-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jt3ZaGq6Og9GKVU5zhkFsymg7fpBb/Xxc/Kf/mskWQNirlq3RVuXFUu6CZxYT1K3 d5eTje2R7PyyFgruAN+gog== /in/edgar/work/20000814/0000950134-00-007078/0000950134-00-007078.txt : 20000921 0000950134-00-007078.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950134-00-007078 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIGH SPEED ACCESS CORP CENTRAL INDEX KEY: 0001075244 STANDARD INDUSTRIAL CLASSIFICATION: [7370 ] IRS NUMBER: 611324009 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26153 FILM NUMBER: 700902 BUSINESS ADDRESS: STREET 1: 1000 W ORMSBY AVE STREET 2: SUITE 210 CITY: LOUISVILLE STATE: KY ZIP: 40210 MAIL ADDRESS: STREET 1: 1000 W ORMSBY AVE STREET 2: SUITE 210 CITY: LOUISVILLE STATE: KY ZIP: 40210 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
EX-10.1 2 ex10-1.txt AGREEMENT & PLAN OF MERGER 1 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made as of June 23, 2000, by and among High Speed Access Corp., a Delaware corporation ("HSA"), High Speed Acquisition Corp., a Florida corporation and direct wholly-owned subsidiary of HSA ("Acquisition"), Digital Chainsaw, Inc., a Florida corporation ("DC") and Gary Allen, as the Representative. RECITALS: WHEREAS, the parties hereto desire to consummate a merger (the "Merger") whereby Acquisition will be merged with and into DC and DC will be the surviving corporation in the Merger, upon the terms and subject to the conditions of this Agreement and in accordance with the Florida Business Corporation Act, as amended (the "FBCA"); and WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the premises and the representations, warranties and covenants herein contained, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1. Definitions. As used in this Agreement, the following terms shall have the respective meanings set forth below: "Accounting Firm" has the meaning set forth in Section 4.3 below. "Acquisition" has the meaning set forth in the preamble hereto. "Acquisition Transaction" has the meaning set forth in Section 8.8 below. "Affiliate" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act. "Affiliated Group" means any affiliated group within the meaning of Section 1504 of the Code, or any consolidated, combined, unitary or similar group defined under a similar provision of state, local or foreign law. 2 "Agreement" has the meaning set forth in the preamble hereto. "Arbitrator" has the meaning set forth in Section 4.4 below. "Articles of Merger" has the meaning set forth in Section 2.2 below. "Base Exchange Ratio" has the meaning set forth in Section 4.1 below. "Basis" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms the basis for any specified consequence. "Closing" has the meaning set forth in Section 2.3 below. "Closing Date" has the meaning set forth in Section 2.3 below. "Code" has the meaning set forth in the Recitals hereto. "Company Plan" means all "material employee benefit plans", as defined in Section 3(3) of ERISA, and all other material employee benefit arrangements or payroll practices, including, without limitation, the DC 401(k) and employee medical benefit plans, maintained by DC or any of its Subsidiaries or to which DC or any of its Subsidiaries contributed or is obligated to contribute thereunder for current or former employees of DC or any of its Subsidiaries. "Confidential Information" means any information concerning the businesses and affairs of DC, the Surviving Corporation or HSA that is not generally available to the public. "Consulting Agreement" has the meaning set forth in Section 9.2 below. "DC" has the meaning set forth in the preamble hereto. "DC Board" has the meaning set forth in Section 7.3 below. "DC Financial Projections" has the meaning set forth in Section 10.2 below. "DC Meeting" has the meaning set forth in Section 8.12 below. "DC Option" has the meaning set forth in Section 4.7 below. "DC Share Certificates" has the meaning set forth in Section 4.1 below. "DC Shares" means the shares of common stock, $.001 par value, of DC. "Disclosure Schedule" has the meaning set forth in the first paragraph of Article 7 below. 2 3 "Earnout Determination" has the meaning set forth in Section 4.3 below. "Earnout Determination Date" has meaning set forth in Section 4.3 below. "Earnout Exchange Ratio" has the meaning set forth in Section 4.3 below. "Earnout Market Value" has the meaning set forth in Section 4.3 below. "Earnout Notice" has the meaning set forth in Section 4.3 below. "Earnout Period" has the meaning set forth in Section 4.3 below. "Earnout Period Financial Statement" has the meaning set forth in Section 4.3 below. "Earnout Right" has the meaning set forth in Section 4.1 below. "Earnout Share Price" means the average trading price of HSA Common Stock on the Nasdaq National Market (as reported in the New York City edition of the Wall Street Journal or, if not reported thereby, another nationally recognized source) for the twenty (20) consecutive trading days ending on (and including) June 29, 2001; provided that if such Earnout Share Price would require HSA to issue a number of Earnout Shares which would require HSA to obtain shareholder approval pursuant to NASD Rule 4460(i)(1)(C), then HSA shall be required to issue the greatest number of Earnout Shares which does not require such approval. "Earnout Shares" has the meaning set forth in Section 4.3 below. "Effective Time" has the meaning set forth in Section 2.2 below. "Employee Pension Benefit Plan" has the meaning set forth in ERISA Section 3(2). "Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section 3(1). "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" has the meaning set forth in Section 7.23 below. "FBCA" has the meaning set forth in the Recitals hereto. "Fiduciary" has the meaning set forth in ERISA Section 3(21). "Final Earnout Determination" has the meaning set forth in Section 4.3 below. 3 4 "Final Loss Determination" has the meaning set forth in Section 4.4 below. "Financial Statements" has the meaning set forth in Section 7.7 below. "GAAP" means United States generally accepted accounting principles as in effect from time to time. "Governmental Authority" means any government, court or tribunal or administrative, governmental or regulatory body, agency or authority, whether federal, state or local, or domestic or foreign, and any departmental or political subdivision thereof. "HSA" has the meaning set forth in the preamble hereto. "HSA Claim" has the meaning set forth in Section 4.4 below. "HSA Common Stock" has the meaning set forth in Section 6.2 below. "HSA Option" has the meaning set forth in Section 4.7 below. "HSA Party" has the meaning set forth in Section 4.4 below. "HSA Representatives" has the meaning set forth in Section 8.4 below. "HSA SEC Reports" has the meaning set forth in Section 6.7 below. "Intellectual Property" means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations and renewals in connection therewith, (c) all copyrightable works, including all meta-tags and unlicensed software code utilized in their business, all copyrights, and all applications, registrations and renewals in connection therewith, (d) all mask works and all applications, registrations and renewals in connection therewith, (e) all trade secrets and Confidential Information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all domain names, (g) all other proprietary rights, and (h) all copies and tangible embodiments thereof (in whatever form or medium). "Investment Representation Letter" has the meaning set forth in Section 8.6 below. 4 5 "Knowledge" of DC means matters actually known by the directors or officers of DC set forth in Section 1.1 of the Disclosure Schedule, and matters that such persons in light of all of the relevant circumstances, reasonably would be expected to know after due inquiry. "Liability" means any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), including any liability for Taxes. "Licenses and Permits" has the meaning set forth in Section 7.20 below. "Limited Losses" has the meaning set forth in Section 4.4 below. "Loss Notice" has the meaning set forth in Section 4.4 below. "Losses" has the meaning set forth in Section 4.4 below. "Material Adverse Effect" means, on any party hereto, any effect, occurrence or change that has or is reasonably likely to have, individually or in the aggregate, a material adverse effect on the business, properties, results of operations, financial condition of such party and its Subsidiaries, taken as a whole, or is reasonably likely to materially hinder or impair the consummation of the transactions contemplated hereby. "Merger" has the meaning set forth in the Recitals hereto. "Merger Consideration" has the meaning set forth in Section 4.3 below. "Most Recent Balance Sheet" means the balance sheet contained within the Most Recent Financial Statements. "Most Recent Financial Statements" has the meaning set forth in Section 7.7 below. "Most Recent Fiscal Month End" has the meaning set forth in Section 7.7 below. "Multiemployer Plan" has the meaning set forth in ERISA Section 3(37). "Ordinary Course of Business" means the ordinary course of business consistent with past practice. "Organizational Documents" has the meaning set forth in Section 7.1 below. "PBGC" means the Pension Benefit Guaranty Corporation. 5 6 "Person" means an individual, a partnership, a corporation, an association, a limited liability company, a joint stock company, a trust, a joint venture, an unincorporated organization, or a Governmental Authority. "Prohibited Transaction" has the meaning set forth in ERISA Section 406 and Code Section 4975. "PWC" has the meaning set forth in Section 4.3 below. "Representative" has the meaning set forth in the Section 10.1 below. "Requisite Vote" has the meaning set forth in Section 7.3 below. "Retained Earnout Shares" has the meaning set forth in Section 4.4 below. "SEC" means the Securities and Exchange Commission. "Secured Note" shall mean the promissory note from DC to HSA, attached hereto as Exhibit A-1, and the related Security Agreement, attached hereto as A-2. "Securities Act" means the Securities Act of 1933, as amended. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended. "Security Interest" means any mortgage, pledge, lien, encumbrance, charge or other security interest, other than (a) mechanic's, materialmen's, and similar liens, (b) liens for Taxes not yet due and payable or for Taxes that the taxpayer is contesting in good faith through appropriate proceedings, (c) purchase money liens and liens securing rental payments under capital lease arrangements and (d) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. "Share Consideration" has the meaning set forth in Section 4.1 below. "Shareholders" means the holders of DC Shares listed on Section 7.2 of the Disclosure Schedule, or the permitted transferees thereof. "Speedy Arbitration" shall mean an arbitration conducted pursuant to "Expedited Procedures" that shall take place in New York, New York and be administered by the New York City Office of the American Arbitration Association or any successor thereto (the "AAA") in accordance with its Commercial Arbitration Rules in effect at the time the arbitration is initiated (collectively, the "Rules"). In accordance with the Rules, "Expedited Procedures" shall be utilized with respect to all matters for determination in the arbitration. 6 7 "Subsidiary" means any corporation or other Person with respect to which a specified Person (or a Subsidiary thereof) owns a majority of the common stock or other ownership interests or has the power to vote or direct the voting of sufficient securities or interests to elect a majority of the directors or individuals serving a similar function. "Surviving Corporation" has the meaning set forth in Section 2.1 below. "Tax" or "Taxes" shall mean all taxes, charges, fees, imposts, levies or other assessments by any Governmental Authority, including all net income, gross receipts, capital, sales, use, ad valorem, value added, transfer, franchise, profits, inventory, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever, together with any interest and any penalties, fines, additions to tax or additional amounts imposed by any Governmental Authority and shall include any transferee or successor liability in respect of Taxes (whether by contract or otherwise) and any liability in respect of any Tax as a result of being a member of any Affiliated Group. "Tax Return" means any return (including any consolidated, combined or unitary return in which DC or any Subsidiary of DC is, or was, included or includable), declaration, report, claim for refund, separate election or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "Termination Fee" has the meaning set forth in Section 11.3 below. "Third Party Business" has the meaning set forth in Section 10.2 below. "Third-Party Claim" has the meaning set forth in Section 4.4 below. "Threshold" has the meaning set forth in Section 4.4 below. "Transaction Expenses" means all costs and expenses (including legal fees and expenses) incurred in connection with the preparation, negotiation, execution and delivery of this Agreement and the transactions contemplated hereby. "Transfer Agent" has the meaning set forth in Section 4.2 below. "Voting Agreement" has the meaning set forth in Section 9.2 below. "WARN" has the meaning set forth in Section 7.22 below. "Working Capital Commitment" has the meaning set forth in Section 10.2 below. 7 8 ARTICLE 2 MERGER; EFFECTIVE TIME; CLOSING 2.1. Merger. Subject to the terms and conditions of this Agreement and the FBCA, at the Effective Time, Acquisition and DC shall consummate the Merger in which (i) Acquisition shall be merged with and into DC and the separate existence of Acquisition shall thereupon cease, (ii) DC shall be the successor or surviving corporation in the Merger and shall continue to be governed by the laws of the State of Florida and (iii) the separate corporate existence of DC with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. The corporation surviving the Merger is sometimes hereinafter referred to as the "Surviving Corporation." The Merger shall have the effects set forth in Section 607.1106 of the FBCA. 2.2. Effective Time. On the Closing Date, subject to the terms and conditions of this Agreement, Acquisition and DC shall (i) cause to be executed Articles of Merger with respect to the Merger, in the form required by the FBCA (the "Articles of Merger"), and (ii) cause the Articles of Merger to be filed with the Florida Secretary of State as provided in the FBCA. The Merger shall become effective at such time as the Articles of Merger shall have been duly filed with the Florida Secretary of State or such other time as is agreed upon by the Representative and HSA and specified in the Articles of Merger. Such time is hereinafter referred to as the "Effective Time." 2.3. The Closing. Subject to the satisfaction of the conditions set forth in Article 9 (or the waiver thereof by the party entitled to waive that condition) the closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Weil, Gotshal & Manges LLP in New York City, commencing at 10:00 a.m. local time on July 28, 2000 (the "Closing Date"). ARTICLE 3 ARTICLES OF INCORPORATION; BYLAWS DIRECTORS AND OFFICERS OF SURVIVING CORPORATION 3.1. Articles of Incorporation. The articles of incorporation of DC, as in effect immediately prior to the Effective Time, a copy of which is attached hereto as Exhibit 3.1, shall be the articles of incorporation of the Surviving Corporation until thereafter amended as provided therein or by law. 3.2. By-Laws. The By-Laws of DC, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation a copy of which is attached hereto as Exhibit 3.2, shall be the Bylaws of the Surviving Corporation until thereafter amended as provided therein or bylaw. 3.3. Directors and Officers. The directors and officers of DC immediately prior to the Effective Time shall be the directors and officers, of the 8 9 Surviving Corporation from and after the Effective Time until their successors have been duly elected, appointed or qualified or until the earlier of their death, resignation or removal in accordance with the articles of incorporation and bylaws of the Surviving Corporation. ARTICLE 4 MERGER CONSIDERATION; PAYMENT OF CONSIDERATION 4.1. Merger Consideration; Conversion or Cancellation of DC Shares. At the Effective Time, by virtue of the Merger and without any action by the parties hereto (A) each of the issued and outstanding DC Shares shall be converted into and exchangeable into the right to receive (x) 0.1017 of a share of HSA Common Stock (the "Base Exchange Ratio") (payable in accordance with Section 4.2 below (the aggregate number of shares of HSA Common Stock to be received by the Shareholders pursuant to the Base Exchange Ratio being the "Share Consideration")); and (y) the non-transferable, uncertificated, contractual right to receive Earnout Shares, if any, pursuant to the terms of this Agreement (the "Earnout Right"), (B) all of the outstanding DC Shares shall cease to be outstanding, and shall be cancelled and retired and shall cease to exist, and each holder of certificates representing such DC Shares (the "DC Share Certificates") shall cease to have any rights with respect thereto, except the right to receive HSA Common Stock therefor upon the surrender of the DC Share Certificates in accordance with this Section 4.1 and Section 4.2, and cash in lieu of fractional shares of HSA Common Stock as set forth in Section 4.5 and (C) each share of common stock of Acquisition shall be converted into a share of common stock of the Surviving Corporation, as such shares of common stock are constituted immediately following the Effective Time. 4.2. Payment of Merger Consideration. (a) At or promptly following the Closing, upon surrender to HSA of the DC Share Certificates for cancellation, HSA shall give irrevocable instructions to American Securities Transfer & Trust, Inc. (the "Transfer Agent") to issue to the Shareholders certificates representing that number of whole shares of HSA Common Stock determined pursuant to Section 4.1 and, if applicable, a check representing the cash to which the Shareholders may be entitled pursuant to Section 4.5 on account of fractional shares of HSA Common Stock. Until surrendered as contemplated by this Section 4.2, each DC Share Certificate shall be deemed at any time after the Effective Time to represent only the right to receive upon such surrender the certificate representing HSA Common Stock and cash in lieu of any fractional shares of HSA Common Stock as contemplated in this Article 4 and the Earnout Right. Upon surrender to HSA of the DC Share Certificates by the Shareholders for cancellation, together with any other required documents, the Shareholders shall receive HSA Common Stock in the Merger and, in addition, as described in Section 4.1, the Earnout Right. (b) All HSA Common Stock issued upon the surrender of DC Shares in accordance with the terms hereof (including any cash paid pursuant to Section 4.5) shall be deemed to have been paid and issued in full satisfaction of all rights 9 10 pertaining to such DC Shares and there shall be no further registration of transfers on the transfer books of the Surviving Corporation of DC Shares which were outstanding immediately prior to the Effective Time. If, after the Effective Time, DC Share Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Article 4. 4.3. Earnout. (a) No later than September 30, 2001 (the "Earnout Determination Date"), HSA shall, for the period commencing on the date hereof and ending on July 31, 2001 (the "Earnout Period"), deliver to the Representative DC's audited consolidated statements of operations ("Earnout Period Financial Statement"), which financial statement shall have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby and reviewed by Pricewaterhouse Coopers LLP, HSA's independent accountants ("PWC"). Concurrently with the delivery of the Earnout Period Financial Statement, HSA shall deliver to the Representative a notice (the "Earnout Notice") indicating the Earnout Market Value (as defined in Section 4.3(b) below), if any, as determined by HSA in good faith based on the Earnout Period Financial Statement (the "Earnout Determination"). At the request and expense of the Representative, HSA shall permit independent accountants designated by the Representative to have access to the accounting personnel of PWC used by HSA to perform such review. The Earnout Determination shall become final (the "Final Earnout Determination") thirty (30) days after the Earnout Notice is so delivered by HSA unless the Representative sets forth any objection thereto in a written notice to HSA, which notice shall include the basis for the objection to the Earnout Determination and the Representative's own determination of the Earnout Market Value during such thirty (30) day period, in which event the parties shall endeavor in good faith to resolve such dispute within fifteen (15) days after such notice and failing such resolution to mutually agree upon a partner of a Big Five accounting firm (other than a firm which represents HSA) (the "Accounting Firm") to resolve such dispute promptly, and in no event later than 30 days after the 15-day dispute resolution period, and whose determination shall be final and conclusive. If the parties cannot agree on the selection of the Accounting Firm, or the selected Accounting Firm declines to accept its appointment as the Accounting Firm and the parties cannot agree on the selection of another independent accounting firm to act as the Accounting Firm, either party may seek Speedy Arbitration to select such a firm, and such appointment shall be conclusive and binding on the parties. Promptly, but within 30 days after acceptance of its appointment as the Accounting Firm, the Accounting Firm shall take all such actions (including, without limitation, any audit procedures) as shall be necessary to determine the remaining disputed items and shall render a written report to the Representative and the Surviving Corporation upon such items. During such 30 day period, the Surviving Corporation shall afford the Accounting Firm full access to any and all of its records and work papers related to the dispute, and the Surviving Corporation shall use its reasonable best efforts to make available (subject to the policies of the Surviving Corporation's accountants) any work papers of the Surviving Corporation's accountants created in connection with the calculation of the Earnout Market Value, and the assistance of the Surviving Corporation's accountants, in each case, as is necessary to enable the Accounting Firm to review the calculation of the 10 11 Earnout Market Value. The Accounting Firm's decision shall be final, conclusive and binding on all parties. The parties agree to cooperate with each other and each other's representatives and with the Accounting Firm in order that any and all matters in dispute shall be resolved as soon as practicable. The fees and expenses of the Accounting Firm shall be paid by HSA but borne equally by HSA and the Shareholders and, accordingly, the Earnout Market value shall be reduced by an amount equal to fifty percent (50%) of such expenses. (b) The following table sets forth certain revenue levels for the Earnout Period (expressed as a percentage of $11,000,000), and, the corresponding "Earnout Market Value," if any (expressed as a percentage of $25,000,000):
Earnout Period Revenue Earnout Market Value $11,000,000 $25,000,000 ---------------------------------- ---------------------------------- 100% 100% or more Less than 100% but greater than or 95% equal to 95% Less than 95% but greater than or 90% equal to 90% Less than 90% but greater than or 75% equal to 85% Less than 85% but greater than or 60% equal to 80% Less than 80% but greater than or 50% equal to 75% Less than 75% 0%
provided, however, that solely for purposes of determining the revenue level achieved and the calculation of the Earnout Market Value, DC shall be credited with 2.273 times the amount of cash DC collects between the date hereof and August 25, 2000 as revenues earned in first quarter 2000 but not collected, as of the date hereof, as reflected on Section 4.3 of the Disclosure Schedule. (c) Subject to Section 4.4 below, if there is any Earnout Market Value, within five (5) business days after HSA's calculation of the Earnout Determination, HSA shall issue to each Shareholder that number of additional HSA Common Shares (the "Earnout Shares") equal to the number of DC Shares listed opposite such Shareholder's name on Section 4.3 of the Disclosure Schedule, multiplied by the Earnout Exchange Ratio. The "Earnout Exchange Ratio" shall be the quotient obtained by dividing (i) the Earnout Market Value by the number of DC Shares outstanding as of the date hereof, by (ii) the Earnout Share Price. Subject to Section 4.4. below, if additional Earnout Shares are due to be issued as a result of the Final Earnout Determination, HSA shall have an additional five (5) business days after the determination to issue such shares. Notwithstanding anything contained herein to the contrary, if such Earnout Share Price would require HSA to issue a number of Earnout Shares which would require HSA to 11 12 obtain shareholder approval pursuant to NASD Rule 4460(i)(1)(C), then HSA shall be required to issue the greatest number of Earnout Shares which does not require such approval. (d) In addition to the calculation provided in paragraph (b) of this Section 4.3, the number of Earnout Shares and the Earnout Share Price shall be adjusted to reflect fully the effect of any reclassification, stock split, reverse stock split, stock dividend, reorganization or recapitalization or other similar event with respect to HSA Common Stock occurring after the Effective Time and prior to the Earnout Payment Date. For purposes hereof, the Earnout Shares and the Share Consideration shall be collectively referred to as the "Merger Consideration." 4.4. Earnout Reduction For Losses. (a) The Earnout Market Value shall be subject to reduction in accordance with the provisions of Section 4.4(b) below for any losses, threatened losses, damages, deficiencies, claims, liabilities, obligations, suits, actions (including any Tax audits, examinations or other proceedings), fees, costs or expenses of any nature whatsoever (including, without limitation, all reasonable fees and disbursements of counsel) (collectively, "Losses") incurred or suffered by HSA and Acquisition and each of their respective officers, directors, employees, agents and advisors (each, an "HSA Party") arising or resulting from (x) any breach of any representation and warranty of DC which is contained in this Agreement or any Schedule, Exhibit, agreement or certificate delivered pursuant hereto (provided that (I) for the purposes hereof, any breach of any representation or warranty shall be deemed not to contain, and shall be determined without regard to any qualification related to, materiality, Material Adverse Effect or Knowledge contained in such representation or warranty (II) for the purposes of determining Losses with respect to breaches of representations and warranties, only those Losses which individually exceed $2,500 shall be considered (such Losses are referred to herein as "Limited Losses"); (III) except as provided in (IV) below, there shall be no reduction in the Earnout Market Value for Limited Losses until the aggregate amount of such Limited Losses exceeds $150,000 (the "Threshold"); (IV) the Earnout Market Value shall be reduced in an amount equal to an amount by which Limited Losses in the aggregate exceed the Threshold, except that if Limited Losses in the aggregate exceed $250,000, the Earnout Market Value shall be reduced to account for all Limited Losses in the aggregate, including those below the Threshold; (y) any breach or non-fulfillment of or any failure to perform any of the covenants, agreements or undertakings of DC which are contained in or made pursuant to this Agreement or any Schedule, Exhibit, agreement or certificate delivered pursuant hereto; or (z) any Taxes of or imposed upon DC or any of its Subsidiaries relating to or arising from periods (or portions thereof) ending on or prior to or including the Closing Date (except, with respect to Taxes not yet due, to the extent of the accruals therefor reflected in the Financial Statements). (b) In the event of the occurrence, at any time between the Effective Time and the date which is twelve months from the date of the Effective Time, of an event which an HSA Party asserts constitutes a Loss (an "HSA Claim"), HSA shall provide prompt notice of such event (a "Loss Notice") to the Representative. Such Loss 12 13 Notice shall detail the circumstances of the Loss, the aggregate amount of the Loss and the corresponding reduction in Earnout Market Value based on such Loss. Upon the written request of the Representative, HSA shall provide the Representative with copies of all written documentation related to the Loss. The reduction in Earnout Market Value pursuant to the Loss Notice shall become final (the "Final Loss Determination") thirty (30) days after the Loss Notice is so delivered by HSA unless the Representative sets forth any objection thereto in a written notice to HSA, which notice shall include the basis for the Representative's objection to the Loss and the corresponding reduction in the Earnout Market Value during such thirty (30) day period, in which event the parties shall endeavor in good faith to resolve such dispute within fifteen (15) days after such notice, and failing such resolution, to submit their dispute to an arbitrator (the "Arbitrator") and whose determination as to the Final Loss Determination shall be final and conclusive in an arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules. The Arbitrator's decision shall be final, conclusive and binding on all parties and the judgment or award rendered may be entered in any court having jurisdiction thereof. The fees and expenses of the Arbitrator shall be paid by HSA but borne equally by HSA and the Shareholders. Accordingly, the Earnout Market Value shall be reduced by an amount equal to fifty percent (50%) of such expenses. (c) If the event giving rise to the Loss involves the claim of any third party (a "Third-Party Claim"), HSA shall assume sole control of the defense, settlement, adjustment or compromise of such claim, provided, however, that HSA shall diligently pursue the defense of any such Third Party Claim. (d) In the event that upon the Final Earnout Determination, a Loss Notice has been delivered to the Representative, but the Final Loss Determination has not yet occurred, pending such determination, the Earnout Market Value shall be reduced by the amount of the Loss set forth in the Loss Notice and a corresponding reduction shall be made in the number of Earnout Shares issued to the Shareholders (the "Retained Earnout Shares"). Promptly upon the occurrence of the Final Loss Determination, HSA shall, subject to reductions for arbitration fees pursuant to Section 4.4(b) above, deliver to Shareholders such number of Retained Earnout Shares, if any, as shall be necessary to comply with the Final Loss Determination. HSA shall not be required to issue any Retained Earnout Shares prior to the Final Loss Determination, and HSA shall not incur any liabilities with respect to the non-issuance of any Retained Earnout Shares pending the Final Loss Determination. 4.5. Fractional Shares of HSA Common Stock. No certificates representing fractional shares of HSA Common Stock shall be issued upon surrender of any DC Share Certificates. In lieu of any fractional shares of HSA Common Stock, there shall be paid to the holder of DC Shares who otherwise would be entitled to receive a fractional share of HSA Common Stock an amount of cash (without interest) determined by multiplying such fraction by the Base Exchange Ratio or the Earnout Exchange Ratio, as the case may be. 13 14 4.6. Withholding Rights. Each of the Surviving Corporation and HSA shall be entitled, or shall be entitled to cause the Transfer Agent, to deduct and withhold from the Merger Consideration otherwise payable pursuant to this Agreement to any holder of DC Shares such amounts as it is required to deduct and withhold with respect to the making of such payment under the Code and the rules and regulations promulgated thereunder, or any provision of a Tax law. To the extent that amounts are so withheld by the Surviving Corporation, HSA or the Transfer Agent, as the case may be, such amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the DC Shares in respect to which such deduction and withholding was made by the Surviving Corporation or HSA, as the case may be. 4.7. Effect on Options to Acquire DC Shares. (a) As soon as practicable, following the Effective Time (in accordance with standard procedures of the Compensation Committee of HSA's Board of Directors and HSA's past practices with respect to granting options to its employees) each employee of DC as of the Effective Time shall be granted an option to purchase HSA Shares (an "HSA Option") for each outstanding and unexpired option to purchase DC Shares (a "DC Option"), which DC Options are listed opposite such employee's name on Section 4.7(a) of the Disclosure Schedule, whether vested or unvested, shall (except to the extent exercised prior to the Effective Time) on the same terms and subject to the same conditions as applicable to similarly situated employees of HSA under the HSA 1999 Stock Option Plan pursuant to which plan such HSA Option shall be granted (including term and exercisability), and such HSA Option shall be an option to purchase the same number of whole shares of HSA Common Stock as the holder of such DC Option would have been entitled to receive pursuant to this Agreement (assuming solely for the purposes of this calculation that the Earnout Market Value was equal to $25,000,000) had such holder exercised such DC Option in full for DC Shares immediately prior to the Effective Time, at a price per share of HSA Common Stock equal to the per share exercise price equal to the closing price of HSA Common Stock on the date immediately prior to the date of the grant. (b) Each of the non-employee holders of DC Options listed in Section 4.7(b) of the Disclosure Schedule shall receive a warrant to receive HSA Common Stock substantially in the form attached hereto as Exhibit K. Such warrant shall permit the holder thereof to purchase the number of shares of HSA Common Stock equal to the number of shares of HSA Common Stock each such holder would have been entitled to receive pursuant to this Agreement (assuming solely for the purposes of this calculation that the Earnout Market Value was equal to $25,000,000) had such holder exercised the number of DC Options listed opposite such holder's name on Schedule 4.7(b) of the Disclosure Schedule prior to the Effective Time. The exercise price per share pursuant to the warrant shall be equal to the closing price of a share of HSA Common Stock on the Closing Date on the Nasdaq National Market (as reported in the New York City edition of the Wall Street Journal or, if not reported thereby, another nationally recognized source). (c) At or prior to the Effective Time, HSA shall take all corporate action necessary to reserve for issuance a sufficient number of shares of HSA Common 14 15 Stock for delivery upon exercise of such DC Options in accordance with this Section 4.7. Any option or stock plan with respect to DC Shares existing immediately prior to the Effective Time shall terminate as of the Effective Time with respect to any future grants thereunder. Prior to any grant of an HSA Option pursuant to Section 4.7(a) above, or the grant of a warrant pursuant to Section 4.7(b) above, any DC Option held by the recipient of the HSA Option or warrant, as the case may be, shall be terminated. ARTICLE 5 [INTENTIONALLY OMITTED] ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF ACQUISITION AND HSA Acquisition and HSA jointly and severally represent and warrant to DC that the statements contained in this Article 6 are correct and complete as of the date hereof. 6.1. Organization of Acquisition and HSA. HSA is a corporation, duly organized, validly existing, and in good standing under the laws of the State of Delaware. Acquisition is a corporation, duly organized, validly existing and in good standing under the laws of the state of Florida. Acquisition is a wholly-owned subsidiary of HSA. 6.2. Capital Stock. The authorized capital stock of HSA consists of 400,000,000 shares of common stock, $.01 par value ("HSA Common Stock"), of which 55,668,025 shares are outstanding as of May 10, 2000; 100,000,000 shares of Class A Common Stock, par value $0.01 per share of which no shares are outstanding as of the date hereof; and 10,000,000 shares of Preferred Stock (of which no shares are outstanding as of the date hereof). Since May 10, 2000, HSA has not issued any shares of capital stock except pursuant to the exercise of options or warrants outstanding on such date to purchase HSA Common Stock. All outstanding shares of HSA Common Stock are, and all shares of HSA Common Stock issuable under stock option plans or warrants of HSA, will be when issued in accordance with the terms thereof, duly authorized, validly issued, fully paid and nonassessable. 6.3. Authorization for Common Stock. The Merger Consideration will, when issued, be duly authorized, validly issued, fully paid and nonassessable, and no stockholder of HSA will have any preemptive right or similar rights of subscription or purchase in respect thereof. The Share Consideration will, subject to compliance with Regulation D promulgated under the Securities Act, be exempt from registration under the Securities Act and will be registered or exempt from registration under all applicable state securities laws. 15 16 6.4 Authorization of Transaction. Each of Acquisition and HSA has full power and authority to execute and deliver this Agreement and to perform its respective obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of each of HSA and Acquisition. This Agreement constitutes the valid and legally binding obligation of each of Acquisition and HSA, enforceable in accordance with its terms and conditions, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and to general principles of equity. Neither Acquisition nor HSA need give any notice to, make any filing with, or obtain any Licenses or Permits of any Governmental Authority in order to consummate the transactions contemplated by this Agreement, except in connection with the filing of the Articles of Merger with the Florida Secretary of State and compliance with applicable state securities laws. 6.5 Noncontravention. Neither the execution and the delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) violate any law, constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any Governmental Authority to which Acquisition or HSA is subject or any provision of their respective Organizational Documents or (ii) result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel or require any notice under any agreement, contract, lease, license, instrument or other arrangement to which Acquisition or HSA is a party or by which it is bound or to which any of its assets is subject. 6.6. Brokers' Fees. Neither Acquisition nor HSA has any Liability or obligation to pay any fees or commissions to any investment banker, broker, finder or agent (other than Lehman Brothers, Inc.) with respect to the transactions contemplated by this Agreement. 6.7. HSA SEC Reports and Financial Statements. HSA has filed with the SEC, and has heretofore made available to DC true and complete copies of (A) HSA's annual report on Form 10-K for the period ended December 31, 1999, (B) HSA's quarterly report on Form 10-Q for the period ended March 31, 2000, (C) HSA's Proxy Statement for the 2000 Annual Meeting of Stockholders of HSA and (D) the Annual Report to Stockholders of HSA for the year ended December 31, 1999 (collectively, the "HSA SEC Reports"), which are all of the forms, reports, schedules, statements and other documents (other than preliminary materials) required to be filed by HSA under the Securities Exchange Act or the Securities Act from and after December 31, 1999. The HSA SEC Reports, at the time filed, (a) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, and (b) complied in all material respects with the applicable requirements of the Securities Exchange Act and the Securities Act, as the case may be, and the applicable rules and regulations of the SEC thereunder. The financial statements of HSA included in the HSA SEC Reports, as well as HSA's financial statements as of and for the 16 17 year ended December 31, 1999 heretofore delivered to DC, as of the dates thereof, comply as to form in all material respects with the published rules and regulations of the SEC with respect thereto, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Rule 10-01 of Regulation S-X promulgated by the SEC) and fairly presented (subject, in the case of the unaudited statements, to normal adjustments, none of which will be material) the consolidated financial position of HSA and its consolidated subsidiaries as of the dates thereof and the consolidated results of operations and cash flows for the periods then ended. ARTICLE 7 REPRESENTATIONS AND WARRANTIES CONCERNING DC DC represents and warrants to Acquisition and HSA that the statements contained in this Article 7 are correct and complete as of the date hereof, except as set forth in the disclosure schedule delivered by DC to Acquisition and HSA on the date hereof (the "Disclosure Schedule"), which Disclosure Schedule shall identify the specific Sections of this Article 7 as to which the exception or disclosure applies. Nothing in the Disclosure Schedule shall be deemed adequate to disclose an exception to a representation or warranty made herein, however, unless the Disclosure Schedule reasonably identifies the exception. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or other item itself). The Disclosure Schedule will be arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Article 7. 7.1. Organization, Qualification, and Corporate Power. Each of DC and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the states set forth in Section 7.1(a) of the Disclosure Schedule. Each of DC and its Subsidiaries is duly authorized to conduct business and is in good standing under the laws of each jurisdiction, except where failure to be so qualified could not be reasonably expected to have a Material Adverse Effect on DC, and each such jurisdiction is set forth in Section 7.1(a) of the Disclosure Schedule. Each of DC and its Subsidiaries has full corporate power and authority necessary to carry on the businesses in which it is engaged and to own and use the properties owned and used by it. Section 7.1(b) of the Disclosure Schedule lists the directors and officers of DC and each Subsidiary. DC has provided a description of each directors' and officers' business experience during the past five (5) years and a description of the services provided by such person to DC. Each of DC and its Subsidiaries has delivered to Acquisition and HSA correct and complete copies of the articles of incorporation and bylaws (such documents and, as may be applicable, any similar organizational documents with respect to any Person referred to in 17 18 this Agreement, being referred to herein as the "Organizational Documents") of each of DC and its Subsidiaries, respectively (as amended to date). The minute books (containing the records of meetings of the stockholders, the board of directors and any committees of each of DC and its Subsidiaries), the stock certificate books and the stock record books of each of DC and its Subsidiaries in the forms in which they have been provided to HSA are correct and complete, except for the minutes of DC Board or committee meetings which have not been finalized. Neither DC nor any of its Subsidiaries is in default under or in violation of any provision of its Organizational Documents. 7.2. Capitalization. The entire authorized capital stock of DC consists of 100,000,000 shares of common stock, $.0001 par value, of which 30,364,441 shares were issued and outstanding as of June 23, 2000. All of the issued and outstanding DC Shares have been duly authorized, are validly issued, fully paid, and nonassessable, and are held of record by the Shareholders as set forth in Section 7.2 of the Disclosure Schedule. Except as set forth in a list (including exercise prices, dates of grant and expiration, and number granted to each holder thereof, if applicable) in Section 7.2 of the Disclosure Schedule, there are no outstanding or authorized options, warrants, purchase rights, pre-emptive rights, subscription rights, conversion rights, exchange rights or other contracts or commitments that could require DC to issue, sell, or otherwise cause to become outstanding any of its capital stock. There are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar rights with respect to DC. There are no outstanding contractual obligations of the Company or any of its Subsidiaries to repurchase, redeem or otherwise acquired any shares or other capital stock of the Company or any of its Subsidiaries to provide funds to make any investment (in the form of a loan, capital contribution or otherwise) in any Subsidiary. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting of the DC Shares. None of the outstanding DC Shares are subject to any forfeiture or similar restriction in connection with the termination of employment of any holder thereof with DC. 7.3. Authorization of Transaction. DC has full power and authority (including full corporate power and authority) to execute and deliver this Agreement and to perform its obligations hereunder. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action on the part of DC and the Board of Directors of DC (the "DC Board") has resolved (i) to adopt this Agreement (ii) recommend that the Shareholders approve and adopt this Agreement and the Merger. The DC Board has directed that this Agreement be submitted to the Shareholders as required pursuant to Section 607.1103 of the FBCA. The affirmative vote of a majority of the DC Shares outstanding is the only vote necessary to approve and adopt this Agreement and the transactions contemplated hereby, including the Merger (the "Requisite Vote"). This Agreement constitutes the valid and legally binding obligation of DC, enforceable in accordance with its terms and conditions, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and to general principles of equity. DC is not required to give any notice 18 19 to, make any filing with, or obtain any Licenses and Permits of any Governmental Authority in order to consummate the transactions contemplated by this Agreement, except in connection with the filing of the Articles of Merger with the Florida Secretary of State and applicable state securities laws. 7.4. Noncontravention. Neither the execution and the delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) violate any law, constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge or other restriction of any Governmental Authority to which DC or any of its Subsidiaries is subject or any provision of the Organizational Documents of DC or any of its Subsidiaries or (ii) except as otherwise set forth in Section 7.4 of the Disclosure Schedule, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, cancel, or require any notice, receive any additional consideration or payments under, any agreement, contract, lease, license, instrument, or other arrangement to which DC or any of its Subsidiaries is a party or by which it is bound or to which any of its assets is subject (or, except pursuant to the Secured Note, result in the imposition of any Security Interest upon any of its assets), the result of which could reasonably result in a Material Adverse Effect on DC or prevent the consummation of the Merger or the other transactions contemplated hereby. 7.5. Title to Assets. Except as set forth in Section 7.5 of the Disclosure Schedule, each of DC and its Subsidiaries has good and marketable title to, or a valid leasehold interest in, the properties and assets used by it, located on its premises, or shown on the Most Recent Balance Sheet or acquired after the date thereof, free and clear of all Security Interests (except those Security Interests imposed pursuant to the Secured Note), except for properties and assets disposed of in the Ordinary Course of Business since the date of the Most Recent Balance Sheet. 7.6. Subsidiaries. (a) Sections 7.6 of the Disclosure Schedule sets forth, as of the date hereof, a true and complete list of all of the Subsidiaries of DC, including the jurisdiction of incorporation or organization of each Subsidiary and the percentage of each Subsidiary's outstanding capital stock owned by DC, another Subsidiary of DC or by any other Person. (b) All of the outstanding shares of capital stock of each Subsidiary have been validly issued and are fully paid and nonassessable and are owned beneficially and of record by DC, free and clear of all encumbrances. At the Closing, DC will not, directly or indirectly, own any capital stock of or other equity interests in any corporation, partnership or other Person other than the Subsidiaries listed in Section 7.6 19 20 of the Disclosure Schedule, and neither DC nor any of its Subsidiaries is a member of or participant in a partnership, joint venture or similar Person. 7.7. Financial Statements. DC has delivered (collectively, the "Financial Statements") to HSA its (i) audited condensed/consolidated balance sheets and statements of income, changes in shareholders' equity and cash flows as of and for the fiscal years ended December 31, 1997, 1998 and 1999, and (ii) unaudited condensed/consolidated balance sheet and statement of income (the "Most Recent Financial Statements") as of and for the three-month period ended March 31, 2000 (the "Most Recent Fiscal Month End"). The Financial Statements are attached hereto as Exhibit 7.7. The Financial Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the periods covered thereby, present fairly the consolidated financial condition of DC and its Subsidiaries as of such dates and the consolidated results of operations of DC and its Subsidiaries for such periods, subject, in the case of the Most Recent Financial Statements, to normal year-end adjustments and the absence of notes thereto, and are consistent with the books and records of DC and its Subsidiaries (which books and records are correct and complete in all material respects). 7.8. Absence of Certain Developments. Except as set forth in Section 7.8 of the Disclosure Schedule, since December 31, 1999, there has not been any event, occurrence or circumstance outside the Ordinary Course of Business that has had or could reasonably be expected to have a Material Adverse Effect on DC or any of its Subsidiaries. Without limiting the generality of the foregoing, since that date: (a) Except as set forth in Section 7.8(a) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has sold, leased, transferred, or assigned any of its assets, tangible or intangible, other than for a fair consideration in the Ordinary Course of Business; (b) Except as set forth in Section 7.8(b) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has entered into any agreement, contract, lease or license (or series of related agreements, contracts, leases and licenses) outside the Ordinary Course of Business; (c) Except as set forth in Section 7.8(c) of the Disclosure Schedule, no party (including DC and any of its Subsidiaries) has accelerated, terminated, modified, or canceled any agreement, contract, lease, or license (or series of related agreements, contracts, leases, and licenses) to which DC or any of its Subsidiaries is a party or by which it is bound, except for such accelerations, terminations or modifications in the Ordinary Course of Business which have not and could not reasonably be expected to have a Material Adverse Effect on DC or any of its Subsidiaries; (d) Except as set forth in Section 7.8(d) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has imposed any Security Interest upon any of its assets, tangible or intangible; 20 21 (e) Neither DC nor any of its Subsidiaries has made any capital expenditure (or series of related capital expenditures) outside the Ordinary Course of Business; (f) Neither DC nor any of its Subsidiaries has materially changed any of its accounting or Tax reporting principles, methods (including elections) or policies; (g) Neither DC nor any of its Subsidiaries has made any capital investment in, any loan to, or any acquisition of the securities or assets of, any other Person (or series of related capital investments, loans and acquisitions), except for purchases of assets in the Ordinary Course of Business which have not and could not reasonably be expected to constitute a Material Adverse Effect on DC; (h) Neither DC nor any of its Subsidiaries has issued any note, bond or other debt security or created, incurred, assumed, or guaranteed any indebtedness for borrowed money or capitalized lease obligation; (i) Except as set forth in Schedule 7.8(i) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has failed to pay and discharge current liabilities in the Ordinary Course of Business, except where disputed in good faith by appropriate proceedings and for which adequate reserves were made; (j) Except as set forth in Section 7.8(j) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has canceled, compromised, waived or released any right or claim (or series of related rights and claims) outside the Ordinary Course of Business; (k) Except in the Ordinary Course of Business, neither DC nor any of its Subsidiaries has granted any license or sublicense of any rights under or with respect to any Intellectual Property; (l) Except as set forth in Section 7.8(l) of the Disclosure Schedule, there has been no change made or authorized in the Organizational Documents of DC or any of its Subsidiaries; (m) Except as set forth in Sections 7.2 and 7.8(m) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has issued, sold, or otherwise disposed of any of its capital stock, or granted any options, warrants, or other rights to purchase or obtain (including upon conversion, exchange, or exercise) any of its capital stock, as the case may be; (n) Neither DC nor any of its Subsidiaries has declared, set aside or paid any dividend or made any distribution with respect to its capital stock (whether in cash or in kind) or redeemed, purchased or otherwise acquired any of its capital stock; (o) Neither DC nor any of its Subsidiaries has experienced any damage, destruction or loss (whether or not covered by insurance) to its property; 21 22 (p) Except as set forth in Section 7.8(p) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has made any loan to, or entered into any other transaction with, any of its directors or officers; (q) Except as set forth in Sections 7.8(p) and 7.8(q) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has entered into any employment contract, written or oral, or modified the terms of any such existing contract or agreement; (r) Except as set forth in Sections 7.8(p), 7.8(q) and 7.8(s) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has granted any increase in the compensation of any of its directors, officers, or employees; (s) Except as set forth in Sections 7.8(p), 7.8(q) and 7.8(s) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has adopted, amended, modified or terminated any bonus, profit-sharing, incentive, stock option, severance, or other plan, contract, or commitment for the benefit of any of its directors, officers and employees (or taken any such action with respect to any other Employee Benefit Plan); (t) Except as set forth in Sections 7.8(p), 7.8(q) and 7.8(s) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has made any other change in employment terms for any of its directors, officers or employees outside the Ordinary Course of Business or in the terms of its agreements with any independent contractors; and (u) Neither DC nor any of its Subsidiaries has made or pledged to make any charitable or other capital contribution; (v) There has not been any other material occurrence, event, incident, action, failure to act or transaction outside the Ordinary Course of Business involving DC or any of its Subsidiaries; and (w) Neither DC nor any of its Subsidiaries is under any legal obligation, whether written or oral, to do any of the foregoing. 7.9. Undisclosed Liabilities. Neither DC nor any of its Subsidiaries has any Liability (and to DC's Knowledge there is no Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against DC and any of its Subsidiaries giving rise to any Liability), except for (i) Liabilities set forth on the face of the Most Recent Balance Sheet (rather than in any notes thereto), (ii) Liabilities which have arisen after the Most Recent Fiscal Month End in the Ordinary Course of Business (none of which results from, arises out of, relates to, is in the nature of or was caused by any breach of contract, breach of warranty, tort, infringement or violation of law) and (iii) the Liabilities specifically identified in the Schedules and Exhibits attached hereto. 22 23 7.10. Legal Compliance. To their knowledge, each of DC and its Subsidiaries has complied in all material respects with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings and charges thereunder) of any Governmental Authority, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice has been filed or commenced against it alleging any failure so to comply. 7.11. Taxes. (a) Except as set forth in Section 7.11(a) of the Disclosure Schedule, (i) all Tax Returns required to be filed by or on behalf of DC and each of its Subsidiaries have been properly prepared and duly and timely filed with the appropriate taxing authorities in all jurisdictions in which such Tax Returns are required to be filed (after giving effect to any valid extensions of time in which to make such filings), and all such Tax Returns were true, complete and correct in all material respects; (ii) all Taxes payable by or on behalf of DC and each of its Subsidiaries or in respect of their income, assets or operations have been fully and timely paid, and adequate reserves or accruals for Taxes have been provided in the Financial Statements with respect to any period for which Tax Returns have not yet been filed or for which Taxes are not yet due and owing; and (iii) neither DC nor any of its Subsidiaries has executed or filed with the Internal Revenue Service or any other taxing authority any agreement, waiver or other document or arrangement extending or having the effect of extending the period for assessment or collection of Taxes (including, but not limited to, any applicable statute of limitation), and no power of attorney with respect to any Tax matter is currently in force. (b) DC and each of its Subsidiaries have complied in all material respects with all applicable laws, rules and regulations relating to the payment and withholding of Taxes and has duly and timely withheld from employee salaries, wages and other compensation and has paid over to the appropriate taxing authorities all amounts required to be so withheld and paid over for all periods under all applicable laws. (c) DC has provided HSA with complete copies of (A) all federal, state, local and foreign income or franchise Tax Returns of DC and each of its Subsidiaries relating to the taxable periods since 1996 and (B) any audit report issued within the last three years relating to Taxes due from or with respect to DC or any of its Subsidiaries. (d) Section 7.11(d) of the Disclosure Schedule lists all material types of Taxes paid and material types of Tax Returns filed by or on behalf of DC and each of its Subsidiaries. Except as set forth in Section 7.11(d) of the Disclosure Schedule, no claim has been made by a taxing authority in a jurisdiction where DC or any of its Subsidiaries does not file Tax Returns such that DC or any of its Subsidiaries is or may be subject to taxation by that jurisdiction. (e) Except as set forth in Section 7.11(e) of the Disclosure Schedule, all deficiencies asserted or assessments made as a result of any examinations by the Internal Revenue Service or any other taxing authority of the Tax Returns of or covering or including DC or any of its Subsidiaries have been fully paid, and there are no audits or investigations by any taxing authority in progress, nor have the Shareholders, DC or any 23 24 of its Subsidiaries received any notice from any taxing authority that it intends to conduct such an audit or investigation. No issue has been raised by a federal, state, local or foreign taxing authority in any current or prior examination which, by application of the same or similar principles, could reasonably be expected to result in a proposed deficiency for any subsequent taxable period. (f) Except as set forth in Section 7.11(f) of the Disclosure Schedule, none of DC, any of its Subsidiaries or any other Person (including any of the Shareholders) on behalf of DC or any of its Subsidiaries has (A) filed a consent pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply to any disposition of a subsection (f) asset (as such term is defined in Section 341(f)(4) of the Code) owned by DC or any of its Subsidiaries, (B) agreed to or is required to make any adjustments pursuant to Section 481(a) of the Code or any similar provision of state, local or foreign law by reason of a change in accounting method initiated by DC or any of its Subsidiaries or has any knowledge that the Internal Revenue Service has proposed any such adjustment or change in accounting method, or has any application pending with any taxing authority requesting permission for any changes in accounting methods that relate to the business or operations of DC or any of its Subsidiaries, (C) executed or entered into a closing agreement pursuant to Section 7121 of the Code or any predecessor provision thereof or any similar provision of state, local or foreign law with respect to DC or any of its Subsidiaries, or (D) requested any extension of time within which to file any Tax Return, which Tax Return has since not been filed. (g) No property owned by DC or any of its Subsidiaries is (i) property required to be treated as being owned by another Person pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended and in effect immediately prior to the enactment of the Tax Reform Act of 1986, (ii) "tax-exempt use property" within the meaning of Section 168(h)(1) of the Code, (iii) "tax-exempt bond financed property" within the meaning of Section 168(g) of the Code or (iv) is "limited use property" (as such term is used in Rev. Proc. 76-30). (h) Neither DC nor any of its Subsidiaries has ever been a "United States real property holding corporation" as defined in Section 897(c) of the Code. (i) Except as set forth in Section 7.11(i) of the Disclosure Schedule, neither DC nor any of its Subsidiaries is a party to any income tax sharing or other material tax sharing, tax indemnification or similar tax agreement or arrangement (whether or not written) pursuant to which it will have any obligation to make any payments after the Closing. (j) Neither DC nor any of its Subsidiaries is a party to any agreement, contract, plan or arrangement that has resulted or could result, separately or in the aggregate, in the payment of "excess parachute payments" within the meaning of Section 280G of the Code in connection with the transactions contemplated hereby (whether alone or in combination with any other event). 24 25 (k) Neither DC nor any of its Subsidiaries is subject to any private letter ruling of the Internal Revenue Service or comparable rulings of other taxing authorities. (l) Except as set forth in Section 7.11(l) of the Disclosure Schedule, there are no liens as a result of any unpaid Taxes upon any of the assets of DC. (m) Except as set forth in Section 7.11(m) of the Disclosure Schedule, neither DC nor any of its Subsidiaries has ever been a member of any consolidated, combined, unitary or affiliated group of corporations for any Tax purposes other than the group of which DC is the common parent. (n) Neither DC nor any of its Subsidiaries has constituted either a "distributing corporation" or a "controlled corporation" (within the meaning of Section 355(a)(1)(A) of the Code) in a distribution of shares qualifying for tax-free treatment under Section 355 of the Code (i) in the two years prior to the date of this Agreement or (ii) in a distribution that could otherwise constitute part of a "plan" or "series of related transactions" (within the meaning of Section 355(e) of the Code) in connection with the Merger. (o) All options, warrants or similar rights to acquire a DC Share had an exercise price equal to or greater than 80% of the fair market value of such DC Share at the time of grant. (p) To DC's knowledge, it has no reason to believe that any conditions exist the could reasonably be expected to prevent the Merger from qualifying as a reorganization within the meaning of Section 368(a)(1)(A) and Section 368(a)(2)(E) of the Code. (q) None of the debt obligations of either DC or any of its Subsidiaries constitutes "corporate acquisition indebtedness" within the meaning of Section 279(b) of the Code. 7.12. Real Property. Section 7.12(a) of the Disclosure Schedule lists and describes briefly all real property owned, leased or subleased by or to DC and each of its Subsidiaries. Each of DC and its Subsidiaries has delivered to Acquisition and HSA correct and complete copies of the leases and subleases listed in Sections 7.12(b) of the Disclosure Schedule (as amended to date). With respect to each lease and sublease listed in Sections 7.12(b) of the Disclosure Schedule: (a) such lease or sublease is legal, valid, binding, enforceable, and in full force and effect; (b) except as set forth in Section 7.21 of the Disclosure Schedule, no consent is required with respect to such lease or sublease as a result of this Agreement, and the actions contemplated by this Agreement will not result in the change of any terms of any lease or sublease or otherwise affect the ongoing validity of any lease or sublease; 25 26 (c) neither DC nor any of its Subsidiaries nor, to the Knowledge of DC or any of its Subsidiaries, any other party to the lease or sublease is in breach or default, and no event has occurred which, with notice or lapse of time, would constitute a breach or default, or permit termination, modification, or acceleration thereunder; (d) no party to such lease or sublease has repudiated any provision thereof; (e) there are no disputes, oral agreements or forbearance programs in effect as to such lease or sublease; (f) with respect to each such sublease, the representations and warranties set forth in subsections (a) through (e) above are true and correct with respect to the underlying lease; (g) neither DC nor any of its Subsidiaries has assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold or subleasehold; (h) all facilities leased or subleased thereunder have received all Licenses and Permits required by DC and any of its Subsidiaries, as applicable, in connection with the operation thereof and have been operated and maintained by DC and each of its Subsidiaries in accordance with applicable laws, rules, and regulations; and (i) all facilities leased or subleased thereunder are supplied with utilities and other services necessary for the operation of said facilities. 7.13. Intellectual Property. (a) Each of DC and its Subsidiaries owns or has the right to use, pursuant to license, sublicense, agreement or permission, all Intellectual Property which is material to the operation of its business as presently conducted or reasonably expected to be conducted. Each item of Intellectual Property owned or used by DC and its Subsidiaries immediately prior to the Closing hereunder will be owned or available for use by the Surviving Corporation on identical terms and conditions immediately subsequent to the Closing hereunder. Each of DC and its Subsidiaries has taken all necessary action to maintain and protect such Intellectual Property that it owns or uses in the conduct of its business, as presently conducted or reasonably expected to be conducted. Except as set forth in Section 7.13(a) of the Disclosure Schedule, all such Intellectual Property owned by DC or its Subsidiaries is valid, subsisting and enforceable. (b) To the Knowledge of DC or any of its Subsidiaries, neither DC nor any of its Subsidiaries has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of third parties except as set forth in Section 7.13(b) of the Disclosure Schedule. None of the directors or officers (or employees with responsibility for Intellectual Property matters) of DC or any of its 26 27 Subsidiaries has ever received any charge, complaint, claim, demand, or notice alleging any such interference, infringement, misappropriation, or violation (including any claim that DC or any of its Subsidiaries must license or refrain from using any Intellectual Property rights of any third party). Except as set forth in Section 7.13(b) of the Disclosure Schedule, to the Knowledge of DC or any of its Subsidiaries, no third party has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any Intellectual Property rights of DC or any of its Subsidiaries. (c) Section 7.13(c) of the Disclosure Schedule sets forth a complete and accurate listing of each patent, registration or application which has been issued or filed with respect to any of DC's, or any of its Subsidiaries', Intellectual Property and all material unregistered trademarks and service marks. (d) To the Knowledge of DC or any of its Subsidiaries, except as set forth in Section 7.13(d) of the Disclosure Schedule, the continued operation of the business of DC or any of its Subsidiaries as presently conducted or reasonably expected to be conducted will not interfere with, infringe upon, misappropriate, or otherwise come into conflict with, any Intellectual Property rights of third parties. 7.14. Tangible Assets. Each of DC and its Subsidiaries owns or leases all buildings, machinery, equipment and other tangible assets which are material to the conduct of its business as presently conducted and as presently proposed to be conducted. To DC's Knowledge, each such tangible asset is free from all defects, has been maintained in accordance with normal industry practice, is in good operating condition and repair (subject to normal wear and tear), and is suitable for the purposes for which it presently is used. The tangible assets owned or leased by each of DC and its Subsidiaries are sufficient to conduct its business as it is currently being conducted and as it is contemplated to be conducted in the future. 7.15. Contracts. Section 7.15 of the Disclosure Schedule lists the following material contracts and other material agreements to which DC or any of its Subsidiaries is a party: (a) any agreement (or group of related agreements) for the lease of personal property to or from any Person providing for lease payments in excess of $10,000 per annum; (b) any agreement concerning a partnership or joint venture; (c) any agreement (or group of related agreements) under which it has created, incurred, assumed or guaranteed any indebtedness for borrowed money, or any capitalized lease obligation or under which a Security Interest has been imposed on any of its assets, tangible or intangible; (d) any agreement concerning confidentiality or noncompetition; 27 28 (e) any agreement with any Shareholders or any Affiliate of any of the Shareholders; (f) any profit sharing, stock option, stock purchase, stock appreciation, deferred compensation, severance or other material plan or arrangement for the benefit of its current or former directors, officers and employees; (g) any agreement for the employment of any individual on a full-time, part-time, consulting or other basis providing annual compensation in excess of $50,000 or providing severance benefits; (h) any agreement under which it has borrowed, advanced or loaned any amount to any of its directors, officers or employees; (i) any agreement under which the consequences of a default or termination could reasonably be expected to have a Material Adverse Effect on DC or any of its Subsidiaries; (j) any agreements with employees or consultants for the provision of any material goods or services other than on arms-length terms and in the Ordinary Course of Business; or (k) with respect to each such agreement: (A) the agreement is legal, valid, binding, enforceable and in full force and effect; (B) the agreement will continue to be legal, valid, binding, enforceable, and in full force and effect on substantially identical terms following the consummation of the transactions contemplated hereby; (C) neither DC nor any of its Subsidiaries nor, to the Knowledge of DC any of its Subsidiaries, any other party thereto, (i) is in breach or default, and (ii) no event has occurred which with notice or lapse of time would constitute a breach or default by, or permit termination, modification or acceleration under the agreement, except for such breach or default in (i) or (ii) above which could not reasonably be expected to have a Material Adverse Effect; and (D) no party has repudiated any provision of the agreement. The consummation of the transactions described herein will not affect any of the agreements disclosed herein in a manner that could reasonably be expected to have a Material Adverse Effect on DC or any of its Subsidiaries. 7.16. Notes and Accounts Receivable. All notes and accounts receivable of DC and each of its Subsidiaries are reflected properly on its books and records, are valid receivables subject to no setoffs or counterclaims and are current and collectible in accordance with their terms at their recorded amounts, except for the reserve for bad debts set forth on the face of the Most Recent Balance Sheet (rather than in any notes thereto) as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of DC and its Subsidiaries, which reserve has been established and maintained in accordance with GAAP consistently applied. Section 7.16 of the Disclosure Schedule sets forth the note and account receivable aging report of DC 28 29 as of April 30, 2000, and such report lists individually any uncollected amounts in excess of $1,000 and sets forth the name of the related debtor. 7.17. Powers of Attorney. Except as set forth in Section 7.17 of the Disclosure Schedule, there are no outstanding powers of attorney executed on behalf of DC or any of its Subsidiaries. 7.18. Insurance. Section 7.18 of the Disclosure Schedule identifies each insurance policy (including policies providing property, casualty, liability and workers' compensation coverage and bond and surety arrangements) currently in effect to which DC or any of its Subsidiaries is a party, a named insured or otherwise the beneficiary of coverage. With respect to each such insurance policy: (A) the policy is legal, valid, binding, enforceable and in full force and effect; (B) the policy will continue to be legal, valid, binding, enforceable and in full force and effect on substantially identical terms following the consummation of the transactions contemplated hereby; (C) to the Knowledge of DC or any of its Subsidiaries, neither DC nor any of its Subsidiaries nor, to the Knowledge of DC or any of its Subsidiaries, any other party to the policy is in breach or default (including with respect to the payment of premiums or the giving of notices), and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default by, or permit termination, modification, or acceleration, under the policy; and (D) to DC's knowledge, no party to the policy has repudiated any provision thereof. Each of DC and its Subsidiaries has been covered during the past three years by insurance in scope and amount customary and reasonable for the businesses in which it has engaged during the aforementioned period. DC has no self-insurance arrangements affecting DC or any of its Subsidiaries. 7.19. Litigation. Section 7.19 of the Disclosure Schedule sets forth each instance in which DC or any of its Subsidiaries (i) is subject to any outstanding injunction, judgment, order, decree, ruling or charge or (ii) is a party or, to the Knowledge of DC, is threatened to be made a party to any action, suit, proceeding, hearing or investigation of, in, or before any Governmental Authority, including any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator. None of the actions, suits, proceedings, hearings, and investigations set forth in Section 7.19 of the Disclosure Schedule could reasonably be expected to have a Material Adverse Effect on DC or any of its Subsidiaries. DC has no reason to believe that any such action, suit, proceeding, hearing, or investigation may be brought or threatened against DC or any of its Subsidiaries which could reasonably be expected to have a Material Adverse Effect on DC. 7.20. Licenses and Permits. Except as set forth in Section 7.20 of the Disclosure Schedule, each of DC and its Subsidiaries owns, holds or possesses all licenses, consents, franchises, permits, approvals and other permits, orders or authorizations of, or registrations, declarations, notices or filings with, (collectively, "Licenses and Permits") any Governmental Authority and any other Person necessary to entitle it to use its corporate name, to own or lease, operate and use its assets and properties and to carry on and conduct its business and operations as presently conducted, 29 30 except for such Licenses and Permits the absence of which would not reasonably be expected to have a Material Adverse Effect. Neither DC nor any of its Subsidiaries is in violation of or default under any Licenses or Permits or any judgment, order, writ, injunction or decree of any court or administrative agency issued against it or any law, ordinance, rule or regulation applicable to it in any case which would reasonably be expected to have a Material Adverse Effect. 7.21. Consents. Section 7.21 of the Disclosure Schedule lists each material permit and contract (true and complete copies of which have been made available to HSA) as to which notice to, or the consent of, a Governmental Authority or Person is required as a condition to the transfer of control or the right to control such material permit or contract in connection with the transactions contemplated hereby. Except for (i) the aforementioned notices and consents, which shall have been obtained prior to the Closing Date and (ii) the filing of the Articles of Merger with the Florida Secretary of State and appropriate documents with the relevant authorities of other states in which DC or any of its Subsidiaries is qualified to do business, and compliance with applicable state securities laws, no Licenses and Permits of any Governmental Authority or any Person are required to be obtained or made by or with respect to DC or any of its Subsidiaries on or prior to the Closing Date in connection with (A) the execution, delivery and performance of this Agreement, the consummation of the transactions contemplated hereby or the taking by DC or any of its Subsidiaries of any other action contemplated hereby, (B) the continuing validity and effectiveness immediately following the Effective Time of any material contract or permit of each of DC and its Subsidiaries or (C) the conduct by each of DC and its Subsidiaries of its business immediately following the Closing substantially as conducted or proposed to be conducted on the date hereof. 7.22. Employees. Neither DC nor any of its Subsidiaries has committed any unfair labor practice. DC is not a party to any collective bargaining agreements. None of the employees of DC or any of its Subsidiaries is represented in his or her capacity as an employee of DC or any of its Subsidiaries by any labor organization, and none of the Shareholders or DC has any Knowledge of any organizational effort presently being made or threatened by or on behalf of any labor union with respect to employees of DC or any of its Subsidiaries. DC and each of its Subsidiaries are in compliance in all material respects with all laws, regulations and orders relating to the employment of labor, including all such laws, regulations and orders relating to wages, hours, the Worker Adjustment and Retraining Notification Act and any similar state or local "mass layoff" or "plant closing" law ("WARN"), collective bargaining, discrimination, civil rights, safety and health, workers' compensation and the collection and payment of withholding and/or social security taxes and any similar tax. There has been no "mass layoff" or "plant closing" as defined by WARN with respect to the Seller Entity within the six (6) months prior to Closing. 30 31 7.23. Employee Benefits. (a) Section 7.23(a) of the Disclosure Schedule lists each Company Plan. Neither DC, any Subsidiary nor any trade or business (whether or not incorporated) which is or has ever been under common control, or which is or has ever been treated as a single employer, with any of them under Section 414(b), (c), (m) or (o) of the Code ("ERISA Affiliate") has ever contributed or has ever been obligated to contribute to any Employee Pension Benefit Plan subject to Title IV of ERISA or to any Multiemployer Plan. (b) The Company Plans have been maintained, in all material respects, in accordance with their terms and with all provisions of ERISA, the Code (including rules and regulations thereunder). The Company Plans intended to qualify under Section 401 of the Code are so qualified and the trusts maintained pursuant thereto are exempt from federal income taxation under Section 501 of the Code, and nothing has occurred with respect to the operation of the Company Plans which could cause the loss of such qualification or exemption or the imposition of any material liability, penalty or tax under ERISA or the Code. (c) All required reports and descriptions (including Form 5500 Annual Reports, Summary Annual Reports, and Summary Plan Descriptions) have been filed (or appropriate extensions have been applied for) or distributed appropriately with respect to each such Employee Benefit Plan. The requirements of Part 6 of Subtitle B of Title 1 of ERISA and of Code Section 4980B have been met with respect to each group health plan (as defined in Section 607(1) of ERISA and Section 4980B(g)(2) of the Code). (d) All contributions premiums or other payments (including all employer contributions and employee salary reduction contributions) which are due have been paid to each Company Plan and all contributions for any period ending on or before the Closing Date which are not yet due have been paid to each such plan or accrued in accordance with the past custom and practice of each of DC and its Subsidiaries. (e) Each Company Plan which is an Employee Pension Benefit Plan meets the requirements of a "qualified plan" under Code Section 401(a) and, in the case of all other qualified plans, a favorable determination letter has been received by the plan within the last two years from the Internal Revenue Service. (f) With respect to each Company Plan, each of DC and its Subsidiaries has delivered to Acquisition and HSA correct and complete copies, to the extent applicable, of the plan documents and any amendments thereto, summary plan descriptions, the most recent determination letter received from the Internal Revenue Service, the most recent Form 5500 Annual Report and all schedules and attachments thereto, and all related trust agreements, insurance contracts, and other funding agreements which implement each such Company Plan. 31 32 (g) There have been no Prohibited Transactions with respect to any such Company Plan. No Fiduciary has any Liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets of any such Company Plan. No action, suit, proceeding, hearing, or investigation with respect to the administration or the investment of the assets of any such Company Plan (other than routine claims for benefits) is pending or threatened and, none of the Shareholders or DC has any Knowledge of any Basis for any such action, suit, proceeding, hearing, or investigation. (h) Neither DC nor any of its Subsidiaries maintains or contributes to, has ever maintained or contributed to and has ever been required to contribute to, any Company Plan providing post-retirement, medical, health or life insurance or other welfare-type benefits for current or future retired or terminated employees, their spouses, or their dependents (other than in accordance with Code Section 4980B). (i) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment becoming due to any employee (current, former or retired) of DC or any of its Subsidiaries, (ii) increase any benefits otherwise payable under any Company Plan or (iii) result in the acceleration of the time of payment or vesting of any such benefits under any such plan. (j) No stock or other security issued by DC forms or has formed a material part of the assets of any Company Plan. (k) Any individual who performs services for DC or any of its Subsidiaries (other than through a contract with an organization other than such individual) and who is not treated as an employee of DC or any of its Subsidiaries for federal income tax purposes by DC or any of its Subsidiaries is not an employee for such purposes. 7.24. Guaranties. Neither DC nor any of its Subsidiaries is a guarantor and otherwise is not liable for any Liability or obligation (including indebtedness) of any other Person. 7.25. Customers. All contracts and agreements with customers of DC and any of its Subsidiaries are valid, effective and enforceable and Section 7.25 of the Disclosure Schedule sets forth all customers who have account balances that are in excess of 90 days past due. Section 7.25 of the Disclosure Schedule is complete and accurate in all material respects and represents bona fide orders from DC or any of its Subsidiaries for goods and services. 7.26. Relationships with Customers and Suppliers. Except as set forth in Section 7.26 of the Disclosure Schedule, DC believes that the relationships of each of DC and its Subsidiaries with its existing customers and suppliers are sound. The Shareholders and DC do not know of any written or oral communication, fact, event or 32 33 action which exists or has occurred within 120 days prior to the date of this Agreement which would indicate that any of the following shall terminate or materially reduce its business with DC or any of its Subsidiaries: (i) any current customer of DC or any of its Subsidiaries which accounted for over 1% of total net sales of such company for its most recently completed fiscal year; or (ii) any current supplier to DC or any of its Subsidiaries of items essential to the conduct of the business, which items cannot be replaced at comparable cost and the loss of which could reasonably be expected to have a Material Adverse Effect on DC or any of its Subsidiaries. Except as set forth in Section 7.26 of the Disclosure Schedule, since the date of the Most Recent Balance Sheet, (A) each of DC and its Subsidiaries has retained all sales personnel employed in connection with the operation of its businesses and (B) no customer (or group of customers) purchasing in the aggregate of $200,000 in products and services on a yearly basis has terminated its relationship with DC or any of its Subsidiaries. 7.27. Bank Accounts. Sections 7.27 of the Disclosure Schedule sets forth all bank accounts and marketable securities (both debt and equity) of DC and each of its Subsidiaries. 7.28. Related Party Agreements. Section 7.28 of the Disclosure Schedule sets forth all agreements between each of DC and its Subsidiaries and (i) any Shareholder or any of his Affiliates or (ii) any officer, director or employee of or consultant to DC, any of its Subsidiaries or any of its Affiliates. 7.29. Change in Control. Except as set forth in Section 7.29 of the Disclosure Schedule, neither DC nor any of its Subsidiaries is a party to any contract or arrangement which contains a "change in control," "potential change in control" or similar provision, and the consummation of the transactions contemplated hereby shall not (either alone or upon the occurrence of additional acts or events) result in any payment or payments becoming due from DC or any of its Subsidiaries to any person or give any person the right to terminate or alter the provisions of any agreement to which DC and any of its Subsidiaries is a party. 7.30. Brokers' Fees. Except as set forth in Section 7.30 of the Disclosure Schedule, neither DC, any of its officers, directors or employees, nor any Shareholder, has any Liability or obligation to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement. 7.31. Options. All issued and outstanding options to purchase DC Shares shall expire at or prior to the Effective Time, and the DC Board has taken no 33 34 action, the effect of which would cause, permit or result in the survival of such options following the Effective Time. 7.32. DC Affiliates. Section 7.32 of the Disclosure Schedule sets forth a true and correct list of all Affiliates of DC. 7.33. Prior Securities Issuances. All issuances of securities of DC prior to the date hereof complied with the Securities Act. 7.34. Disclosure. The representations and warranties contained in this Article 7 do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements and information contained in this Article 7 not misleading. 7.35. Secured Note. The parties acknowledge and agree that to the extent the Secured Note would be inconsistent with, or constitute a breach of, (i) the representations and warranties in this Article 7, or (ii) any agreement contained in Article 8, such Secured Note shall constitute a fully disclosed exception, whether or not particularly referenced in each case. ARTICLE 8 COVENANTS AND ADDITIONAL AGREEMENTS The parties hereto agree as follows with respect to the period from the date hereof to the Closing: 8.1. General. Each of HSA and DC shall use its reasonable best efforts to (i) take all actions necessary or appropriate to consummate the transactions contemplated by this Agreement and (ii) cause the fulfillment at the earliest practicable date of all of the conditions to their respective obligations to consummate the transactions contemplated by this Agreement. 8.2. Notices and Consents. Each Party shall give any notices to third parties and shall use its reasonable best efforts to obtain any third party consents, undertakings, agreements and opinions that the other may reasonably request in connection with the matters referred to in Section 8.1 above and in Article 9 below. Each of the parties shall give any notices to, make any filings with and use its reasonable best efforts to obtain any authorizations, consents and approvals of Governmental Authorities in connection with the transactions contemplated hereby. 8.3. Conduct of Business of the Company Pending the Closing. During the period from the date of this Agreement to the Effective Time, DC shall not, and DC shall cause each of its Subsidiaries to not take any action that could reasonably be expected to have a Material Adverse Effect on the ability of DC or any of its Subsidiaries to (i) pursue its business in the Ordinary Course of Business, (ii) seek to preserve intact 34 35 its current business organizations, (iii) keep available the service of its current officers and employees and (iv) preserve its relationships with customers, suppliers and others having business dealings with it; and DC shall not, and shall cause each of its Subsidiaries not to, without HSA's prior written consent: (a) except as contemplated elsewhere in this Agreement, issue, deliver, sell, dispose of, pledge or otherwise encumber, or authorize or propose the issuance, delivery, sale, disposition or pledge or other encumbrances of (i) any additional shares of its capital stock of any class, or any securities or rights convertible into, exchangeable for or evidencing the right to subscribe for any shares of its capital stock, or any rights, warrants, options, calls, commitments or any other agreements of any character to purchase or acquire any shares of its capital stock or any other securities or rights convertible into, exchangeable for or evidencing the right to subscribe for any shares of its capital stock, or (ii) any other securities in respect of, in lieu of or in substitution for shares of its capital stock outstanding on the date hereof; (b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or otherwise acquire, any of its outstanding securities; (c) split, combine, subdivide or reclassify any shares of its capital stock or otherwise make any payments to any Shareholder in his capacity as a shareholder of DC; (d) (i) grant any increases in the compensation of any of its directors, officers or executives or grant any increases in compensation to any of its employees, (ii) pay or agree to pay any pension, retirement allowance or other employee benefit not required or contemplated by any Employee Benefit Plan as in effect on the date hereof to any such director, officer or employee, whether, past or present, (iii) enter into any new or amend any existing employment or severance agreement with any such director, officer or, except in the Ordinary Course of Business, any employee, except as approved by HSA in its reasonable discretion, (iv) pay or agree to pay any bonus to any director, officer or employee (whether in the form of cash, capital stock or otherwise) or (v) except as may be required to comply with applicable law, amend any existing, or become obligated under any new Employee Benefit Plan; (e) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization (other than the Merger); (f) make any acquisition, by means of merger, consolidation or otherwise, of any direct or indirect ownership interest in or assets comprising any business enterprise or operation; (g) adopt any amendments to its articles of incorporation or by-laws; (h) incur any indebtedness for borrowed money or guarantee such indebtedness or agree to become contingently liable, by guaranty or otherwise, for the 35 36 obligations or indebtedness of any other person or make any loans, advances or capital contributions to, or investments in, any other corporation, any partnership or other legal entity or to any other persons, except for any of the foregoing incurred or made in the Ordinary Course of Business; (i) engage in the conduct of any business the nature of which is materially different from the business in which DC and its Subsidiaries are currently engaged; (j) enter into any agreement providing for acceleration of payment or performance or other consequence as a result of (or make any payment contingent upon) a change of control of DC or any of its Subsidiaries; (k) forgive any indebtedness owed to DC or any of its Subsidiaries or convert or contribute by way of capital contribution any such indebtedness owed; (l) authorize or enter into any agreement providing for management services to be provided by DC or any of its Subsidiaries to any third party or an increase in management fees paid by any third party under existing management agreements (except pursuant to the terms thereof in effect on the date hereof); (m) mortgage, pledge, encumber, sell, lease or transfer any material assets of DC or any of its Subsidiaries except with the prior written consent of HSA or as contemplated by this Agreement; (n) take any action that would jeopardize the transactions contemplated by this Agreement from being exempt from the registration requirements of the Securities Act pursuant to Regulation D of the Securities Act; or (o) authorize or announce an intention to do any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing or to take any action described in clauses (a) through (w) of Section 7.8. 8.4. Access. DC agrees that, prior to the Closing Date, HSA shall be entitled, through its officers, employees and representatives (including, without limitation, its legal and financial advisors, accountants and consultants) (collectively, "HSA Representatives"), subject to reasonable notice and without unreasonably disrupting the business of DC, to investigate the respective properties, businesses and operations of DC and its Subsidiaries, and examine the books, records, contracts, financial condition and other aspects of DC and its Subsidiaries, including its management personnel and employees, and to make extracts and copies of such books, records and contracts. No investigation by HSA, prior to or after the date of this Agreement shall diminish or obviate any of the representations, warranties, covenants or agreements of the other parties hereto contained in this Agreement. In order that HSA may have full opportunity to make such physical, business, accounting, tax and legal review, examination or investigation as it may reasonably request of the affairs of DC and its Subsidiaries, subject to reasonable notice and without unreasonably disrupting the 36 37 business of DC, DC shall cause its officers, directors, agents and employees, and those of its Subsidiaries, to cooperate fully with the HSA Representatives in connection with such review and examination. Any information furnished or to be furnished by either DC or its Subsidiaries to HSA and the HSA Representatives shall be subject to that certain Non-disclosure and Non-solicitation Agreement, dated as of April 1, 2000, by and between DC and HSA. 8.5. Notice of Developments. Each of HSA and DC shall give prompt written notice to the others of any development which could reasonably be expected to have a Material Adverse Effect. No disclosure by either HSA or DC pursuant to this Section 8.5, however, shall be deemed to amend or supplement the Disclosure Schedule or to prevent or cure any misrepresentation, breach of warranty, or breach of covenant. 8.6. Investment Representation Letter. DC shall use its best efforts to cause each of the Shareholders to execute and deliver to HSA an Investment Representation and Agreement Letter in the form of Exhibit B hereto (the "Investment Representation Letter"). 8.7. Filings with Governmental Bodies. (a) As promptly as practicable after the execution of this Agreement, HSA and DC shall, in cooperation with each other shall furnish or cause to be furnished to the other all such information in its possession as may be reasonably necessary for the completion of the reports, notifications or submissions to be filed by the other. HSA and DC each agree to use their respective reasonable commercial efforts to comply and cause their respective Affiliates to comply in a full and timely manner with any request from a Governmental Authority for additional information. (b) HSA and DC shall keep each other apprised of the status of any communications with, and any inquiries or requests for additional information from, the Federal Trade Commission and the Department of Justice and shall comply promptly with any such inquiry or request. 8.8. No Solicitation. (a) DC shall not, directly or indirectly through any of its directors, officers, employees, agents or consultants (including without limitation, its legal and financial advisors), (i) discuss, negotiate, undertake, authorize, recommend, propose or enter into, either as the proposed surviving, merged, acquiring or acquired corporation, any transaction involving a merger, consolidation, business combination, purchase or disposition of the assets (other than sales of inventory in the Ordinary Course of Business) or capital stock or other equity interest in DC, in whole or in part, other than the transactions contemplated by this Agreement (an "Acquisition Transaction"), (ii) facilitate, encourage, solicit or initiate discussions, negotiations or submissions of proposals or offers in respect of an Acquisition Transaction, (iii) furnish or cause to be furnished, to any Person, any information concerning the business, operations, properties or assets of DC in connection with an Acquisition Transaction, (iv) enter into any agreement, agreement in principle, letter of intent or similar agreement (whether or not legally binding) relating to an Acquisition Transaction or (v) otherwise 37 38 cooperate in any way with, or assist or participate in, facilitate or encourage, any effort or attempt by any other Person to do or seek any of the foregoing. DC will inform HSA in writing immediately following the receipt, by it or any of its directors, officers, employees, agents or consultants (including without limitation, its legal and financial advisers) of any proposal or inquiry in respect of any Acquisition Transaction. The restrictions contained in this Section 8.8 do not apply to business alliances in which DC engages in the Ordinary Course of Business. 8.9. Publicity. Neither HSA nor DC shall issue any press release or public announcement concerning this Agreement or the transactions contemplated hereby without obtaining the prior written approval of the other parties hereto, which approval will not be unreasonably withheld or delayed; provided, that if, in the reasonable judgment of HSA or DC, disclosure is otherwise required by applicable law or any listing or trading agreement, HSA or DC, as the case may be, may make such disclosure provided that, to the extent any such disclosure is so required, the party intending to make such release shall use its best efforts consistent with such applicable law to consult with the other party with respect to the text thereof; provided, further, that upon execution of this Agreement HSA may issue a public announcement with respect thereto. 8.10. HSA Common Stock. (a) Each certificate issued to the Shareholders representing HSA Common Stock shall be imprinted with a legend substantially in the following form: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), IN RELIANCE UPON THE EXEMPTION FROM REGISTRATION CONTAINED IN SECTION 4(2) OF THE 1933 ACT AND REGULATION D OF THE RULES AND REGULATIONS PROMULGATED UNDER THE 1933 ACT, AND IN RELIANCE UPON THE REPRESENTATION BY THE HOLDER THAT THEY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO RESALE OR FURTHER DISTRIBUTION IN VIOLATION OF APPLICABLE LAW. SUCH SHARES MAY NOT BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE OR, HYPOTHECATED, NOR WILL ANY ASSIGNEE OR ENDORSEE HEREOF BE RECOGNIZED AS AN OWNER HEREOF BY THE ISSUER FOR ANY PURPOSE, UNLESS A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH SHARES SHALL THEN BE IN EFFECT OR UNLESS THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION SHALL BE ESTABLISHED TO THE REASONABLE SATISFACTION OF COUNSEL TO THE ISSUER. 38 39 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER PURSUANT TO AN AGREEMENT AND PLAN OF MERGER, DATED AS OF JUNE 23, 2000, AMONG THE ISSUER, DC AND THE SHAREHOLDERS LISTED ON SCHEDULE A THERETO, A COPY OF WHICH WILL BE FURNISHED BY THE ISSUER TO ANY HOLDER HEREOF UPON WRITTEN REQUEST. Subject to the restrictions contained herein, if any Shareholder desires to transfer any shares of HSA Common Stock received in connection with the Merger, other than in a registered offering or pursuant to a sale which counsel for HSA confirms is in compliance with Rule 144 of the Securities Act, such Shareholder must first furnish HSA with (i) a written opinion of counsel reasonably satisfactory in form and substance to HSA to the effect that such Shareholder may transfer the shares of HSA Common Stock as desired without registration under the Securities Act and (ii) a written undertaking executed by the desired transferee reasonably satisfactory to HSA in form and substance agreeing to be bound by the restrictions on transfer contained herein. 8.11. Employee Matters. HSA shall, as soon as practicable following the Effective Time, offer to enroll all DC employees who, following the Effective Time, are employed by the Surviving Corporation, in the benefits packages of HSA offered to those employees of HSA performing substantially similar duties for HSA as such DC employees shall perform for the Surviving Corporation. 8.12. DC Meeting. DC shall, as promptly as practicable following the date of this Agreement, duly call, give notice of and convene and hold a special meeting of the Shareholders or, in lieu of a special meeting of the Shareholders, circulate to the Shareholders a form of a written consent of Shareholders for the purpose of approving the execution, delivery and performance of this Agreement and all other documents to be delivered pursuant to this Agreement, and the consummation of the transactions contemplated hereby and thereby (the "DC Meeting"). DC will through its Board of Directors, recommend to the Shareholders the adoption of the Agreement and the approval of the Merger and such recommendation will not be revoked. 8.13. Insurance and Indemnification. For a period of three (3) years from the Effective Time, HSA and the Surviving Corporation shall cause to be maintained directors' and officers' liability insurance for each individual who served as a director or officer of DC at any time prior to the Effective Time who is currently covered by directors' and officers' liability insurance at the Effective Time (HSA may substitute liability insurance no less favorable in coverage and amount) to the extent that such liability insurance can be maintained at a cost not greater than 150 percent of the current annual premium. If the premium exceeds such amount, HSA and the surviving corporation shall purchase a policy with the greatest coverage available for such 150% of the current annual premium. 39 40 8.14. Indemnification of Personal Guarantees. HSA shall indemnify Gary Allen, Paul Lunter and Brian Burke for all obligations arising from the agreements set forth in Section 8.14 of the Disclosure Schedule. 8.15. Representation and Information of Surviving Corporation. From the Effective Time until 30 days following the later of the issuance of all Earnout Shares pursuant to the Final Earnout Determination or the final resolution of all HSA Claims and Third Party Claims, HSA shall (i) permit B. Judson Hennington, III to serve as a director of the Surviving Corporation, (ii) permit the Representative to attend all meetings of the Board of Directors of the Surviving Corporation, and (iii) provide the Representative with financial statements of the Surviving Corporation at least quarterly and such other information requested by the Representative as may be reasonably necessary for the Representative to monitor progress on the DC Financial Projections. ARTICLE 9 CONDITIONS TO OBLIGATION TO CLOSE 9.1. Conditions to Each Party's Obligation. The respective obligations of HSA, Acquisition, the Shareholders and DC to consummate the transactions contemplated by this Agreement, including all Schedules and Exhibits attached hereto, are subject to the fulfillment at or prior to the Closing Date of each of the following conditions, which conditions may be waived upon the written consent of HSA or DC, as the case may be: (a) Governmental Approvals. The parties hereto shall have received any material Licenses and Permits of Governmental Authorities referred to in Section 6.4, Section 7.3 and 7.20 above. (b) No Injunction or Proceedings. There shall not be in effect any action, suit or proceeding pending or threatened before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling or charge would, in the reasonable judgment of HSA or DC (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, (C) affect adversely the right of HSA to own the capital stock of the Surviving Corporation or (D) affect adversely the right of the Surviving Corporation to own its assets and to operate its businesses (and no such injunction, judgment, order, decree, ruling, or charge is in effect). (c) Secured Note. HSA and DC shall have executed and delivered counterparts to the Secured Note and the Security Agreement attached hereto as Exhibits A-1 and A-2, and the funds under the Secured Note, shall have been made available to DC in accordance with the terms of the Secured Note. 40 41 (d) Shareholder Approval. The Shareholders shall have approved this Agreement, the Merger, and the other transactions contemplated hereby. 9.2. Conditions to Obligations of Acquisition and HSA. The obligations of Acquisition and HSA to consummate the transactions to be performed by them in connection with the Closing are subject to satisfaction of the following conditions (notwithstanding the foregoing, DC shall be permitted to cure any breaches of representations or warranties within 30 days of the date hereof, if DC provides written notice of such breach to HSA prior to HSA's discovery of such breach): (a) Representation and Warranties. The representations and warranties of DC set forth in this Agreement shall be true and correct as of the date of this Agreement and shall be true and correct in all material respects (without giving any effect to any "materiality" or "Material Adverse Effect" qualifiers) as of the Closing Date as though made at and as of the Closing Date, except to the extent a representation and warranty expressly relates to an earlier date (in which case as of such date), and HSA shall have received a certificate signed by the Chief Executive Officer of DC to such effect. (b) Performance of Obligations of HSA. DC and the Shareholders shall have performed or complied in all material respects with all agreements, obligations, conditions and covenants required to be performance or complied with by it under this Agreement, including all Schedules and Exhibits attached hereto, at or prior to the Closing, and HSA shall have received a certificate signed by the Chief Executive Officer of DC to such effect. (c) Certificate of Incumbency and Resolutions. HSA shall have received a certificate of the Secretary of DC (i) as to the incumbency and signatures of the officers of DC; and (ii) as to the adoption and continued effectiveness of resolutions of DC authorizing this Agreement and the transactions contemplated hereby, including the Merger. (d) Opinion of DC's Counsel. Acquisition and HSA shall have received an opinion, dated as of the Closing Date, from Shumaker, Loop & Kendrick, LLP, counsel to the Representative and DC, in substantially the form attached hereto as Exhibit D. (e) FIRPTA Affidavit. HSA shall have received an affidavit, in form and substance acceptable to HSA, that satisfies the requirements of Section 1445(b)(3)(A) and United States Treasury Regulation Section 1.1445-2(c)(3). (f) Board Approval. The DC Board shall have unanimously approved the Merger and the other transactions contemplated hereby. (g) Required Consents. DC shall have received all material regulatory and third party approvals necessary for DC to (i) consummate the transactions contemplated 41 42 herein and (ii) necessary for the Surviving Corporation to continue to conduct the business of DC materially in the manner conducted as of the date hereof. (h) Absence of Material Adverse Effect. As of the Closing Date, there has been no Material Adverse Effect on DC or its operations. (i) Investment Representation Letter. (i) HSA shall have received from each Shareholder an executed Investment Representation Letter, in the form attached hereto as Exhibit B and (x) the representations contained therein are true and correct in all material respects and (y) each Shareholder shall have performed all its obligations thereunder in all material respects; and (ii) 35 or fewer such Shareholders are not "accredited investors," as such term is defined in Regulation D of the Securities Act. (j) Dissenter's Rights. (i) DC shall have received waivers from Shareholders of their right to demand dissenter's rights pursuant to the provisions of Section 607.1320(3) of the FBCA from holders of not less than 90% of DC Shares outstanding as of the Closing Date; and (ii) Shareholders holding no more than 5% of DC Shares outstanding as of the Closing Date shall have perfected their dissenter's rights pursuant to the provisions of Section 607.1320(3) of the FBCA. (k) Voting Agreements. The Persons listed on Section 9.2 of the Disclosure Schedule shall agree, pursuant to a voting agreement substantially in the form of the voting agreement attached hereto as Exhibit E (the "Voting Agreement"), to vote all of their DC Shares to approve and adopt this Agreement and the transactions contemplated hereby, including the Merger and all the transactions contemplated hereby, and against any Acquisition Transaction. (l) Hennington Agreement. B. Judson Hennington, III shall have entered into an employment agreement with HSA in substantially the form attached hereto as Exhibit F. (m) Consulting Agreements. Each of Gary Allen, Paul Lunter and Brian Burke shall have entered into a consulting agreement with the Surviving Corporation in substantially the form attached hereto as Exhibit G (the "Consulting Agreement"). (n) Lock-Up. Promptly upon execution of this Agreement by the parties hereto, each Shareholder shall enter into with HSA a lock-up agreement substantially in the form of the lock-up agreement attached hereto as Exhibit H. (o) Other Conditions. The conditions set forth on Section 9.2(o) of the Disclosure Schedule have been satisfied. HSA may waive any condition specified in this Section 9.2 if it executes a writing so stating at or prior to the Closing. 42 43 9.3. Conditions to Obligations of DC. The obligations of DC to consummate the transactions to be performed by it in connection with the Closing are subject to satisfaction of the following conditions: (a) Representations and Warranties. The representations and warranties of HSA set forth in this Agreement shall be true and correct as of the date of this Agreement and shall be true and correct in all material respects (without giving any effect to any "materiality" or "Material Adverse Affect" qualifiers) as of the Closing as though made at and as of the Closing, except to the extent a representation and warranty expressly relates to an earlier date (in which case as of such date), and DC shall have received a certificate signed by an authorized officer of HSA to such effect. (b) Performance of Obligations of HSA. HSA shall have performed or complied in all material respect with all obligations, conditions and covenants required to be performed or complied with by it under this Agreement at or prior to the Closing, and DC shall a have received a certificate signed by an authorized officer of HSA to such effect. (c) Certificate of Incumbency and Resolutions. DC shall have received a certificate of the Secretary of HSA (i) as to the incumbency and signatures of the officers of HSA; and (ii) as to the adoption and continued effectiveness of resolutions of HSA authorizing this Agreement and the transactions contemplated hereby, including the Merger. (d) Board Approval. The Board of Directors of HSA shall have approved the Merger and the other transactions contemplated hereby; (e) Delivery of Shares. HSA shall have furnished to the Transfer Agent irrevocable instructions to deliver the Share Consideration to such accounts as may be specified in writing by the Shareholders in accordance with Section 4.2; (f) Opinion of Harvard's Counsel. The Representative and DC shall have received an opinion, dated as of the Closing Date, from Weil, Gotshal & Manges LLP, counsel to Acquisition and HSA, substantially in the form attached hereto as Exhibit I. (g) Registration Rights Agreements. The registration rights agreements, substantially in the form attached hereto as Exhibit J-1 and J-2, shall have been executed and delivered by the parties thereto. DC or the Representative may waive any condition specified in this Section 9.3 if it executes a writing so stating at or prior to the Closing. 43 44 ARTICLE 10 SHAREHOLDER REPRESENTATIVE; CONDUCT OF BUSINESS DURING THE EARNOUT PERIOD 10.1. Representative. The representative of the Shareholders (the "Representative") shall be Gary Allen, or such other representative as may be hereafter appointed by a majority in interest of the Shareholders. The Representative shall act on each Shareholder's behalf with respect to all of the transactions contemplated by this Agreement, including, without limitation, the Final Earnout Determination and any Final Loss Determination. The Representative shall take any and all actions which the Representative believes are necessary or appropriate under this Agreement for and on behalf of each Shareholder, as fully as if such Shareholder were acting on his or her own behalf, including, without limitation, executing on the Shareholders' behalf all agreements and documents required to consummate the transactions contemplated by this Agreement, conducting negotiations or arbitrations with HSA and its representatives regarding the Final Earnout Determination and any Final Loss Determination, taking any and all other actions specified in or contemplated by this Agreement and engaging counsel, accountants or other representatives in connection with the foregoing matters. HSA shall have the right to rely upon all actions taken or omitted to be taken by the Representative pursuant to this Agreement, all of which actions or omissions shall be legally binding upon the Shareholders. The Representative, acting pursuant to this Section 10.1, shall not be liable to any Shareholder for any act or omission, except in connection with any act or omission that was the result of the Representative's bad faith or gross negligence. 10.2. Conduct of Surviving Corporation from the Date of Signing to the Earnout Date. From and after the signing of this Agreement through the Earn Out Date, DC's management shall operate its business substantially in accordance with the financial projections prepared by DC and attached hereto as Exhibit C (the "DC Financial Projections") with a view towards achieving the full Earn Out Market Value; it being understood that the revenue and expense targets for DC set forth in the DC Financial Projections do not take into account any acquisitions or any direct management or cross-marketing assistance from HSA, but do take into account an aggregate of $5 million of working capital to be provided to DC by HSA, less the aggregate amount funded by HSA under the Secured Note (the "Working Capital Commitment"). HSA agrees that DC's officers shall have the authority and discretion to carry out the business and activities of DC in accordance with the DC Financial Projections. DC shall consult with HSA in respect of its business and operations, and shall furnish monthly financial and operations reports to HSA within 20 days of the end of each month. In the event and to the extent DC's monthly financial results reflect a revenue, operating expense and/or EBITDA variance of 10% or more from the DC Financial Projections, HSA shall have the option, in its sole and absolute discretion, to modify the level of Working Capital Commitment and/or require DC to modify its business practices in view of such changed business circumstances. 44 45 For the purpose of calculating the "Earnout Period Revenue" levels set forth on the table in Section 4.3(b) hereof, (i) DC shall not be charged with expenses attributable to servicing third party business(es) acquired by HSA or DC or new business obtained through HSA sales channels (i.e., sales originating by or through HSA's marketing and field operations organizations) (either referred to as a "Third Party Business"); (ii) DC shall be credited with 20% of the revenue (net of appropriate reserves) generated by DC from Third Party Business, it being understood and agreed that HSA shall not be obligated to affirmatively cause or support such acquisitions or sales; and (iii) HSA may in its sole and absolute discretion transition its pre-existing hosting customers to DC and DC shall be credited with 5% of revenue generated therefrom. To the extent DC, with the consent of HSA, acquires a Third Party Business from proceeds of the Working Capital Commitment, such acquired Third Party Business's operating results shall be charged towards the Earnout calculation. ARTICLE 11 TERMINATION 11.1. Termination by Mutual Consent. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, before or after the approval by the Shareholders, either by the mutual written consent of HSA and DC or by mutual action of the board of directors of HSA and the board of directors of DC. 11.2. Termination by Either HSA or DC. This Agreement may be terminated and the Merger may be abandoned: (a) by HSA in the event that there has been a material breach by DC of any representation, warranty, covenant or agreement set forth in this Agreement, including the Schedules and Exhibits attached hereto, which breach (x) would give rise to the failure of a condition set forth in Section 9.1 or 9.2 of this Agreement and (y) which breach has not been cured within thirty days following receipt by DC of written notice of such breach by HSA; (b) by DC in the event that there has been a material breach by HSA or its shareholders of any representation, warranty, covenant or agreement set forth in this Agreement, which breach (x) would give rise to the failure of a condition set forth in Section 9.1 or 9.3 of this Agreement and (y) which breach has not been cured within thirty days following receipt by HSA of written notice of such breach by DC; (c) by either HSA or DC, (i) if the Merger shall not have been consummated on or prior to August 30, 2000, (ii) if a United States federal or state court or governmental agency of competent jurisdiction shall have issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and non-appealable or (iii) if, upon a vote 45 46 at the DC Meeting called pursuant to Section 8.12 hereof, the Requisite Vote shall not have been obtained. 11.3. Effect of Termination and Abandonment. (a) In the event of (i) a termination pursuant to Section 11.2(a) above, provided that HSA shall not have breached in any material respect its obligations under this Agreement in any manner that would permit DC to terminate this Agreement or (ii) a termination pursuant to Sections 11.2(c)(i) and 11.2(c)(iii) above and within ninety days (90) DC enters into an Acquisition Transaction with a third party, DC shall pay to HSA, prior to the earlier to occur of (X) the ninetieth (90th) day following such termination or (Y) the consummation of any Acquisition Transaction, the following amounts in immediately available funds: (1) a termination fee of $1,000,000.00 (the "Termination Fee"), (2) up to $100,000 for all documented reasonable fees and expenses incurred by HSA through the date of such termination (except for such fees and expenses incurred in connection with the collection thereof) in connection with this Agreement and the transactions contemplated hereby and (3) any other amounts owed by DC or its affiliates to HSA or its affiliates, including pursuant to the Secured Note. (b) In the event of a termination pursuant to Section 11.2(b) above, provided that DC shall not have breached in any material respect its obligations under this Agreement in any names that would permit HSA to terminate this Agreement, HSA shall reimburse DC up to $100,000 for all documented reasonable fees and expenses incurred by DC through the date of such termination (except for such fees and expenses incurred in connection with the collection thereof) in connection with this Agreement and the transactions contemplated hereby. (c) In the event of termination of this Agreement and abandonment of the Merger pursuant to this Article 11, no party hereto (or any of its directors or officers) shall have any liability or further obligation to any other party to this Agreement, except (i) for the obligations described in Sections 11.3(a) and (b) above and (ii) that nothing herein will relieve any party from liability for any breach of this Agreement. ARTICLE 12 MISCELLANEOUS 12.1. No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the parties hereto and their respective successors and permitted assigns. 12.2. Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes any prior agreements by or among the parties hereto, written or oral, to the extent they are related in any way to the subject matter hereof. 46 47 12.3. Survival. All representations and warranties, and, except as otherwise provided in this Agreement, all covenants and agreements of the parties hereto contained in or made pursuant to this Agreement, and the rights of the parties to seek indemnification with respect thereto, shall survive for a period ending on the date which is twelve (12) months following the Effective Time. 12.4. Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto named herein and their respective successors and permitted assigns. No party hereto may assign either this Agreement or any of such party's rights, interests or obligations hereunder without the prior written approval of HSA, DC and the Representative; provided, however, that HSA may (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates and (ii) designate one or more of its Affiliates to perform its obligations hereunder (in any or all of which cases HSA nonetheless shall remain responsible for the performance of all of its obligations hereunder). 12.5. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 12.6. Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 12.7. Notices. All notices, requests, demands, claims and other communications hereunder will be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given two business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below: If to DC: Digital Chainsaw, Inc. 330 First Avenue South, Suite 500 St. Petersburg, FL 37701 Attn: Charles E. Richardson, Esq. Telecopy: (727) 524-8544 With copy to: Balch & Bingham LLP 1710 Sixth Avenue North P.O. Box 306 Birmingham, AL 35201-0306 Attn: Lana K. Hawkins, Esq. Telecopy: (205) 226-8798 47 48 If to the Representative: Gary S. Allen c/o Darrell C. Smith, Esq. Shumaker, Loop & Kendrick, LLP Barnett Plaza, Suite 2800 101 East Kennedy Boulevard Tampa, FL 33602 Telecopy: (813) 229-7600 With copy to: Shumaker, Loop & Kenrick, LLP Barnett Plaza, Suite 2800 101 East Kennedy Boulevard Tampa, FL 33602 Attn: Darrell S. Smith, Esq. Telecopy: (813) 229-7600 If to HSA and Acquisition: High Speed Access Corp. 10300 Ormsby Park Place Suite 405 Louisville, KY 40223 Attn: John Hundley, Esq. Telecopy: (502) 420-7001 With copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attn: David E. Zeltner, Esq. Telecopy: (212) 310-8007 Any party may send any notice, request, demand, claim or other communication hereunder to the intended recipient at the respective address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other parties hereto notice in the manner herein set forth. 48 49 12.8. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF FLORIDA, WITHOUT REGARD TO THE CONFLICT OF LAWS RULES CONTAINED THEREIN. 12.9. Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by HSA, DC and the Representative. No waiver by any party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 12.10. Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 12.11. Expenses. Except as provided in Sections 4.3 and 4.4, each party shall bear their own Transaction Expenses. 12.12. Construction. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean including without limitation. Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, the singular forms of nouns and pronouns shall include the plural, and vice versa. The parties hereto intend that each representation, warranty and covenant contained herein shall have independent significance. If any party has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the party has not breached shall not detract from or mitigate the fact that the party is in breach of the first representation, warranty or covenant. 12.13. Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 12.14. Specific Performance. Each of the parties hereto acknowledges and agrees that the other parties would be damaged irreparably in the event any of the 49 50 provisions of this Agreement are not performed in accordance with their specific terms or otherwise are breached. Accordingly, each of the parties hereto agrees that the other parties shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having jurisdiction over the parties and the matter (subject to the provisions set forth in Section 12.15 below), in addition to any other remedy to which they may be entitled, at law or in equity. 12.15. Submission to Jurisdiction. Each of the parties hereto submits to the jurisdiction of any federal court sitting in the State of Florida in any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of the action or proceeding may be heard and determined in any such court. [signature pages follow] 50 51 [MERGER AGREEMENT SIGNATURE PAGE] IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. HIGH SPEED ACCESS CORP. By: ---------------------------------------- Name: John G. Hundley Title: Vice President, Secretary and General Counsel HIGH SPEED ACQUISITION CORP. By: ---------------------------------------- Name: John G. Hundley Title: Vice President and Secretary DIGITAL CHAINSAW, INC. By: ---------------------------------------- Name: B. Judson Hennington III Title: President and Chief Executive Officer GARY ALLEN, AS THE REPRESENTATIVE ------------------------------------------- Gary Allen 51 52 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 DEFINITIONS...........................................................................1 1.1. Definitions...........................................................................1 ARTICLE 2 MERGER; EFFECTIVE TIME; CLOSING.......................................................8 2.1. Merger .............................................................................8 2.2. Effective Time........................................................................8 2.3. The Closing...........................................................................8 ARTICLE 3 ARTICLES OF INCORPORATION; BYLAWS, DIRECTORS AND OFFICERS OF SURVIVING CORPORATION....8 3.1. Articles of Incorporation.............................................................8 3.2. By-Laws...............................................................................8 3.3. Directors and Officers................................................................8 ARTICLE 4 MERGER CONSIDERATION; PAYMENT OF CONSIDERATION........................................9 4.1. Merger Consideration; Conversion or Cancellation of DC Shares.........................9 4.2. Payment of Merger Consideration.......................................................9 4.3. Earnout..............................................................................10 4.4. Earnout Reduction For Losses.........................................................12 4.5. Fractional Shares of HSA Common Stock................................................13 4.6. Withholding Rights...................................................................14 4.7. Effect on Options to Acquire DC Shares...............................................14 ARTICLE 5 [INTENTIONALLY OMITTED]..............................................................15 ARTICLE 6 REPRESENTATIONS AND WARRANTIES OF ACQUISITION AND HSA................................15 6.1. Organization of Acquisition and HSA..................................................15 6.2. Capital Stock........................................................................15 6.3. Authorization for Common Stock.......................................................15 6.4. Authorization of Transaction.........................................................16 6.5. Noncontravention.....................................................................16 6.6. Brokers' Fees........................................................................16 6.7. HSA SEC Reports and Financial Statements.............................................16
i 53 TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE 7 REPRESENTATIONS AND WARRANTIES CONCERNING DC.........................................17 7.1. Organization, Qualification, and Corporate Power.....................................17 7.2. Capitalization.......................................................................18 7.3. Authorization of Transaction.........................................................18 7.4. Noncontravention.....................................................................19 7.5. Title to Assets......................................................................19 7.6. Subsidiaries.........................................................................19 7.7. Financial Statements.................................................................20 7.8. Absence of Certain Developments......................................................20 7.9. Undisclosed Liabilities..............................................................22 7.10. Legal Compliance.....................................................................23 7.11. Taxes................................................................................23 7.12. Real Property........................................................................25 7.13. Intellectual Property................................................................26 7.14. Tangible Assets......................................................................27 7.15. Contracts............................................................................27 7.16. Notes and Accounts Receivable........................................................28 7.17. Powers of Attorney...................................................................29 7.18. Insurance............................................................................29 7.19. Litigation...........................................................................29 7.20. Licenses and Permits.................................................................29 7.21. Consents.............................................................................30 7.22. Employees............................................................................30 7.23. Employee Benefits....................................................................31 7.24. Guaranties...........................................................................32 7.25. Customers............................................................................32 7.26. Relationships with Customers and Suppliers...........................................32 7.27. Bank Accounts........................................................................33 7.28. Related Party Agreements.............................................................33 7.29. Change in Control....................................................................33 7.30. Brokers' Fees........................................................................33
ii 54 TABLE OF CONTENTS (CONTINUED)
PAGE ---- 7.31. Options..............................................................................33 7.32. DC Affiliates........................................................................33 7.33. Prior Securities Issuances...........................................................34 7.34. Disclosure...........................................................................34 7.35. Secured Note.........................................................................34 ARTICLE 8 COVENANTS AND ADDITIONAL AGREEMENTS..................................................34 8.1. General..............................................................................34 8.2. Notices and Consents.................................................................34 8.3. Conduct of Business of the Company Pending the Closing...............................34 8.4. Access...............................................................................36 8.5. Notice of Developments...............................................................37 8.6. Investment Representation Letter.....................................................37 8.7. Filings with Governmental Bodies.....................................................37 8.8. No Solicitation......................................................................37 8.9. Publicity............................................................................38 8.10. HSA Common Stock.....................................................................38 8.11. Employee Matters.....................................................................39 8.12. DC Meeting...........................................................................39 8.13. Insurance and Indemnification........................................................39 8.14. Indemnification of Personal Guarantees...............................................40 8.15. Representation and Information of Surviving Corporation..............................39 ARTICLE 9 CONDITIONS TO OBLIGATION TO CLOSE....................................................40 9.1. Conditions to Each Party's Obligation................................................40 9.2. Conditions to Obligations of Acquisition and HSA.....................................41 9.3. Conditions to Obligations of DC......................................................43 ARTICLE 10 SHAREHOLDER REPRESENTATIVE; CONDUCT OF BUSINESS DURING THE EARNOUT PERIOD............44 10.1. Representative.......................................................................44 10.2. Conduct of Surviving Corporation from the Date of Signing to the Earnout Date........44 ARTICLE 11 TERMINATION..........................................................................45 11.1. Termination by Mutual Consent........................................................45
iii 55 TABLE OF CONTENTS (continued)
PAGE ---- 11.2. Termination by Either HSA or DC.....................................................45 11.3. Effect of Termination and Abandonment................................................46 ARTICLE 12 MISCELLANEOUS........................................................................46 12.1. No Third Party Beneficiaries.........................................................46 12.2. Entire Agreement.....................................................................46 12.3. Survival.............................................................................47 12.4. Succession and Assignment............................................................47 12.5. Counterparts.........................................................................47 12.6. Headings.............................................................................47 12.7. Notices..............................................................................47 12.8. Governing Law........................................................................49 12.9. Amendments and Waivers...............................................................49 12.10. Severability.........................................................................49 12.11. Expenses.............................................................................49 12.12. Construction.........................................................................49 12.13. Incorporation of Exhibits and Schedules..............................................49 12.14. Specific Performance.................................................................49 12.15. Submission to Jurisdiction...........................................................50
iv 56 SCHEDULES AND EXHIBITS: Exhibit 3.1 Articles of Incorporation of Digital Chainsaw, Inc. Exhibit 3.2 By-Laws of Digital Chainsaw, Inc. Exhibit 7.7 Financial Statements Exhibit A Secured Note and Security Agreement Exhibit B Form of Investment Representation Letter Exhibit C Form of Business Plan Exhibit D Form of Form of Opinion of Shumaker, Loop & Kenrick, LLP Exhibit E Form of Voting Agreement Exhibit F Form of Employment Agreement of B. Judson Hennington III Exhibit G Form of Consulting Agreement Exhibit H Form of Lock-Up Agreement Exhibit I Form of Opinion of Weil, Gotshal & Manges LLP Exhibit J Forms of Registration Rights Agreements Exhibit K Form of Warrant Disclosure Schedule-- Exceptions to Representations and Warranties Concerning Digital Chainsaw, Inc. 57 AGREEMENT AND PLAN OF MERGER BY AND AMONG HIGH SPEED ACCESS CORP., HIGH SPEED ACQUISITION CORP., DIGITAL CHAINSAW, INC. AND GARY ALLEN, AS THE REPRESENTATIVE, DATED AS OF JUNE 23, 2000 EX-27 3 ex27.txt FINANCIAL DATA SCHEDULE
5 1,000 1 6-MOS DEC-31-2000 JUN-30-2000 1 56,070 67,439 1,019 165 0 128,459 68,587 14,046 196,772 28,635 3,417 0 0 557 157,202 196,772 0 4,751 0 63,950 0 392 1,020 (56,288) 0 (56,288) 0 0 0 (56,288) (1.03) (1.03)
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