets at estimated net realizable value and liabilities
at estimated settlement amounts under liquidation basis accounting, the Company
recorded the following adjustments to record its assets and liabilities to fair
value as of November 27, 2002, the date of adoption of liquidation basis
accounting (in thousands):
ADJUST ASSETS AND LIABILITIES TO FAIR VALUE:
Record future interest income $ 551
Write-off prepaid expenses (168)
Adjust furniture and fixtures to fair value 150
Adjust accounts payable and accrued expenses to fair value 123
----------
Total adjustments to fair value 656
----------
ACCRUE ESTIMATED COSTS DURING LIQUIDATION:
Costs to be incurred during the liquidation period (1,110)
----------
Total estimated costs during liquidation (1,110)
----------
Total liquidation adjustments $ (454)
==========
7
The amount and timing of liquidating distributions will depend upon a
variety of factors including, but not limited to, the actual proceeds from the
realization of the Company's assets, the ultimate settlement amounts of the
Company's liabilities and obligations and actual costs incurred in connection
with carrying out the Plan, including salaries, administrative and operating
costs during the liquidation period. A summary of significant estimates and
judgments utilized in preparation of the March 31, 2003 consolidated financial
statements on a liquidation basis follows:
Interest Receivable. At March 31, 2003, interest receivable of $0.3 million
represents the Company's estimate of future interest earnings on cash, cash
equivalents and short-term investments over the liquidation period through
December 4, 2005 and accounts for less than 0.5% of the Company's total
estimated assets.
Charter Holdback. At March 31, 2003, the Charter holdback of $1.1 million
represents the remaining amount of the Asset Sale purchase price held back by
Charter to secure indemnity claims against the Company under the Asset Purchase
Agreement plus accrued interest.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (see Note 5, "Commitments,
Guarantees and Contingencies"), and deferred release of half of the $2.0 million
indemnity holdback. The Company collected $1.0 million of its indemnity holdback
plus accrued interest from Charter, and will seek the release of the $1.0
million balance plus accrued interest if and at such time as Charter is
dismissed as a defendant in the IPO Litigation or the IPO Litigation is
otherwise settled, minus Charter's actual defense costs if such costs exceed
$250,000.
Furniture and Fixtures. At March 31, 2003, furniture and fixtures of $0.1
million represents the Company's estimate of cash proceeds to be received on the
sale of office furniture.
Accounts Payable and Accrued Liabilities. At March 31, 2003, accounts
payable and accrued expenses were $2.1 million. Included in this amount are
accrued circuit termination charges of $0.2 million and other known obligations
totaling $1.0 million, including $0.2 million for the expected payout on
2,862,174 stock options outstanding under the Company's stock option plans that
were cancelled on March 3, 2003. The balance of $0.9 million in accounts payable
and accrued liabilities is comprised of the following items:
o Severance and Other Compensation. Severance and other compensation in
the amount of $0.7 million represents severance payable to our former
President and Chief Executive Officer of $0.5 million, as well as other
healthcare and compensation expenses for current and former employees.
o Estimated Litigation Settlement Costs. Litigation settlement costs in
the amount of $0.2 million represents the Company's expected
proportional share of fees and expenses related to settling the
Delaware Class Action lawsuits (Denault v. O'Brien, et. al., Civil
Action No. 19045-NC, Tesche v. O'Brien, et al., Civil Action No.
19046-NC, Johnson v. O'Brien, et. al., Civil Action No. 19053-NC, and
Krim v. Allen, et al., Civil Action 19478-NC).
Estimated Costs to be Incurred During The Liquidation Period. At March 31,
2003, the Company estimates that there are $1.0 million of costs to be incurred
through December 4, 2005, including compensation for liquidation personnel ($0.4
million), professional fees ($0.5 million), and miscellaneous other costs ($0.1
million).
Contingency Reserve. In view of the duration of the liquidation period to
December 4, 2005, and provision in Delaware law that the Company maintain
reserves sufficient to allow for the payment of all its liabilities and
obligations, including all contingent, conditional and unmatured claims, the
Company established a Contingency Reserve upon the adoption of liquidation basis
accounting on November 27, 2002. The amount of reserve initially established was
$2.0 million and is unchanged as of March 31, 2003. At March 31, 2003, the
Company has no known material claims against this reserve and will periodically
assess whether maintenance of a lower or higher Contingency Reserve is required.
In the event there are no claims against this reserve, the amount of liquidation
proceeds that may be paid to stockholders will be increased.
8
Stock-Based Employee Compensation. The Company accounted for stock-based
awards to employees in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" and adopted the disclosure-only
requirements of SFAS No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123").
The following illustrates the effect on net income and net income per share
for the three months ended March 31, 2002 if the fair value based method of SFAS
123 had been applied to all outstanding and unvested awards (in thousands).
Net income as reported........................................... $ 32,576
Add: Stock based employee compensation expense included in
reported net income........................................... 350
Deduct: Total stock-based employee compensation expense
determined under fair value based methods for all awards...... (3,319)
----------
Pro forma net income (loss)...................................... $ 29,607
==========
Basic and diluted net income (loss) per share:
As reported.................................................. $ 0.63
Pro forma.................................................... $ 0.57
NOTE 2 - DISCONTINUED OPERATIONS
HIGH SPEED INTERNET ACCESS AND RELATED SERVICES
On February 28, 2002, the Company consummated the sale of substantially all
of its assets (the "Asset Sale") to CC Systems, LLC immediately after obtaining
the required approval of the Company's stockholders. The Asset Sale was effected
pursuant to an asset purchase agreement (the "Asset Purchase Agreement"), dated
September 28, 2001, between the Company and Charter Communications Holding
Company, LLC. Subsequent to September 28, 2001, Charter Communications Holding
Company, LLC assigned to CC Systems, LLC the rights to purchase assets and
certain other rights under the Asset Purchase Agreement and certain other
related agreements. Except as otherwise specifically noted or unless the context
otherwise requires, any reference herein to "Charter" should be deemed a
reference individually and/or collectively to any of the following Charter
entities: Charter Communications Holding Company, LLC, Charter Communications,
Inc., CC Systems, LLC, and Charter Communications Ventures, LLC.
The assets acquired by Charter pursuant to the Asset Purchase Agreement were
used by the Company primarily in the provision of high speed Internet access to
residential and commercial customers of Charter via cable modems. Subsequent to
the Asset Sale, we do not own or operate any revenue-generating businesses.
Pursuant to the terms of the Asset Purchase Agreement, Charter acquired
certain assets from us in consideration for (i) the payment to us of a cash
amount equal to $81.1 million, subject to certain adjustments, (ii) the
assumption of certain of our operating liabilities, and (iii) the tender to us
of all our outstanding shares of Series D Preferred Stock and warrants held by
Charter to purchase shares of common stock. On February 28, 2002, Charter held
back an aggregate of $3.4 million of the purchase price to secure certain
purchase price adjustments and indemnity claims against the Company under the
Asset Purchase Agreement. Of this amount, $1.4 million was paid to us on April
30, 2002 and $1.0 million plus accrued interest was paid to us on February 28,
2003.
The Company received from Charter on February 28, 2002, a net cash amount
equal to $69.5 million. The payment consisted of the following (in millions):
Cash purchase price per the Asset Purchase Agreement...... $ 81.1
--------
Adjustments:
Current assets acquired by Charter, as adjusted per
the Asset Purchase Agreement........................ 4.5
Capital leases, debt and other liabilities assumed
or paid by Charter.................................. (12.7)
Indemnity holdbacks.................................... (3.4)
--------
Total adjustments................................ (11.6)
--------
Net cash proceeds from sale to Charter................. $ 69.5
========
Under the Asset Purchase Agreement:
9
o We sold substantially all of our revenue-generating fixed assets with a net
book value of $22.8 million at February 28, 2002.
o We sold all accounts receivable related to Charter systems with a net book
value of $4.1 million at February 28, 2002 for which we received a purchase
price adjustment.
o The Company paid to Charter $5.1 million for outstanding launch fees.
o Charter paid to the Company $2.2 million for expenses incurred by the
Company on Charter's behalf prior to September 28, 2001.
o Charter assumed certain of the Company's operating and capital lease
obligations with future minimum lease payments of $13.5 million.
o The Company paid $2.2 million to retire all outstanding long-term debt and
$8.1 million to pay-off substantially all of the Company's remaining
capital lease obligations. In connection with these payments, the Company
recorded a loss on the early extinguishment of debt and capital lease
obligations of $2.0 million during the first quarter of 2002.
o Warrants to purchase 2,650,659 shares of our Company's common stock earned
by Charter under various distribution agreements were cancelled.
o All of the Company's 75,000 outstanding shares of Series D Preferred Stock
were cancelled.
o Charter assumed certain commitments relating to circuits with a national
telecommunications company with future minimum payments of $7.4 million
through 2003.
o On February 28, 2002, the Company paid an additional $3.4 million of
expenses related to the Asset Sale. The total expenses paid were $6.4
million.
The Company recorded a gain on the Asset Sale to Charter of $40.3 million
during the first quarter of 2002. The components of the gain are as follows (in
millions):
Net cash proceeds from sale to Charter...... $ 69.5
Fair value of preferred stock............... 3.7
Liabilities assumed by Charter.............. 14.4
Book value of assets acquired by Charter.... (44.3)
Indemnity holdbacks......................... 3.4
Transaction expenses........................ (6.4)
--------
Gain on Asset Sale.......................... $ 40.3
========
Also on February 28, 2002, the Company purchased 20,222,139 shares of our
common stock from Vulcan Ventures Incorporated ("Vulcan") for an aggregate
purchase price of $4.4 million, or $0.22 per share. The consummation of the
Asset Sale was a condition precedent to the purchase of common stock from
Vulcan. The Board of Directors approved the cancellation of these shares in
March, 2002 and they were officially retired in September, 2002. Following the
consummation of the Asset Sale and the purchase of common stock from Vulcan,
none of Vulcan, Charter or any of their respective affiliates hold any equity
interest in the Company. Accordingly, the Company is no longer affiliated with
Vulcan, Charter, or any of their respective affiliates.
The Asset Sale completed the discontinuance of the Company's high speed
Internet access and related services business.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144)
on January 1, 2002. SFAS 144 supersedes Emerging Issues Task Force Issue No.
95-18 "Accounting and Reporting for a Discontinued Business Segment When the
Measurement Date Occurs after the Balance Sheet Date but before the Issuance of
Financial Statements" and requires a discontinued operation to be accounted for
under SFAS 144 if a measurement date for the discontinued operations is not
reached under Accounting Principles Board Opinion No. 30, "Reporting Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business" prior
to the entity's period-end. The measurement date for the discontinuance of the
Company's high speed Internet access and related services business that included
the Asset Sale occurred on February 28, 2002, the date on which the Company's
stockholders approved the Asset Sale. Consequently, the results of operations of
the high speed Internet access and related services business have been presented
as discontinued.
INTERNATIONAL ISP INFRASTRUCTURE SERVICES
On December 31, 2001, the Company terminated its agreement with Kabel
Nordrhein-Westfalen GmbH & Co. KG ("KNRW") in Germany for the provision of
international ISP infrastructure services. The results of this operation have
also been classified as discontinued.
NOTE 3 - STOCKHOLDERS' EQUITY
10
Activity in stockholders' equity for the three months ended March 31, 2002 was
as follows (in thousands except share amounts):
PREFERRED STOCK COMMON STOCK
--------------- ----------------- TREASURY STOCK COMPRE- STOCK-
PAID-IN DEFERRED ACCUMULATED ------------------- HENSIVE HOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT SHARES AMOUNT LOSS EQUITY
------ ------ ---------- ------ -------- ------------ ----------- ------ ------- ------- --------
Balance at
December 31,
2001 75,000 $ 1 60,394,835 $ 604 $742,144 $(1,763) $(698,791) -- $ -- $ 38 $42,233
Amortization
of deferred
compensation 350 350
Purchase of
treasury
stock 20,222,139 (4,449) (4,449)
Retirement of
preferred
stock (75,000) (1) (3,663) (3,664)
Net unrealized
gain on
investments 15 15
Net income 32,576 32,576
------- ---- ---------- ----- -------- ------- --------- ---------- ------ ----- -------
Balance at
March 31,
2002 -- $ - 60,394,835 $ 604 $738,481 $(1,413) $(666,215) 20,222,139 $(4,449) $ 53 $67,061
======== ==== ========== ===== ======== ======= ========= ========== ======= ===== =======
COMPREHENSIVE INCOME (LOSS)
Comprehensive income, comprised of net income and net unrealized holding
gains and losses on investments, totaled $32.6 million for the three months
ended March 31, 2002.
NOTE 4 - INCOME PER SHARE
For the three months ended March 31, 2002, the Company computed net income
per share under the provisions of SFAS No. 128, "Earnings per Share," ("SFAS
128"). Under the provisions of SFAS 128, basic net income per share was computed
by dividing the net income for the period by the weighted average number of
shares of common stock outstanding during the period.
Diluted earnings per share was determined in the same manner as basic
earnings per share, except that the number of shares was increased assuming
exercise of dilutive stock options and warrants using the treasury stock method,
assuming conversion of preferred stock, and assuming vesting of restricted stock
awards. In addition, income was adjusted for dividends and other transactions
relating to preferred stock for which conversion was assumed. The calculation of
diluted net income per share excluded potential common shares if the effect was
anti-dilutive.
Basic and diluted net income per share for the three months ended March 31,
2002 was $0.63 based on weighted average shares outstanding of 52,018,876.
Diluted net income per share equals basic net income per share because the
assumed exercise of the Company's stock options and warrants, the assumed
conversion of preferred stock, and the vesting of restricted stock is
anti-dilutive to the loss from continuing operations per share. Stock options
and warrants to purchase 5,934,778 shares of our common stock at March 31, 2002
were excluded from the calculation of diluted net income per share as they were
anti-dilutive.
NOTE 5 - COMMITMENTS, GUARANTEES AND CONTINGENCIES
The Delaware Class Action Lawsuits. The Company, our then directors,
certain former directors as well as Charter and Paul Allen, were named as
defendants in four putative class action lawsuits filed in the Court of Chancery
of the State of Delaware (Denault v. O'Brien, et. al., Civil Action No.
19045-NC, Tesche v. O'Brien, et al., Civil Action No. 19046-NC, Johnson v.
O'Brien, et. al., Civil Action No. 19053-NC, and Krim v. Allen, et al., Civil
Action 19478-NC). All four lawsuits, which alleged breach of fiduciary duties by
the individual defendants and Charter, were consolidated and settled with the
approval of the Delaware Chancery Court on April 16, 2003. No objections to the
settlement were filed, and any appeals must be filed by May 16, 2003. Assuming
no appeals are filed, the Company will pay its $166,500 portion of the $390,000
settlement amount required to reimburse plaintiffs' counsel for their fees and
expenses incurred in the litigation. The Company will not make any liquidation
distributions until the court's approval of the settlement (including any
appeals) is final in all respects.
The IPO Litigation. Also, on November 5, 2001, the Company, our President
and Chief Financial Officer (Mr. George Willett) and one of our former
Presidents (Mr. Ron Pitcock), together with Lehman Brothers, Inc., J.P. Morgan
Securities, Inc., CIBC World Markets Corp., and Banc of America Securities,
Inc., were named as defendants in a purported class action lawsuit filed in the
United States District Court for the Southern District of New York (Ruthy Parnes
v. High Speed Access Corp., et. al., Index No. 01-CV-9743(SAS)). The lawsuit
alleges that our Registration Statement, dated June 3, 1999, and Prospectus,
dated June 4, 1999, for the issuance and initial public offering of 13,000,000
shares of our common stock to investors contained material misrepresentations
and/or omissions. The purported class action alleges violations of Sections 11
and 15 of the Securities Act of 1933 (the "1933 Act") and Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-
promulgated thereunder. The
11
essence of the complaints is that defendants issued and sold our common stock
pursuant to the Registration Statement for the IPO without disclosing to
investors that certain underwriters in the offering had solicited and received
excessive and undisclosed commissions from certain investors. The complaints
also allege that our Registration Statement for the IPO failed to disclose that
the underwriters allocated Company shares in the IPO to customers in exchange
for the customers' promises to purchase additional shares in the aftermarket at
pre-determined prices above the IPO price, thereby maintaining, distorting
and/or inflating the market price for the shares in the aftermarket. The
plaintiff asks to represent the interest of all holders of our common stock and
seeks unspecified monetary damages.
On July 15, 2002, the Company moved to dismiss all claims against it and
Messrs. Willett and Pitcock. The allegations against Messrs. Willett and Pitcock
were dismissed without prejudice on October 11, 2002 pursuant to a Reservation
of Rights and Tolling Agreement dated as of July 20, 2002. On February 19, 2003,
the Court denied the Company's motion to dismiss the alleged violations of
Section 11 and 15 of the 1933 Act. However, the Court granted the Company's
motion to dismiss the alleged violations of Sections 10(b) and 20(a) of the 1934
Act and Rule 10b- promulgated thereunder.
This action is being coordinated with nearly three hundred other nearly
identical actions filed against other companies. Prior to the February 19, 2003
ruling on the Company's motion to dismiss, there were settlement discussions
among the plaintiffs, the company defendants and their insurance carriers, which
if closed would have removed the Company from the litigation without payment of
any funds. However, as a result of the recent ruling, we cannot opine as to
whether or when a settlement might occur.
With respect to the allegations against the Company, we believe this
lawsuit is without merit and intend to continue to vigorously defend against the
claims made therein. We express no opinion as to the allegations lodged against
Lehman Brothers, Inc., J.P. Morgan Securities, Inc., CIBC World Markets Corp.,
and Banc of America Securities Inc.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (the "Charter IPO Litigation
Indemnity Claim"), and deferred release of half of the $2.0 million indemnity
holdback until such time as we obtain the dismissal of Charter as a defendant in
the IPO Litigation or the IPO Litigation is otherwise settled, minus Charter's
actual defense costs if such costs exceed $250,000. On February 28, 2003, we
collected $1.0 million of the indemnity holdback plus accrued interest thereon
from Charter. We do not believe Charter is a "successor in interest" to the
Company, and are attempting to obtain an out-of-court dismissal of Charter from
the IPO Litigation. If we are not successful in this effort, we may either file
a motion with the court to obtain Charter's dismissal or wait on a possible
settlement of the IPO Litigation with respect to the Company.
We do not believe that the IPO litigation will have a material adverse
effect on our net assets in liquidation.
Indemnification of Charter. In connection with the Asset Sale, we agreed to
indemnify Charter against all claims arising from breaches of our
representations, warranties and covenants, various excluded liabilities and the
pre-closing operation of the assets we sold to Charter. The material
representations and warranties related to, among other things: the necessary
stockholder approval required to consummate the Asset Sale; the absence of
defaults under our material agreements; the assets being sold comprising of all
material assets used in the provision of high speed Internet access to Charter's
customers via cable modems; the absence of certain changes or events; compliance
with applicable laws, including environmental laws; the absence of litigation;
the status of our material contracts, capital leases and operating leases; real
property, including leased premises; title to and condition of the assets being
sold; intellectual property rights; taxes; labor matters; employee benefit
plans; our solvency immediately following the closing; and the correctness of
information we provided to Houlihan Lokey and Lehman Brothers in connection with
the issuance of their fairness opinion.
With the exception of certain representations and warranties and covenants
described below, all of the above-noted representations and warranties are in
effect through August 31, 2003, however any claims arising from any breaches of
these representations and warranties can only be asserted against and are
limited to the $2.0 million indemnification holdback that was released to us on
February 28, 2002 (subject to the single $1.0 million potential claim described
below).
The following representations and warranties and covenants extend beyond
August 31, 2003 and are not subject to any limitations:
(i) breaches of representations and warranties related to title to the
acquired assets, and certain matters affecting intellectual property,
technology and know-how, will be in effect until the Company is finally
dissolved on December 5, 2005;
12
(ii) breaches of representations and warranties related to taxes, certain
employee benefit plans and environmental matters will be in effect through
February 28, 2004;
(iii) the excluded liabilities, including the $1.0 million claim pertaining
to Charter being named as a defendant and "successor in interest" to the
Company in the IPO Litigation;
(iv) our operation of the assets sold to Charter prior to the closing of
the Asset Sale; and
(v) common law fraud.
The Company has no liability to Charter for claims arising from breaches of
our representations and warranties unless the damages in the aggregate for such
breaches exceed $250,000, in which case Charter is entitled to reimbursement
from the first dollar of such damages. However, Charter is entitled to
reimbursement from the first dollar of damages related to (i) breaches of
post-closing covenants and representations and warranties related to title,
taxes, certain benefit plans and environmental matters, (ii) the excluded
liabilities, (iii) operation of the assets sold to Charter prior to the closing
of the Asset Sale, and (iv) actual common law fraud, and such damages are
unlimited. These indemnification obligations are limited to actual damages. The
Company has no liability to Charter for indirect or consequential damages.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (the "Charter IPO Litigation
Indemnity Claim"), and deferred release of half of the $2.0 million indemnity
holdback until such time as we obtain the dismissal of Charter as a defendant in
the IPO Litigation or the IPO Litigation is otherwise settled, minus Charter's
actual defense costs if such costs exceed $250,000. On February 28, 2003, we
collected $1.0 million of the indemnity holdback plus accrued interest thereon
from Charter. We do not believe Charter is a "successor in interest" to the
Company, and are attempting to obtain an out-of-court dismissal of Charter from
the IPO Litigation. If we are not successful in this effort, we may either file
a motion with the court to obtain Charter's dismissal or wait on a possible
settlement of the IPO Litigation with respect to the Company.
Other than the Charter IPO Litigation Indemnity Claim described above, we
are aware of no other claims that Charter has or intends to assert against us in
connection with the Asset Sale.
NOTE 7 - RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In May 2002, the FASB issued SFAS No. 145 ("SFAS 145"), "Rescission of SFAS
Nos. 4, 44, 64, Amendment of SFAS 13, and Technical Corrections as of April
2002." SFAS 145 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," which required that gains and losses from
extinguishment of debt that were included in the determination of net income be
aggregated and, if material, classified as an extraordinary item, net of the
related income tax effect. Under SFAS 145, gains or losses from extinguishment
of debt should be classified as extraordinary items only if they meet the
criteria in Accounting Principal's Board Opinion No. 30 ("APB 30"), "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". Applying the criteria in APB 30 will distinguish transactions
that are part of an entity's recurring operations from those that are unusual or
infrequent or that meet the criteria for classification as an extraordinary
item. The Company adopted SFAS 145 on January 1, 2003. The losses on early
extinguishment of debt and capital lease obligations that were classified as
extraordinary items in prior periods presented that did not meet the criteria of
APB 30 for classification as extraordinary items were reclassified to loss from
operations.
In November 2002, the FASB, issued FASB Interpretation No. 45 ("FIN 45"),
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. Fin
45 requires that upon issuance of a guarantee, the entity must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
FIN 45 requires disclosure about each guarantee even if the likelihood of the
guarantor's having to make any payments under the guarantee is remote. The
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after December 31,
2002 and the disclosure provisions of FIN 45 were effective for our December 31,
2002 financial statements. Adopting the recognition provisions of FIN 45 did not
have an impact on the Company. We have made the disclosures required by FIN 45
in the notes to our consolidated financial statements (see Note 5, "Commitments,
Guarantees and Contingencies").
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an interpretation of ARB 51. The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved
13
through means other than through voting right (variable interest entities, or
VIEs) and how to determine when and which business enterprise should consolidate
the VIE (the primary beneficiary). The provisions of FIN 46 are effective
immediately for VIEs created after January 31, 2003 and no later than July 1,
2003 for VIEs created before February 1, 2003. In addition, FIN 46 requires that
both the primary beneficiary and all other enterprises with a significant
variable interest make additional disclosure in filings issued after January 31,
2003. The adoption of FIN 46 is not expected to have an impact on the Company
because we do not hold any interest in an entity qualifying as a VIE.
In January 2003, the FASB issued Statement No. 148 ("SFAS 148"), Accounting
for Stock-Based Compensation - Transition and Disclosure. SFAS 148 amends FASB
Statement No. 123 ("SFAS 123"), Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. See Note 1, "Basis of Presentation" for our
stock option accounting policy and required disclosures.
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 under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - 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, 2002.
OVERVIEW
High Speed Access Corp. (hereinafter referred to as the Company, we, us or
our) formerly provided high speed Internet access and related services to
residential and commercial customers primarily via cable modems and
international ISP infrastructure services.
On August 13, 2002, our Board concluded that the liquidation of the Company
was the best alternative available for maximizing stockholder value and adopted
a Plan of Liquidation and Dissolution (the "Plan"). The Plan was approved by the
holders of a majority of the Company's shares on November 27, 2002. The key
features of the Plan are (1) filing a Certificate of Dissolution with the
Secretary of State of Delaware and thereafter remaining in existence as a
non-operating entity for three years; (2) winding up our affairs, including the
settlement of any then-outstanding issues with Charter relating to the Asset
Sale, selling any remaining non-cash assets of the Company, and taking such
action as may be necessary to preserve the value of our assets and distributing
our assets in accordance with the Plan; (3) paying our creditors; (4)
terminating any of our remaining commercial agreements, relationships or
outstanding obligations; (5) resolving our outstanding litigation; (6)
establishing a Contingency Reserve for payment of the Company's expenses and
liabilities; and (7) preparing to make distributions to our stockholders.
In connection with the adoption of the Plan and the anticipated liquidation,
the Company adopted the liquidation basis of accounting effective November 27,
2002, and has valued its assets at their estimated net realizable cash values
and has stated its liabilities, including costs to liquidate, at their estimated
settlement amounts, all of which approximate their estimated fair values.
Uncertainties as to the value to be realized from the disposal of the Company's
assets (other than cash), and the ultimate amount paid to settle its liabilities
make it impracticable to predict the aggregate net value that may ultimately be
distributable to stockholders. Claims, liabilities and future expenses of
liquidation (including salaries, payroll and local taxes, professional fees, and
miscellaneous office expenses), although currently declining in the aggregate,
will continue to be incurred with execution of the Plan. Although we do not
believe that a precise estimate of the Company's net assets can currently be
made, we believe that available cash and cash equivalent investments and amounts
received from the sale of office furniture will be adequate to provide for the
Company's obligations, liabilities, operating costs and claims (including
contingent liabilities), and to make future cash distributions to stockholders.
Under Delaware law, the Company will remain in existence as a non-operating
entity until December 4, 2005 and is required to maintain a certain level of
liquid assets and reserves to cover any remaining liabilities and pay operating
costs during the dissolution period. During the dissolution period, the Company
will attempt to covert its remaining assets to cash and settle its liabilities
as expeditiously as possible.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
14
Liquidation Basis of Accounting. As of November 27, 2002, all activities of
the Company are presented under the liquidation basis of accounting. Inherent in
the liquidation basis of accounting are significant management estimates and
judgments. Under the liquidation basis of accounting, assets have been valued at
their estimated net realizable values and liabilities are stated at their
anticipated settlement amounts, all of which approximate their estimated fair
values. The estimated net realizable values of assets and settlement amounts of
liabilities, including costs of liquidation, represent our best estimate of the
recoverable value of the assets and settlement amounts of liabilities. There can
be no assurance, however, that we will be successful in selling the assets at
their estimated net realizable value or in settling the liabilities at their
estimated amounts. The liquidation basis of accounting requires that we accrue
an estimate for all liabilities related to expenses to be incurred during the
wind up period. While we believe our estimates are reasonable under the
circumstances, if the length of our wind up period were to change or other
conditions were to arise, actual results may differ from these estimates and
these differences may be material.
Interest Receivable. At March 31, 2003, interest receivable of $0.3 million
represents the Company's estimate of future interest earnings on cash, cash
equivalents and short-term investments over the liquidation period through
December 4, 2005 and accounts for less than 0.5% of the Company's total
estimated assets.
Charter Holdback. At March 31, 2003, the Charter holdback of $1.1 million
represents the remaining amount of the Asset Sale purchase price held back by
Charter to secure indemnity claims against the Company under the Asset Purchase
Agreement plus accrued interest.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (see Note 5 of Notes to
Condensed Consolidated Financial Statements, "Commitments, Guarantees and
Contingencies"), and deferred release of half of the $2.0 million indemnity
holdback. The Company collected $1.0 million of its indemnity holdback plus
accrued interest from Charter, and will seek the release of the $1.0 million
balance plus accrued interest if and at such time as Charter is dismissed as a
defendant in the IPO Litigation or the IPO Litigation is otherwise settled,
minus Charter's actual defense costs if such costs exceed $250,000.
Furniture and Fixtures. At March 31, 2003, furniture and fixtures of $0.1
million represents the Company's estimate of cash proceeds to be received on the
sale of office furniture.
Accounts Payable and Accrued Liabilities. At March 31, 2003, accounts
payable and accrued expenses were $2.1 million. Included in this amount are
accrued circuit termination charges of $0.2 million and other known obligations
totaling $1.0 million, including $0.2 million for the expected payout on
2,862,174 stock options outstanding under the Company's stock option plans that
were cancelled on March 3, 2003. The balance of $0.9 million in accounts payable
and accrued liabilities is comprised of the following items:
o Severance and Other Compensation. Severance and other compensation in
the amount of $0.7 million represents severance payable to our former
President and Chief Executive Officer of $0.5 million, as well as other
healthcare and compensation expenses for current and former employees.
o Estimated Litigation Settlement Costs. Litigation settlement costs in
the amount of $0.2 million represents the Company's expected
proportional share of fees and expenses related to settling the
Delaware Class Action lawsuits (Denault v. O'Brien, et. Al., Civil
Action No. 19045-NC, Tesche v. O'Brien, et al., Civil Action No.
19046-NC, Johnson v. O'Brien, et. Al., Civil Action No. 19053-NC, and
Krim v. Allen, et al., Civil Action 19478-NC).
Estimated Costs to be Incurred During The Liquidation Period. At March 31,
2003, the Company estimates that there are $1.0 million of costs to be incurred
through December 4, 2005, including compensation for liquidation personnel ($0.4
million), professional fees ($0.5 million) and other miscellaneous costs ($0.1
million).
Contingency Reserve. In view of the duration of the liquidation period to
December 4, 2005, and provision in Delaware law that the Company maintain
reserves sufficient to allow for the payment of all its liabilities and
obligations, including all contingent, conditional and unmatured claims, the
Company established a Contingency Reserve upon the adoption of liquidation basis
accounting on November 27, 2002. The amount of reserve initially established was
$2.0 million and is unchanged as of March 31, 2003. At March 31, 2003, the
Company has no known material claims against this reserve and will periodically
assess whether maintenance of a lower or higher Contingency Reserve is required.
In the event there are no claims against this reserve, then the amount of
liquidation proceeds that may be paid to stockholders will be increased.
15
STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION
The condensed consolidated financial statements for the three months ended
March 31, 2002 were prepared on the going concern basis of accounting, which
contemplates realization of assets and satisfaction of liabilities in the normal
course of business. The Company adopted the liquidation basis of accounting as
of November 27, 2002. In order to record assets at estimated net realizable
value and liabilities at estimated settlement amounts under liquidation basis of
accounting, the Company recorded the following adjustments to record its assets
and liabilities to fair value as of November 27, 2002 (in thousands):
ADJUST ASSETS AND LIABILITIES TO FAIR VALUE:
Future interest income $ 551
Prepaid expenses (168)
Furniture and fixtures 150
Accounts payable and accrued expenses 123
----------
Total adjustments to fair value 656
----------
ACCRUE ESTIMATED COSTS DURING LIQUIDATION:
Costs to be incurred during the liquidation period (1,110)
----------
Total estimated costs during liquidation (1,110)
----------
Total liquidation adjustments $ (454)
==========
The amount and timing of future liquidating distributions will depend upon a
variety of factors including, but not limited to, the actual proceeds from the
realization of the Company's assets, the ultimate settlement amounts of the
Company's liabilities and obligations, and actual costs incurred in connection
with carrying out the Plan, including salaries, administrative and operating
costs during the liquidation period.
The increase in net assets in liquidation during the three months ended
March 31, 2003 is the result of the following (in thousands):
ADJUST ASSETS AND LIABILITIES TO FAIR VALUE:
Increase in estimated future interest income $ 28
Accounts payable and accrued expenses 33
----------
Total adjustments to fair value 61
----------
ACCRUE ADDITIONAL ESTIMATED COSTS DURING IQUIDATION:
Costs to be incurred during the liquidation period (56)
----------
Total estimated costs during liquidation (56)
----------
Total liquidation adjustments $ 5
==========
The increase in estimated costs during the liquidation period is primarily
the result of additional legal fees relating to the remaining $1.0 holdback from
Charter.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary objectives are to liquidate its assets in the shortest
time period possible while realizing the maximum values for such assets. The
actual nature, amount, and timing of all future distributions will be determined
by the Board in its sole discretion, and will depend in part upon the Company's
ability to convert certain remaining assets into cash and settle certain
obligations. Although the liquidation is currently expected to be concluded on
December 4, 2005, the period of time to liquidate the assets and distribute the
proceeds is subject to uncertainties and contingencies, many of which are beyond
the Company's control (see Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors"). The Company
currently intends to make an initial cash distribution of $1.40 per share or
$56.4 million to its stockholders in late May 2003, to be followed by a
subsequent liquidating distribution of $0.13 per share or $5.2 million on or
before November 27, 2003. The "per share" amounts are based on 40,294,783 shares
of common stock outstanding as of April 18, 2003. These amounts do not include
any benefit that might be realized if some or all of the Contingency Reserve is
not required to pay claims.
At March 31, 2003, the Company estimates that there is $1.0 million of
operating costs to be incurred during the remaining liquidation period through
December 4, 2005. The estimated liabilities of the Company at March 31, 2003
total $3.1 million. In addition, the Company has established a Contingency
Reserve of $2.0 million (see Note 1 of "Notes to Condensed Consolidated
Financial Statements"), equivalent to approximately $0.05 per share.
16
At March 31, 2003, net assets in liquidation were $63.8 million. We had cash
and cash equivalents and short-term investments of $64.3 million and $1.3
million, respectively, compared to cash and cash equivalents and short-term
investments of $63.6 million and $1.2 million, respectively, at December 31,
2002. The increase in cash, cash equivalents and short-term investments of $0.6
million is the result of the following: (in thousands):
Receipt of portion of Charter holdback $ 1,046
Interest received
152
Compensation and related expenses and severance (251)
Property, income and franchise taxes (138)
Circuit termination charges (82)
Professional fees (79)
Other accrued expenses (19)
----------
Net increase in cash, cash equivalents and short-term investments $ 629
==========
We invest excess cash in money market accounts with the intent to make such
funds readily available for potential distributions to stockholders.
The amount and timing of liquidating distributions will depend upon a
variety of factors including, but not limited to, the actual proceeds from the
realization of the Company's assets, the ultimate settlement amounts of the
Company's liabilities and obligations and actual costs incurred in connection
with carrying out the Plan, including salaries, administrative and operating
costs during the liquidation period.
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 of investments in interest-bearing money market
accounts with financial institutions. Short-term investments at March 31, 2003
are comprised solely of certificates of deposit.
LEGAL PROCEEDINGS.
The Delaware Class Action Lawsuits. The Company, our then directors,
certain former directors as well as Charter and Paul Allen, were named as
defendants in four putative class action lawsuits filed in the Court of Chancery
of the State of Delaware (Denault v. O'Brien, et. al., Civil Action No.
19045-NC, Tesche v. O'Brien, et al., Civil Action No. 19046-NC, Johnson v.
O'Brien, et. al., Civil Action No. 19053-NC, and Krim v. Allen, et al., Civil
Action 19478-NC). All four lawsuits, which alleged breach of fiduciary duties by
the individual defendants and Charter, were consolidated and settled with the
approval of the Delaware Chancery Court on April 16, 2003. No objections to the
settlement were filed, and any appeals must be filed by May 16, 2003. Assuming
no appeals are filed, the Company will pay its $166,500 portion of the $390,000
settlement amount required to reimburse plaintiffs' counsel for their fees and
expenses incurred in the litigation. The Company will not make any liquidation
distributions until the court's approval of the settlement (including any
appeals) is final in all respects.
The IPO Litigation. Also, on November 5, 2001, the Company, our President
and Chief Financial Officer (Mr. George Willett) and one of our former
Presidents (Mr. Ron Pitcock), together with Lehman Brothers, Inc., J.P. Morgan
Securities, Inc., CIBC World Markets Corp., and Banc of America Securities,
Inc., were named as defendants in a purported class action lawsuit filed in the
United States District Court for the Southern District of New York (Ruthy Parnes
v. High Speed Access Corp., et. al., Index No. 01-CV-9743(SAS)). The lawsuit
alleges that our Registration Statement, dated June 3, 1999, and Prospectus,
dated June 4, 1999, for the issuance and initial public offering of 13,000,000
shares of our common stock to investors contained material misrepresentations
and/or omissions. The purported class action alleges violations of Sections 11
and 15 of the Securities Act of 1933 (the "1933 Act") and Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-
promulgated thereunder. The essence of the complaints is that defendants issued
and sold our common stock pursuant to the Registration Statement for the IPO
without disclosing to investors that certain underwriters in the offering had
solicited and received excessive and undisclosed commissions from certain
investors. The complaints also allege that our Registration Statement for the
IPO failed to disclose that the underwriters allocated Company shares in the IPO
to customers in exchange for the customers' promises to purchase additional
shares in the aftermarket at pre-determined prices above the IPO price, thereby
maintaining, distorting and/or inflating the market price for the shares in the
aftermarket. The plaintiff asks to represent the interest of all holders of our
common stock and seeks unspecified monetary damages.
17
On July 15, 2002, the Company moved to dismiss all claims against it and
Messrs. Willett and Pitcock. The allegations against Messrs. Willett and Pitcock
were dismissed without prejudice on October 11, 2002 pursuant to a Reservation
of Rights and Tolling Agreement dated as of July 20, 2002. On February 19, 2003,
the Court denied the Company's motion to dismiss the alleged violations of
Section 11 and 15 of the 1933 Act. However, the Court granted the Company's
motion to dismiss the alleged violations of Sections 10(b) and 20(a) of the 1934
Act and Rule 10b- promulgated thereunder.
This action is being coordinated with nearly three hundred other nearly
identical actions filed against other companies. Prior to the February 19, 2003
ruling on the Company's motion to dismiss, there were settlement discussions
among the plaintiffs, the company defendants and their insurance carriers, which
if closed would have removed the Company from the litigation without payment of
any funds. However, as a result of the recent ruling, we cannot opine as to
whether or when a settlement might occur.
With respect to the allegations against the Company, we believe this
lawsuit is without merit and intend to continue to vigorously defend against the
claims made therein. We express no opinion as to the allegations lodged against
Lehman Brothers, Inc., J.P. Morgan Securities, Inc., CIBC World Markets Corp.,
and Banc of America Securities Inc.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (the "Charter IPO Litigation
Indemnity Claim"), and deferred release of half of the $2.0 million indemnity
holdback until such time as we obtain the dismissal of Charter as a defendant in
the IPO Litigation or the IPO Litigation is otherwise settled, minus Charter's
actual defense costs if such costs exceed $250,000. On February 28, 2003, we
collected $1.0 million of the indemnity holdback plus accrued interest thereon
from Charter. We do not believe Charter is a "successor in interest" to the
Company, and are attempting to obtain an out-of-court dismissal of Charter from
the IPO Litigation. If we are not successful in this effort, we may either file
a motion with the court to obtain Charter's dismissal or wait on a possible
settlement of the IPO Litigation with respect to the Company.
We do not believe that the IPO litigation will have a material adverse effect on
our net assets in liquidation.
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. The Company's plan is to wind-up
the Company's affairs and distribute its net assets to the stockholders. The
timing and completion of these objectives are subject to a number of risks and
uncertainties, including those set forth below:
WE MAKE FORWARD-LOOKING STATEMENTS IN THIS FORM 10-Q THAT ARE SUBJECT TO RISKS
THAT MAY CHANGE THE LIKELIHOOD OF THOSE STATEMENTS BEING REALIZED.
This Form 10-Q, as well as other documents incorporated by reference herein
and to which we refer in this Form 10-Q, describes many of the positive factors
and assumed benefits of the Plan. You should also be aware of factors that could
have a negative impact on the Plan and our ability to make distributions of net
assets, including the expected Initial Distribution, to you. When we use such
words as "believes", "expects", "anticipates", or similar expressions, we are
making forward-looking statements. In addition, we have made in this Form 10-Q
certain forward looking statements, including statements concerning the timing
and amount of distributions of cash to stockholders and other statements
concerning the value of our net assets and the resultant liquidation value per
share of common. All such forward-looking statements are necessarily only
estimates of future results, and there can be no assurance that actual results
will not materially differ from expectations. These statements are subject to
many risks, including those set forth in each of the following paragraphs.
YOU WILL NOT KNOW THE EXACT AMOUNT OR TIMING OF THE LIQUIDATION DISTRIBUTIONS.
The methods used by the Board and management to estimate the value of our
net assets do not result in an exact determination of value nor are they
intended to indicate definitively the amount of cash you will receive in
liquidation. The Company has established reserves for known and unknown
liabilities (see "Contingency Reserve" discussion below) and the adequacy of
those reserves will be reviewed prior to making the initial and any subsequent
cash distributions to stockholders. We cannot assure you that the amount you
will receive in liquidation will equal or exceed the price or prices at which
the common stock has recently traded or may trade in the future. Any
distributions to you may be reduced by additional liabilities we may incur, and
the ultimate settlement amounts of our liabilities.
18
The expected distribution of our cash to stockholders, including the
anticipated Initial Distribution in May 2003, may be delayed from the timing we
have previously announced for any number of reasons. These reasons include the
following:
1. It may take us longer than we anticipate to settle or finally resolve our
outstanding litigation. The Delaware Chancery Court approved the
settlement the Delaware Class Action Suits (see "Legal Proceedings") on
April 16, 2003. No objections to the settlement were filed, and any
appeals must be filed by May 16, 2003. We do not intend to make the
Initial Distribution until the Delaware Class Action Suits are finally
settled in all respects. Moreover, we may need additional time to
evaluate and assess the progress of the IPO Litigation (see "Legal
Proceedings") in order to more accurately gauge and reserve for our
non-insured exposure, if any, in the IPO Litigation.
2. Uncertainty remains regarding our expected collection of a $1.0 million
indemnity holdback due to us from Charter under the Asset Purchase
Agreement. On February 28, 2003, Charter notified the Company of its
assertion of a potential claim for indemnity in respect of Charter being
named as a "successor in interest" to the Company in the IPO Litigation
(see "Legal Proceedings"), and deferred release of half of the $2.0
million indemnity holdback. The Company collected $1.0 million of its
indemnity holdback plus accrued interest from Charter, and will seek the
release of the $1.0 million balance plus accrued interest if and at such
time as Charter is dismissed as a defendant in the IPO Litigation or the
IPO Litigation is otherwise settled or disposed of, less actual defense
costs to the extent they exceed $250,000. We are presently not aware of
any additional claims that Charter intends to assert against us under the
Asset Purchase Agreement. Nevertheless, many of our covenants,
representations and warranties survived the closing of the Asset Sale and
will not expire until February 28, 2004, while others will continue
indefinitely.
3. Additionally, even though we are not aware of any other pending or
threatened claims, a creditor of HSA or other party with a claim against
HSA might file a new lawsuit or obtain an injunction against our making
the proposed distributions to you under the Plan. In that event, either
our board or a court may decide that the amounts to be distributed are
needed to provide for the payment of such liabilities and expenses,
including unknown or contingent liabilities that may arise or be put in
dispute at a later date.
WE MIGHT MISCALCULATE OR FAIL TO ADEQUATELY RESERVE AN AMOUNT SUFFICIENT TO
COVER OUR CONTINGENT LIABILITIES.
On December 4, 2002 we filed a Certificate of Dissolution with the State of
Delaware dissolving HSA. According to Delaware General Corporation Law, HSA will
continue to exist for three years after the dissolution becomes effective
(December 4, 2005) or for a longer period if the Delaware Court of Chancery
requires us to, for the purpose of prosecuting and defending suits against HSA
and enabling us to dispose of our property, discharge our liabilities and
distribute to our stockholders any remaining assets.
Under Delaware law, the Board established a reserve for known and unknown
liabilities expected to be incurred through completion of our liquidation (the
"Contingency Reserve"), and the adequacy of that reserve will be reviewed prior
to making cash distributions to you. As of March 31, 2003, we set aside a $2.0
million Contingency Reserve. However, we cannot assure you that the Contingency
Reserve we established will be adequate to cover all of our expenses and
liabilities expected to be incurred through completion of our liquidation.
If the Contingency Reserve is insufficient for payment of our expenses and
liabilities, you could be held liable for payment to HSA's creditors of your
proportional share of amounts owed to creditors in excess of the Contingency
Reserve. In that regard, your liability would be limited to the amounts
previously received by you from HSA or a liquidating trust established by HSA.
Accordingly, you could be required to return some or all distributions
previously made to you. In such an event, you could receive nothing from HSA
under the Plan. Moreover, you could incur a net tax cost if you paid taxes on
the amounts received from HSA and then have to repay such amounts back to HSA's
creditors. Unless you are able to get a corresponding reduction in taxes in
connection with your repayment, you may end up having paid taxes on monies that
you have had to return.
YOU MAY NOT BE ABLE TO BUY OR SELL SHARES OF HSA'S COMMON STOCK IF WE CLOSE OUR
STOCK TRANSFER BOOKS.
We may close our stock transfer books at some after which you will no longer
be able to transfer shares. At the present time, we expect to keep our stock
transfer books open for some period of time after we make the Initial
Distribution. However, we expect to close our stock transfer books and
discontinue recording transfers of shares of common stock on the earliest to
occur of:
19
o the close of business on the date on which the remaining assets of HSA are
transferred to a liquidating trust, which we expect to occur sometime if
and after we make the Initial Distribution and any subsequent distributions
prior to November 27, 2003;
o the close of business on the record date fixed by the Board of Directors
for the final liquidating distribution; or
o December 5, 2005, the date on which HSA ceases to exist under Delaware law
(or later if unresolved claims or litigation is still outstanding).
After the stock transfer books have been closed, certificates representing
shares of common stock will not be assignable or transferable on HSA's books
except by will, intestate succession or operation of law. After the final record
date for the recording of stock transfers, we will not issue any new stock
certificates, other than replacement certificates.
OUR STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE
On July 10, 2002, HSA's common stock was delisted from the Nasdaq National
Market ("Nasdaq"). Ours common stock now trades on the Nasdaq over-the-counter
electronic bulletin board and the Pink Sheets, which could affect a
stockholder's ability to obtain price quotations and to buy or sell the
Company's common shares.
At the present time, our stock price is trading at a discount to our net
cash value per share. If we were to announce the timing and amount of a cash
distribution, our stock could fluctuate suddenly and widely depending on the
amount and timing of such distribution and the amount of funds still retained by
the Company. In the past, companies that have experienced volatility in the
market price of their stock have been the objects of securities class action
litigation. If we were the object of securities class action litigation, it
could result in substantial costs to our stockholders. Additionally, the market
price of our common stock may fluctuate significantly in the future, and these
fluctuations may be unrelated to our performance or actions with respect to the
Plan. General market price declines or market volatility in the future could
adversely affect the price of the our common stock, and thus, the current market
price may not be indicative of future market prices.
If the number of the Company's shareholders of record drops below 300,
the Company may deregister under the Securities Act of 1934, and will no longer
be subject to its rules, including those relating to reporting and proxy
solicitations.
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 instruments.
ITEM 4 - CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including the Company's principal executive officer and
chief financial officer, of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, he has concluded that the Company's
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect the disclosure controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Delaware Class Action Lawsuits. The Company, our then directors,
certain former directors as well as Charter and Paul Allen, were named as
defendants in four putative class action lawsuits filed in the Court of Chancery
of the State of Delaware (Denault v. O'Brien, et. al., Civil Action No.
19045-NC, Tesche v. O'Brien, et al., Civil Action No. 19046-NC, Johnson v.
O'Brien, et. al., Civil Action No. 19053-NC, and Krim v. Allen, et al., Civil
Action 19478-NC). All four lawsuits, which alleged breach of fiduciary duties
20
by the individual defendants and Charter, were consolidated and settled with the
approval of the Delaware Chancery Court on April 16, 2003. No objections to the
settlement were filed, and any appeals must be filed by May 16, 2003. Assuming
no appeals are filed, the Company will pay its $166,500 portion of the $390,000
settlement amount required to reimburse plaintiffs' counsel for their fees and
expenses incurred in the litigation. The Company will not make any liquidation
distributions until the court's approval of the settlement (including any
appeals) is final in all respects.
The IPO Litigation. Also, on November 5, 2001, the Company, our President
and Chief Financial Officer (Mr. George Willett) and one of our former
Presidents (Mr. Ron Pitcock), together with Lehman Brothers, Inc., J.P. Morgan
Securities, Inc., CIBC World Markets Corp., and Banc of America Securities,
Inc., were named as defendants in a purported class action lawsuit filed in the
United States District Court for the Southern District of New York (Ruthy Parnes
v. High Speed Access Corp., et. al., Index No. 01-CV-9743(SAS)). The lawsuit
alleges that our Registration Statement, dated June 3, 1999, and Prospectus,
dated June 4, 1999, for the issuance and initial public offering of 13,000,000
shares of our common stock to investors contained material misrepresentations
and/or omissions. The purported class action alleges violations of Sections 11
and 15 of the Securities Act of 1933 (the "1933 Act") and Sections 10(b) and
20(a) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-
promulgated thereunder. The essence of the complaints is that defendants issued
and sold our common stock pursuant to the Registration Statement for the IPO
without disclosing to investors that certain underwriters in the offering had
solicited and received excessive and undisclosed commissions from certain
investors. The complaints also allege that our Registration Statement for the
IPO failed to disclose that the underwriters allocated Company shares in the IPO
to customers in exchange for the customers' promises to purchase additional
shares in the aftermarket at pre-determined prices above the IPO price, thereby
maintaining, distorting and/or inflating the market price for the shares in the
aftermarket. The plaintiff asks to represent the interest of all holders of our
common stock and seeks unspecified monetary damages.
On July 15, 2002, the Company moved to dismiss all claims against it and
Messrs. Willett and Pitcock. The allegations against Messrs. Willett and Pitcock
were dismissed without prejudice on October 11, 2002 pursuant to a Reservation
of Rights and Tolling Agreement dated as of July 20, 2002. On February 19, 2003,
the Court denied the Company's motion to dismiss the alleged violations of
Section 11 and 15 of the 1933 Act. However, the Court granted the Company's
motion to dismiss the alleged violations of Sections 10(b) and 20(a) of the 1934
Act and Rule 10b- promulgated thereunder.
This action is being coordinated with nearly three hundred other nearly
identical actions filed against other companies. Prior to the February 19, 2003
ruling on the Company's motion to dismiss, there were settlement discussions
among the plaintiffs, the company defendants and their insurance carriers, which
if closed would have removed the Company from the litigation without payment of
any funds. However, as a result of the recent ruling, we cannot opine as to
whether or when a settlement might occur.
With respect to the allegations against the Company, we believe this
lawsuit is without merit and intend to continue to vigorously defend against the
claims made therein. We express no opinion as to the allegations lodged against
Lehman Brothers, Inc., J.P. Morgan Securities, Inc., CIBC World Markets Corp.,
and Banc of America Securities Inc.
On February 28, 2003, Charter notified the Company of its assertion of a
potential claim for indemnity in respect of Charter being named as a "successor
in interest" to the Company in the IPO Litigation (the "Charter IPO Litigation
Indemnity Claim"), and deferred release of half of the $2.0 million indemnity
holdback until such time as we obtain the dismissal of Charter as a defendant in
the IPO Litigation or the IPO Litigation is otherwise settled, minus Charter's
actual defense costs if such costs exceed $250,000. On February 28, 2003, we
collected $1.0 million of the indemnity holdback plus accrued interest thereon
from Charter. We do not believe Charter is a "successor in interest" to the
Company, and are attempting to obtain an out-of-court dismissal of Charter from
the IPO Litigation. If we are not successful in this effort, we may either file
a motion with the court to obtain Charter's dismissal or wait on a possible
settlement of the IPO Litigation with respect to the Company.
We do not believe that the IPO litigation will have a material adverse effect on
our net assets in liquidation.
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On March 3, 2003, the Board of Directors cancelled the Company's stock
option plans and authorized the Company to cancel all of its 2,862,174
outstanding stock options upon receipt of each optionee's agreement to accept
payment from the Company of an amount equivalent to what the optionee would have
received had the optionee exercised their options and sold the underlying
shares. The Company expects each optionee to agree to these terms. Pursuant to
the Plan, the Board of Directors also accelerated the vesting of 149,992
options. Accordingly, the Company has recorded $0.2 million in accounts payable
and accrued liabilities to cover these payments.
21
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
On April 30, 2003, George E. Willett, our President and Chief Financial
Officer, was terminated by the Company. Pursuant to his Employment Agreement
dated June 4, 2001, Mr. Willett will receive severance payments in the amount of
$168,000 plus healthcare benefits for a period of 12 months. The restrictions on
his 75,000 shares of restricted common stock lapsed upon his termination. Mr.
Willett will continue to serve as the Company's non-employee President and Chief
Financial Officer under a Consulting Agreement dated April 30, 2003 for a period
of six months ending October 31, 2003. Mr. Willett will receive a consulting fee
of $7,000 per month under this agreement.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Separation Agreement and Consulting Agreement by and between High
Speed Access Corp. and George E. Willett dated April 30, 2003.
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 Of The Sarbanes-Oxley Act Of 2002
(b) On April 21, 2003, the Company filed an 8-K announcing that the Delaware
Chancery Court approved the settlement of the Delaware Class action lawsuits at
a hearing on April 16, 2003.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 as
amended, the Company has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
High Speed Access Corp.
Date: May 1, 2003 By /s/ George E. Willett
-------------------------------------
George E. Willett
President and Chief Financial Officer
I, George E. Willett, President and Chief Financial Officer of High Speed Access
Corp., certify that:
(1) I have reviewed this Quarterly Report on Form 10-Q of High Speed Access
Corp. (the "Company");
(2) Based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this Quarterly Report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the Company as of, and for, the periods presented in this
Quarterly Report;
(4) I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the Company and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this Quarterly Report (the "Evaluation Date"); and
(c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
(5) I have disclosed, based on our most recent evaluation, to the Company's
auditors and the Audit Committee of the Company's Board of Directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Company's
ability to record, process, summarize and report financial data
and have identified for the Company's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's
internal controls; and
(6) I have indicated in this Quarterly Report whether there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 1, 2003 By /s/ George E. Willett
-------------------------------------
George E. Willett
President and Chief Financial Officer
23
EXHIBIT INDEX
No. Description
- --- -------------------------
10.1 Separation Agreement and Consulting Agreement by and between
High Speed Access Corp. and George E. Willett dated April 30,
2003.
99.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002