<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 10, 1998.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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HIWAY TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4813 94-3211977
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
5050 BLUE LAKE DRIVE, SUITE 100
BOCA RATON, FLORIDA 33431
(561) 989-8574
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ARTHUR L. CAHOON, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
5050 BLUE LAKE DRIVE, SUITE 100
BOCA RATON, FLORIDA 33431
(561) 989-8574
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
LAIRD H. SIMONS III, ESQ. THOMAS A. SKORNIA, ESQ. DONALD M. KELLER, JR.,
KATHERINE TALLMAN SCHUDA, THE SKORNIA LAW FIRM ESQ.
ESQ. SUITE 1500 JEFFREY Y. SUTO, ESQ.
JEFFERY L. DONOVAN, ESQ. 160 W. SANTA CLARA STREET DAVID C. LEE, ESQ.
DAVID A. BELL, ESQ. SAN JOSE, CALIFORNIA DAVID Y. EU, ESQ.
FENWICK & WEST LLP 95113 VENTURE LAW GROUP A
TWO PALO ALTO SQUARE (408) 280-2820 PROFESSIONAL CORPORATION
PALO ALTO, CALIFORNIA 2800 SAND HILL ROAD
94306 MENLO PARK, CALIFORNIA
(650) 494-0600 94025
(650) 854-4488
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] _______________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_] _______________
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
AGGREGATE
TITLE OF EACH CLASS OF OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
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<S> <C> <C>
Common Stock, par value $0.001 per share...... $57,500,000 $16,963
</TABLE>
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(1) Estimated pursuant to Rule 457(a) solely for the purpose of calculating
the registration fee.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS +
+OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
JUNE 10, 1998
Shares
[HIWAY TECHNOLOGIES LOGO APPEARS HERE]
Common Stock
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All of the shares of Common Stock offered hereby are being sold by
Hiway Technologies, Inc. (the "Company"). Prior to this offering, there has
been no public market for the Common Stock of the Company. It is currently
estimated that the initial public offering price per share will be between
$ and $ . See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Company has
applied for quotation of its Common Stock on the Nasdaq National Market under
the symbol "HWAY."
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................... $ $ $
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Total(3).................... $ $ $
</TABLE>
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1998.
BT Alex. Brown
Donaldson, Lufkin & Jenrette
Securities Corporation
Bear, Stearns & Co. Inc.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
[Artwork]
Hiway Technologies
Narrative Description of Inside Front Cover
Inside Front Cover -- Portrait
Top Center -- [HT ellipse Logo]; caption beneath logo "A leading global
provider of Web hosting and related enhanced Internet services to small and
medium sized businesses. "
Diagram consisting of a landscape created from a cascaded array of web pages
(each of a mixed graphic and text nature) of a wide variety which retreat to a
horizon just below the sub-logo caption.
Appearing on the landscape in the center of the lower-third of the page are
three persons; the left-most of which is a man seated and typing on a laptop
computer; the center of which is a woman using a palm-top computing device
while standing; the right-most of which is a man reading a newspaper while
standing.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
Hiway Technologies
Narrative Description of Inside Cover Gatefold
Landscape Gatefold, Inside Cover Page: Title heading, center -- "The World's
home on the Web."
Left-side margin, perpendicular heading -- "Hiway Technologies."
Upper-left diagram showing a cascade (moving up to the left) of sample web
pages, each of which have a photograph of a person on the right half of the
web page; the top-most of which shows a heading in the upper left "Chlorgen";
caption beneath -- "Small and medium sized businesses worldwide are
recognizing the need to take advantage of the Internet to provide information
about their products and services and communicate internally and externally.
Often these Companies find an outsourced Web hosting solution effective
because they typically lack the technology expertise, IT resources, capital or
ability to bear the time to market risks required to install, maintain and
monitor their own Web servers and Internet connectivity."
Upper Right Quadrant: Wire-line connecting upper left diagram to space between
captions above upper-right diagram.
Upper-right diagram showing a map of the continental United States (titled to
left-top) superimposed over which are wire-lines connected from a cloud
representing the Internet to two computer-server racks displayed to the left and
right immediately adjacent to the map; caption above-left -- "The established
Best brand is used to market the Company's services in the California market.
The Company maintains a data center in Mountain View, California."; caption
above-right -- "Hiway Technologies, Inc., based in Boca Raton, Florida, is a
leading provider of Web hosting and related enhanced Internet services to small
and medium sized businesses and has more than 87,000 Web hosting accounts. The
Company reaches customers through direct sales, its RapidSite value added
reseller channel and OEM partnerships. The Company's services are designed to
provide small and medium sized businesses with the high-performance,
scalability, flexibility and expertise necessary to deploy, expand or maintain
the functionality of a Web presence at affordable prices."; [HT ellipse Logo]
displayed beneath map; [Best Logo] displayed above the server-rack adjacent to
the west coast of map.
Center of Gatefold -- [HT ellipse Logo]; "Hiway Technologies"
Lower-right sixth of page -- four pictures one beneath another in single
column; the topmost of which shows the "Control Panel -- web page through
which users control features of their Web Page; the second down shows a web
page showing the logo for Microsoft's FrontPage products; the third down shows
an arial photograph of the Company's Blue Lake facility; the lowest of which
is photograph of the exterior of the Company's Blue Lake facility; three
captions adjacent to the left; top caption -- "The Company has developed a
proprietary front-end interface, the Control Panel, that allows customers to
set-up accounts, change account parameters and check Web site statistics
quickly and easily online."; middle caption -- "The Company, under its Best
and Hiway brands, currently represents two of Microsoft's twelve preferred
hosting providers for the FrontPage98 Web authoring tool. The Company
currently hosts over 25,000 Web sites created using Microsoft FrontPage, more
FrontPage accounts than any of the Company's competitors."; bottom caption --
"The Company recently relocated to a 70,000 square foot facility inside the
Blue Lake complex in Boca Raton, Florida. This facility incorporates physical,
network and personal security and is designed to withstand natural disasters,
including hurricanes, without service interruption."
Lower left half of the page showing a black map of the globe (flat mercator
projection) with superimposed dots representing customer distribution; caption
adjacent to left -- "RapidSite is Hiway's brand name for a network of over
1,800 VARs worldwide. RapidSite value added resellers offer local Web hosting
service and support in over 130 countries, interacting directly with the end
user and providing customer support and other services. RapidSite allows the
Company to leverage local value added resellers' marketing and distribution
expertise, thereby efficiently reaching a global audience.'; [Rapidsite Logo]
beneath caption in lower left corner of page; wire-line from lower right of
world map connecting to the [HT eclipse Logo] previously described in upper
left quadrant.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Supplemental Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the
information in this Prospectus (i) reflects the May 1998 conversion of all
outstanding shares of Preferred Stock of the Company into shares of Common
Stock, (ii) reflects the May 1998 merger (the "Merger") of the Company's two
predecessor corporations, Hiway Technologies, Inc., a Florida corporation
("Hiway Florida"), and Best Internet Communications, Inc., a California
corporation ("Best"), and the issuance of 21,836,302 shares of the Company's
Common Stock to shareholders of Hiway Florida in the Merger, (iii) assumes the
Underwriters' over-allotment option will not be exercised and (iv) reflects the
Company's reincorporation into Delaware, which will occur prior to the
completion of this offering. See "Description of Capital Stock" and
"Underwriting."
THE COMPANY
Hiway is a leading global provider of Web hosting and related enhanced
Internet services to small and medium sized businesses. With over 87,000 Web
hosting accounts worldwide, the Company believes that it is currently the
largest provider of business Web hosting services, as measured by number of Web
hosting accounts. The Company focuses on delivering high-quality, reliable and
flexible services that are backed by 24x7 customer support and can be scaled to
host millions of Web sites. Hiway's services enable its customers to deploy,
expand and update Web sites more rapidly and cost-effectively than internally
developed solutions. The Company offers its solutions directly, through third-
party dealers that resell and support the Company's Web hosting services
("VARs") and through large companies that offer the Company's Web hosting
services to their established customer bases under their own brand names
("OEMs"). Hiway's OEMs include two of the five regional Bell operating
companies ("RBOCs"), which two in the aggregate provide telecommunications
services to approximately 30% of the U.S. business market.
Use of the Internet has grown rapidly in recent years and represents a
substantial opportunity for enterprises to interact in innovative ways with
geographically distributed offices, employees, customers, suppliers and
partners. Enterprises are increasingly recognizing the need to take advantage
of the Internet by establishing Web sites that provide information about them
and their products and services. As a result, high-performance and reliable Web
site hosting services have become increasingly critical for many mainstream
enterprises, and many enterprises are seeking to outsource these functions in
order to ensure reliability, high performance, scalability, sophisticated
monitoring and expert management. International Data Corporation ("IDC")
estimates that Web hosting revenues generated by small and medium sized
businesses in the U.S. will grow from $217 million in 1997 to over $3.4 billion
in 2000, a 150% compound annual growth rate.
Only 7% of all small businesses had a Web site at the end of 1997, according
to IDC. However, IDC expects small and medium sized businesses to generate most
of the growth in the Web hosting market, and to account for 95% of the total
estimated Web hosting market in the United States by 2000. Many of these
businesses find an outsourced Web hosting solution effective because they lack
the technology expertise, IT resources, capital or ability to bear the time-to-
market risks required to install, maintain and monitor their own Web servers
and Internet connectivity. Currently, a number of these businesses utilize a
Web site to provide basic information about their products and services.
However, competition for Web traffic continues to drive businesses to create
Web sites with greater functionality. Companies are also augmenting their Web
sites with related enhanced Internet services such as secure electronic
commerce, unified messaging and email. IDC estimates the market for enhanced
Internet services in the United States, including Web hosting, will grow from
approximately $352 million in 1997 to over $7 billion in 2000.
3
<PAGE>
The Company's services are designed to provide small to medium sized
businesses with the high performance, scalability, flexibility and expertise
they need to deploy a Web presence or expand its functionality cost
effectively. The Company's services utilize a redundant, high-speed, secure,
proprietary network architecture and a fault tolerant hosting platform,
monitored on a 24x7 basis through two Network Operations Centers ("NOCs"). This
enables Hiway to offer its customers a 99.9% uptime service level warranty. In
addition, the Company has developed various proprietary operating system level
tools to facilitate a high customer to server ratio, allowing Hiway to host
over 2,000 Web sites on a single server. Hiway also utilizes various
proprietary technologies to improve the back-end processing and customer
interface components of its solutions, allowing customers to order, change and
manage their Web hosting accounts easily and flexibly, regardless of their
level of technical expertise. To meet its customers' needs, the Company offers
Web hosting services on a range of operating systems and computing platforms:
Silicon Graphics, Intel and Sun Microsystems. The Company expects to offer
Windows NT-based Web hosting services commencing in July 1998.
The Company seeks to maximize market share by utilizing three distribution
channels--direct sales, VARs and OEM partnerships. In addition to driving
direct sales through the use of traditional media and online marketing
campaigns, the Company has developed a global VAR network consisting of over
1,800 value-added resellers in more than 130 countries. The Company has also
recently commenced the distribution of its services through OEM partners, which
include two of the five RBOCs. The Company believes that these relationships
present a significant opportunity to penetrate the large, established customer
bases of these OEMs.
Hiway intends to continue to increase its market share as a leading provider
of Web hosting services to small to medium sized businesses. The Company also
intends to seek additional opportunities by offering a range of enhanced
Internet services. In order to achieve this objective, the Company plans to (i)
increase its marketing efforts in order to extend its established brand
recognition; (ii) continue to deliver high quality services at affordable
prices; (iii) pursue multiple direct and indirect distribution channels; (iv)
expand its presence internationally; and (v) leverage its innovative and
proprietary technology.
THE MERGER
The Company was formed in May 1998 through the merger of Best, which was
incorporated in September 1994, and Hiway Florida, which was incorporated in
April 1995. Prior to the Merger, Hiway Florida was a leading provider of shared
server Web hosting domestically and, through its established network of VARs,
internationally. Hiway Florida had also begun to expand its distribution
channels by entering into relationships with RBOCs and other OEMs. Best was a
leading provider of shared server Web hosting bundled with dial-up Internet
access in the California market prior to the Merger, and also offered stand-
alone high-speed Internet connectivity and co-location Web hosting services. In
1997 and the first quarter of 1998, Hiway Florida had revenues of $10.4 million
and $4.3 million, respectively, and Best had revenues of $15.8 million and $4.5
million, respectively. At March 31, 1998, Hiway Florida had approximately
49,000 Web hosting accounts and Best had approximately 29,000 Web hosting
accounts.
The Company intends to reincorporate in Delaware in July 1998 and to change
its name to Hiway Technologies, Inc. in connection with the reincorporation.
Unless the context otherwise requires, the terms the "Company" and "Hiway"
refer to Hiway Technologies, Inc., a Delaware corporation, its California and
Florida predecessor corporations and its wholly-owned subsidiary (RapidSite,
Inc., a corporation incorporated in Florida in January 1997). The address of
the Company's principal executive offices is 5050 Blue Lake Drive, Suite 100,
Boca Raton, Florida 33431 and its telephone number is (561) 989-8574.
Hiway Technologies(R) and Best Internet Communications(R) (stylized) are
registered trademarks of the Company. Hiway(TM), HWAY(TM), A Home For Your
Page(TM) and RapidSite(TM) are trademarks of the Company. This Prospectus also
includes trade names and trademarks of other companies.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............. shares
Common Stock to be outstanding after this shares(1)
offering........................................
Use of proceeds by the Company.................. Working capital and other
general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol.......... HWAY
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER OPERATING DATA
(in thousands, except per share and other operating data)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER ENDED
31, MARCH 31,
----------------------- -------------
1995 1996 1997 1997 1998
------ ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues................................. $2,011 $12,217 $26,185 $5,371 $8,844
Income (loss) from operations............ (539) 783 4,871 1,236 1,260
Pro forma net income (loss) (2).......... $ (551) $ 632 $ 2,871 $ 737 $ 792
Pro forma diluted net income (loss) per
share (3)............................... $(0.03) $ 0.02 $ 0.08 $ 0.02 $ 0.02
Shares used in computing pro forma
diluted net income (loss) per share (3). 16,871 28,122 34,842 33,765 36,044
OTHER OPERATING DATA:
Web hosting accounts at end of period.... N/A 35,000 68,000 44,000 78,000
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------
PRO FORMA (4) AS ADJUSTED (5)
------------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 6,531 $
Working capital.................................. 4,216
Total assets..................................... 22,360
Long-term debt and capital lease obligations,
less current portion............................ 5,188
Total stockholders' equity....................... 10,226
</TABLE>
- --------
(1) Based on shares outstanding as of May 31, 1998. Does not include (i)
1,861,162 shares of Common Stock issuable upon the exercise of stock
options outstanding as of that date under the Company's Stock Option Plan
(the "1995 Plan"), Amended and Restated 1996 Stock Option Plan (the "1996
Plan") or the Hiway Florida Stock Option Plan (the "Hiway Florida Plan"),
with a weighted average per share exercise price of $0.91, (ii) 1,000,000
shares of Common Stock available as of that date for future grant under the
Company's 1998 Equity Incentive Plan (the "1998 Plan"), (iii) 600,000
shares of Common Stock available for future grant or issuance immediately
after this offering under the Company's 1998 Directors Stock Option Plan
(the "Directors Plan") and 1998 Employee Stock Purchase Plan (the "Purchase
Plan") or (iv) 3,115,123 shares of Common Stock issuable upon the exercise
of warrants outstanding as of May 31, 1998, with a weighted average per
share exercise price of $2.69. See "Capitalization," "Management--Director
Compensation," "Management--Employee Benefit Plans," "Description of
Capital Stock" and Notes 9-11 and 13 of Notes to Supplemental Consolidated
Financial Statements.
(2) See Note 17 of Notes to Supplemental Consolidated Financial Statements for
an explanation of the determination of pro forma net income (loss).
(3) See Note 18 of Notes to Supplemental Consolidated Financial Statements for
an explanation of the determination of the number of shares used in
computing pro forma diluted net income (loss) per share.
(4) Pro forma to reflect the May 1998 conversion of all outstanding shares of
Preferred Stock into shares of Common Stock.
(5) Pro forma data as adjusted to reflect receipt of the net proceeds from the
sale of the shares of Common Stock offered by the Company hereby,
at an assumed initial public offering price of $ per share and
after deducting the estimated underwriting discounts and commissions and
offering expenses.
5
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. In addition to the other
information set forth in this Prospectus, the following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing any of the shares of Common Stock of the Company. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed in this Prospectus. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere in this Prospectus.
Limited Operating History. Best and Hiway Florida, the two companies that
merged to form the Company, were incorporated in September 1994 and April
1995, respectively. As a result, the Company's business model is still in an
emerging stage. The revenue and income potential of the Company's business and
market is unproven, and the Company's limited operating history makes an
evaluation of the Company and its prospects difficult. The Company and its
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies in the new and rapidly evolving market for Web
hosting and related enhanced Internet services. To address these risks, among
other things, the Company must market its services and build its brand names
effectively, provide scalable, reliable and cost-effective services, continue
to grow its infrastructure to accommodate additional customers and increased
use of its network bandwidth, expand its channels of distribution, continue to
respond to competitive developments and retain and motivate qualified
personnel. Although the Company has experienced significant growth in revenues
in recent periods, the Company may not achieve a significant rate of revenue
growth and may not sustain profitability in future quarterly or annual
periods. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Potential Fluctuations in Results of Operations. The Company has experienced
significant fluctuations in its results of operations on a quarterly and an
annual basis. The Company expects to continue to experience significant
fluctuations in its quarterly and annual results of operations due to a
variety of factors, many of which are outside the Company's control. These
factors include: (i) demand for and market acceptance of the Company's
services; (ii) introductions of products or services by the Company and its
competitors; (iii) reliable continuity of service and network availability;
(iv) the ability to increase bandwidth as necessary; (v) the mix of services
sold by the Company; (vi) provisions for customer discounts and credits; (vii)
customer retention; (viii) the timing and success of marketing efforts and
service introductions by the Company and its VARs and OEMs; (ix) the timing
and magnitude of capital expenditures, including construction costs relating
to the expansion of operations; (x) the introduction by third parties of new
Internet and networking technologies; (xi) increased competition in the
Company's markets; (xii) changes in the pricing policies of the Company and
its competitors; (xiii) fluctuations in bandwidth used by customers; (xiv) the
timing and magnitude of expenditures on advertising and promotion; (xv)
economic conditions specific to the Internet industry; and (xvi) other general
economic factors. In addition, a relatively large portion of the Company's
expenses are fixed in the short-term, and therefore the Company's results of
operations are particularly sensitive to fluctuations in revenues. Also, if
the Company were unable to continue using third-party products in the
Company's services offerings, the Company's service development costs could
increase significantly. Although the Company has not encountered significant
difficulties in collecting accounts receivable in the past, many of the
Company's customers are individuals and small businesses, and the Company may
not be able to collect accounts receivable on a timely basis. For these and
other reasons, in some future quarters, the Company's results of operations
may not meet or exceed the expectations of securities analysts or investors,
which could have a material adverse effect on the market price of the
Company's Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Recent Merger; Risks Associated with Integration of Operations. Prior to the
Merger, Hiway Florida and Best were headquartered in Florida and California,
respectively, with different service offerings
6
<PAGE>
operating on different networks and technologies. The Merger was consummated in
May 1998 and, accordingly, the Company has not yet completed a full quarter of
combined operations. The successful integration of the operations of Hiway
Florida and Best will require, among other things, the integration of their
respective service offerings, networks and technologies, financial and
information systems, brand names and management teams, and coordination of
their sales and marketing and service development efforts. In this regard, the
Company will be promoting the Hiway brand name nationally, the Best brand name
in California and the RapidSite brand name through its network of domestic and
international VARs. In addition, the Company will be headquartered in Florida
but will maintain a significant management and operational presence in
California. The diversion of the attention of management and any difficulties
encountered in the process of combining the operations of the two organizations
could cause the interruption of, or a loss of momentum in, the activities of
the Company's business. Furthermore, the Company may not achieve any
operational synergies from the Merger, and employees of each company may choose
not to continue to work for the Company following the Merger. As a result of
uncertainty over the integration and continued support of the services of both
companies in connection with the Merger, customers or potential customers may
delay or cancel orders for the Company's Web hosting services. Failure to
accomplish the integration of the two companies' operations efficiently and
effectively could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, if the Company does
not experience the business synergies expected as a result of the Merger as
quickly as may be expected by financial analysts or investors, or if such
synergies are not achieved or are at levels below those expected by financial
analysts or investors, the market price of the Company's Common Stock may be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--The Merger."
Dependence Upon New Market; Uncertainty of Acceptance of Services. The market
for Web hosting and related enhanced Internet services has only recently begun
to develop and is evolving rapidly. There is significant uncertainty regarding
whether this market ultimately will prove to be viable or, if it becomes
viable, whether it will grow. The Company's future growth, if any, will depend
upon the willingness of businesses to outsource Web hosting services and the
Company's ability to market its services in a cost-effective manner to a
sufficiently large number of customers. The market for the Company's services
may not develop further, the Company's services may not be more widely adopted,
and significant numbers of businesses or organizations may not use the Internet
for commerce and communication. If this market fails to develop further or
develops more slowly than expected, or if the Company's services do not achieve
broader market acceptance, the Company's business, results of operations and
financial condition would be materially and adversely affected. In addition, to
be successful in this emerging market, the Company must be able to
differentiate itself from its competition through its service offerings and
brand recognition. The Company may not be successful in differentiating itself
or achieving market acceptance of its services, and the Company may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these services. If the Company incurs increased
costs or is unable, for technical or other reasons, to develop and introduce
new services or products or enhancements to existing services in a timely
manner, or if new services do not achieve market acceptance in a timely manner
or at all, the Company's business, results of operations and financial
condition could be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Dependence Upon Channel Partners. An important element of the Company's
strategy for growth is to continue to develop its reseller channel through
RapidSite, which manages the Company's network of domestic and international
VARs, and through the Company's OEM relationships. The Company's VARs typically
are Web development or Web consulting companies that also sell the Company's
Web hosting services but that do not generally have established customer bases
to which they can market the Company's services. Therefore, in those markets,
primarily international, where the Company does not focus its direct marketing
efforts, the Company is dependent on third parties to stimulate demand for the
Company's services. Although the Company attempts to incentivize its VARs by
providing them with
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price discounts on the Company's services that the VARs seek to resell at a
profit, the failure of the Company's services to be commercially accepted in
certain markets, whether as a result of a VAR's performance or otherwise,
could cause the Company's current channel partners to discontinue their
relationships with the Company, and the Company may not be successful in
establishing additional channel partner relationships as required. The Company
has also developed strategic relationships with certain of its international
VARs through its "Premier Partner" program. Each of the Company's Premier
Partners is responsible for building and supporting a VAR channel, which
allows the Company to leverage the Premier Partner's local marketing and
distribution expertise, and for helping the Company build the RapidSite brand
internationally. In addition, the Company recently has established OEM
relationships with several large companies and is pursuing OEM relationships
with additional companies. The Company's OEM relationships have not generated
a material amount of revenue to date, and, in order for the Company to be
successful, revenues generated by OEMs must increase significantly. OEMs and
VARs have no obligation to market or resell the Company's Web hosting
services, and OEMs can terminate their relationships with the Company with
limited or no penalty with as little as 30 days' notice. The loss of Premier
Partners, other VARs or OEMs, the failure of such parties to perform under
agreements with the Company or the Premier Partner or the inability of the
Company to attract and retain new Premier Partners, VARs or OEMs with the
industry experience required to market the Company's Web hosting services
successfully in the future could have a material adverse effect on the
Company's business, results of operations and financial condition. The
Company's direct sales efforts may conflict with the efforts of its indirect
channel partners, which may adversely affect the Company's relationships with
such partners. In addition, to the extent that the Company succeeds in
increasing its sales through indirect channels such as Premier Partners, VARs
or OEMs, those sales will be at discounted rates, and revenue and gross margin
to the Company for each such sale will be less than if the Company had sold
the same services to the customer directly. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business--
Distribution and Sales."
Competition. The market served by the Company is highly competitive and is
becoming more so. There are few substantial barriers to entry, and the Company
expects that it will face additional competition from existing competitors and
new market entrants in the future. The principal competitive factors in this
market include: (i) brand name; (ii) Internet system engineering and technical
expertise; (iii) quality of service, including network capability,
scalability, reliability and functionality; (iv) price; (v) ability to
maintain and expand distribution channels; (vi) customer service and support;
(vii) broad geographic presence; (viii) variety of services and products
offered; (ix) timing of introductions of new and enhanced services and
products; (x) network security; (xi) financial resources; and (xii) conformity
with industry standards. The Company may not have the resources, expertise or
other competitive factors to compete successfully in the future.
The Company's current and potential competitors include: (i) other Web
hosting and Internet services companies; (ii) national and regional Internet
access service providers ("ISPs"); (iii) global, regional and local
telecommunications companies, including the RBOCs; (iv) large IT outsourcing
firms; (v) data center companies; and (vi) cable companies. Many of the
Company's competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories,
greater name recognition and more established relationships in the industry
than the Company. As a result, certain of these competitors may be able to
develop and expand their network infrastructures and service offerings more
rapidly, adapt to new or emerging technologies and changes in customer
requirements more quickly, take advantage of acquisition and other
opportunities more readily, devote greater resources to the marketing and sale
of their services and adopt more aggressive pricing policies than can the
Company. In addition, these competitors have entered and will likely continue
to enter into joint ventures or consortiums to provide additional services
competitive with those provided by the Company.
In an effort to gain market share, certain of the Company's competitors have
offered Web hosting services similar to those of the Company at lower prices
than those of the Company or with incentives
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not matched by the Company, including free start-up and domain name
registration, periods of free service, low-priced Internet access or free
software. In addition, certain of the Company's competitors may be able to
provide customers with additional benefits, including reduced communications
costs, which could reduce the overall costs of their services relative to
those of the Company. The Company may not be able to reduce the pricing of its
services or offer incentives in response to the actions of its competitors
without a material adverse impact on its operating results. The Company also
believes that the market in which it competes is likely to encounter
consolidation in the near future, which could result in increased price and
other competition that could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business--
Competition."
Management of Growth. The Company is currently experiencing a period of
rapid expansion of its customer base. In addition, the number of Company
employees increased from 98 on March 31, 1997 to 274 on May 31, 1998. This
growth has placed, and if it continues will place, a significant strain on the
Company's financial, management, operational and other resources. In addition,
the Company must manage relationships with a growing number of third parties
as it seeks to complement its service offerings and increase its indirect
sales efforts. The Company's management, personnel, systems, procedures and
controls may not be adequate to support the Company's existing and future
operations, particularly if there is an increase in accounts generated by OEM
sales. The Company's ability to manage its growth effectively will require it
to continue to expand its operating and financial procedures and controls, to
replace or upgrade its operational, financial and management information
systems and to attract, train, motivate, manage and retain key employees. For
example, the Company is currently selecting a new accounting system. The
Company is also in the process of integrating the management of Hiway Florida
and Best, and, as a result, the Company's entire management team has worked
together for only a brief time. In addition, certain executives have recently
assumed new positions and responsibilities. If the Company's executives are
unable to manage growth effectively, the Company's business, results of
operations and financial condition could be materially adversely affected. See
"Management."
Risks Associated with International Expansion and Operations. In 1996, 1997
and the first three months of 1998, revenues derived from customers outside
the United States, primarily in Europe and Asia, represented approximately
9.5%, 14.0% and 18.5%, respectively, of the Company's revenues. The Company's
success is dependent in part on expanding its international presence,
primarily through the Company's VARs and RapidSite's Premier Partners and
their VARs. As a result, the Company will depend upon its VAR network to
market and sell its services and manage the accounts of customers
internationally. The Company's VARs may not be able to continue to market and
sell the Company's Web hosting services successfully. The Company denominates
its sales to VARs and Premier Partners in U.S. dollars. Thus, fluctuations in
the value of the U.S. dollar relative to the currency of a given country may
make the Company's services more or less profitable and therefore more or less
attractive to VARs selling in that country. In addition, there are certain
risks inherent in conducting business internationally, such as changes in
regulatory requirements, export restrictions, tariffs and other trade
barriers, differing technology standards, longer payment cycles, political and
economic instability, fluctuations in currency exchange rates, imposition of
currency exchange controls, seasonal reductions in business activity,
increased difficulty in enforcing contracts and potentially adverse tax
consequences, any of which could adversely affect the Company's international
operations. Furthermore, certain foreign governments, such as Germany, have
enforced laws and regulations related to content distributed over the Internet
that are more strict than those currently in place in the United States. One
or more of these factors could have a material adverse effect on the Company's
current or future international operations and, consequently, on the Company's
business, results of operations and financial condition. To the extent that
the Company does business in foreign markets directly, the Company will also
be subject to risks such as challenges in staffing and managing foreign
operations, employment laws and practices in foreign countries and problems in
collecting accounts receivable. In addition, the Company or its channel
partners may not be able to compete effectively in international markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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Unproven Network Scalability. The Company must continue to expand and adapt
its network infrastructure as the number of users and the amount of
information they wish to transport increase and to meet changing customer
requirements. The expansion and adaptation of the Company's telecommunications
infrastructure will require substantial financial, operational and management
resources as the Company negotiates telecommunications capacity with existing
and other network infrastructure suppliers. If the Company is required to
expand its network significantly and rapidly due to increased usage,
additional stress will be placed upon the Company's network hardware and
traffic management systems. Due to the limited deployment of the Company's
services to date, the ability of the Company's network to connect and manage a
substantially larger number of customers at high transmission speeds is as yet
unknown, and the Company faces risks related to the network's ability to be
scaled up to its expected customer levels while maintaining superior
performance. As customers' usage of bandwidth increases, the Company will need
to make additional investments in its infrastructure to maintain adequate
downstream data transmission speeds, the availability of which may be limited
or the cost of which may be significant. Additional network capacity may not
be available from third-party suppliers as it is needed by the Company, and,
as a result, the Company's network may not be able to achieve or maintain a
sufficiently high capacity of data transmission, especially if the usage of
the Company's customers increases. The Company's failure to achieve or
maintain high-capacity data transmission could significantly reduce consumer
demand for its services and have a material adverse effect on its business,
results of operations and financial condition. See "Business--Technology and
Network Operations."
Risk of System Failure. The Company's operations depend upon its ability to
protect its network infrastructure, equipment and customer files against
damage from human error, fire, earthquakes, hurricanes, floods, power loss,
telecommunications failures, sabotage, intentional acts of vandalism and
similar events. Despite precautions taken by, and planned to be taken by the
Company, the occurrence of a natural disaster or other unanticipated problems
at the Company's data centers could result in interruptions in the services
provided by the Company. The Company has no formal disaster recovery plan.
Although the Company has attempted to build redundancy into its network, the
Company's network is currently subject to various single points of failure,
and a problem with one of the Company's routers or switches could cause an
interruption in the services provided by the Company to a portion of its
customers. The Company has in the past experienced periodic interruptions in
service. In addition, failure of any of the Company's telecommunications
providers to provide the data communications capacity required by the Company,
as a result of human error, a natural disaster or other operational
disruption, could result in interruptions in the Company's services. Any
damage to or failure of the systems of the Company or its service providers
could result in reductions in, or terminations of, services supplied to the
Company's customers, which could have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, the Company's reputation could be materially adversely affected.
The Company currently offers to all customers a 99.9% service level
warranty. Under this policy, the Company guarantees that each customer's Web
site will be available at least 99.9% of the time in each calendar month for
as long as the customer is using the Company's Web hosting services. If uptime
drops below this level in any month, the Company will provide Web hosting
services free for that month. To date, only a limited number of customers have
been eligible under this policy to receive free service. Should the Company
incur significant obligations in connection with system downtime, the Company
could experience a material revenue decline. See "Business--Technology and
Network Operations."
Dependence Upon Network Infrastructure. The Company's success will depend
upon the capacity, scalability, reliability and security of its network
infrastructure, including the capacity leased from its telecommunications
network suppliers. In particular, the Company depends upon MCI, UUNet and
Sprint for its backbone capacity and on Pacific Bell and MFS (in California)
and BellSouth (in Florida) for its local connections to MCI, UUNet and Sprint,
and the Company is therefore dependent on such
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companies to maintain the operational integrity of their telecommunications
networks. In addition, the Company's California operations depend upon Pacific
Bell in San Francisco and ICG Communications Inc. in Los Angeles to provide
dial-up Internet access to the Company's customers. In San Francisco, Pacific
Bell and MFS provide local leased lines for the Company's high-speed Internet
connectivity customers. Therefore, the Company's operating results depend, in
part, upon the pricing and availability of telecommunications network capacity
from a limited number of providers in a consolidated market. In the event of a
material increase in pricing or decrease in telecommunications capacity
available to the Company, if the Company were unable either to access
alternative networks on a cost-effective basis to distribute its customers'
content or to pass through any additional costs of utilizing existing or
alternative networks to its customers, the Company's business, results of
operations and financial condition could be materially adversely affected. See
"Business--Technology and Network Operations."
Dependence Upon the Internet and Internet Infrastructure Development. The
use of the Internet for retrieving, sharing and transferring information among
businesses, consumers, suppliers and partners has escalated in recent periods,
and the Company's success will depend in large part upon continued growth in
the use of the Internet. Critical issues concerning the commercial use of the
Internet, including security, reliability, cost, ease of access, quality of
service and necessary increases in bandwidth availability, remain unresolved
and are likely to affect the development of the market for the Company's
services. The adoption of the Internet for information retrieval and exchange,
commerce and communications, particularly by those enterprises that have
historically relied upon alternative means of information gathering, commerce
and communications, generally will require the acceptance of a new medium of
conducting business and exchanging information. Demand and market acceptance
of the Internet are subject to a high level of uncertainty and depend upon a
number of factors, including the growth in consumer access to and acceptance
of new interactive technologies, the development of technologies that
facilitate interactive communication between organizations and targeted
audiences and increases in the speed of user access. If the Internet as a
commercial or business medium fails to develop further or develops more slowly
than expected, the Company's business, results of operations and financial
condition could be materially adversely affected. See "Business--Technology
and Network Operations."
Rapid Technological Change; Evolving Industry Standards. The Company's
future success will depend, in part, upon its ability to offer services that
incorporate leading technologies, address the increasingly sophisticated and
varied needs of its current and prospective customers and respond to
technological advances and emerging industry standards and practices on a
timely and cost-effective basis. The market for the Company's services is
characterized by rapidly changing and unproven technologies, evolving industry
standards, changes in customer needs, emerging competition and frequent new
service introductions. Technological advances may have the effect of
encouraging certain of the Company's current or future customers to rely on
in-house personnel and equipment to furnish the services currently provided by
the Company. In addition, keeping pace with technological advances in the
Company's industry may require substantial expenditures and lead time, which
may have a material adverse effect on the Company's business, results of
operations and financial condition.
The Company believes that its ability to compete successfully also depends
upon the continued compatibility and interoperability of its services with
products offered by various vendors. Enhanced or newly developed third-party
products may not be compatible with the Company's infrastructure, and such
products may not adequately address the needs of the Company's customers.
Although the Company currently intends to support emerging standards, industry
standards may not be established, and, even if they are established, the
Company may not be able to conform to these new standards in a timely fashion
and maintain a competitive position in the market. The failure of the Company
to conform to the prevailing standard, or the failure of a common standard to
emerge, could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, products, services
or technologies developed by others could render the Company's services
noncompetitive or obsolete.
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System Security Risks. A significant barrier to electronic commerce and
communications is the need for secure transmission of confidential information
over public networks. Certain of the Company's services rely on security
technology licensed from third parties to provide the encryption and
authentication necessary to effect secure transmission of confidential
information. Despite the Company's design and implementation of a variety of
network security measures, unauthorized access, computer viruses, accidental or
intentional actions and other disruptions could occur. The Company has in the
past experienced and may in the future experience delays or interruptions in
service as a result of the accidental or intentional actions of Internet users,
current and former employees or others. Furthermore, such inappropriate use of
the network by third parties could also potentially jeopardize the security of
confidential information, such as credit card and bank account numbers, stored
in the computer systems of the Company, which could result in liability to the
Company and the loss of existing customers or the deterrence of potential
customers. Although the Company intends to continue to implement industry-
standard security measures, such measures have been circumvented in the past,
and any such measures implemented by the Company could be circumvented in the
future. The costs required to eliminate computer viruses and alleviate other
security problems could be prohibitively expensive and the efforts to address
such problems could result in interruptions, delays or cessation of service to
the Company's customers, which could have a material adverse effect on the
Company's business, results of operations and financial condition. Concerns
over the security of Internet transactions and the privacy of users may also
inhibit the growth of the Internet, especially as a means of conducting
commercial transactions. See "Business--Technology and Network Operations."
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct federal, state or local government regulation, other than
regulations that apply to businesses generally. Only a small body of laws and
regulations currently applies specifically to access to, or commerce on, the
Internet. Due to the increasing popularity and use of the Internet, however, it
is possible that laws and regulations with respect to the Internet may be
adopted at federal, state and local levels, covering issues such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. Although sections of the Communications
Decency Act of 1996 (the "CDA") that, among other things, proposed to impose
criminal penalties on anyone distributing "indecent" material to minors over
the Internet were held to be unconstitutional by the U.S. Supreme Court,
similar laws may be proposed, adopted and upheld. The nature of future
legislation and the manner in which it may be interpreted and enforced cannot
be fully determined and, therefore, legislation similar to the CDA could
subject the Company and/or its customers to potential liability, which in turn
could have a material adverse effect on the Company's business, results of
operations and financial condition. The adoption of any such laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for the services of the Company or increase the cost of
doing business or in some other manner have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
applicability to the Internet of existing laws governing issues such as
property ownership, copyright and other intellectual property issues, taxation,
libel, obscenity and personal privacy is uncertain. The vast majority of such
laws were adopted prior to the advent of the Internet and related technologies
and, as a result, do not contemplate or address the unique issues of the
Internet and related technologies. Changes to such laws intended to address
these issues could create uncertainty in the marketplace that could reduce
demand for the services of the Company or increase the cost of doing business
as a result of costs of litigation or increased service delivery costs, or
could in some other manner have a material adverse effect on the Company's
business, results of operations and financial condition. In addition, because
the Company's services are available over the Internet virtually worldwide, and
because the Company facilitates sales by its customers to end users located in
multiple states and foreign countries, such jurisdictions may claim that the
Company is required to qualify to do business as a foreign corporation in each
such state or that the Company has a permanent establishment in each such
foreign country. The Company is qualified to do business in only Delaware,
Florida and California, and failure by the
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Company to qualify as a foreign corporation in a jurisdiction where it is
required to do so could subject the Company to taxes and penalties for failure
to qualify and could result in the inability of the Company to enforce
contracts in such jurisdictions. Any new legislation or regulation, or the
application of laws or regulations from jurisdictions whose laws do not
currently apply to the Company's business, could have a material adverse effect
on the Company's business, results of operations and financial condition. See
"Business--Government Regulation."
Risks Associated With Information Disseminated Through the Company's
Network. The law relating to the liability of online services companies and
Internet access providers for information carried on or disseminated through
their networks is currently unsettled. It is possible that claims could be made
against online services companies and Internet access providers under both
United States and foreign law for defamation, negligence or copyright or
trademark infringement, or other theories based on the nature and content of
the materials disseminated through their networks. Several private lawsuits
seeking to impose such liability upon online services companies and Internet
access providers are currently pending. In addition, legislation has been
proposed that imposes liability for or prohibits the transmission over the
Internet of certain types of information. The imposition upon the Company and
other Web hosting providers of potential liability for information carried on
or disseminated through their systems could require the Company to implement
measures to reduce its exposure to such liability, which may require the
expenditure of substantial resources, or to discontinue certain service
offerings. The increased attention focused upon liability issues as a result of
these lawsuits and legislative proposals also could affect the growth of
Internet use. In addition, the Company is subject to a number of risks
associated with the potential actions of customers utilizing the Company's
network. For example, if a customer were to engage in "spamming" (a practice of
sending large quantities of unsolicited e-mail), the Company would have an
obligation to block that customer's access to the Internet through the
Company's network. A failure by the Company to satisfy this obligation could
result in the Company being denied access to the telecommunications networks
through which the Company's network links to the Internet. Spamming could also
cause a significant disruption in the Company's ability to route e-mail to and
from its customers. See "Business--Government Regulation."
Dependence on Key Personnel. The Company's success depends in significant
part upon the continued services of its key technical, sales and senior
management personnel. Any officer or employee of the Company can terminate his
or her relationship with the Company at any time. The Company's future success
will also depend on its ability to attract, train, retain and motivate highly
qualified technical, marketing, sales and management personnel. Competition for
such personnel is intense, and the Company may not be able to attract and
retain key personnel. The loss of the services of one or more of the Company's
key employees or the Company's failure to attract additional qualified
personnel could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company does not carry key-
man life insurance for any of its employees. See "Business--Employees" and
"Management."
Protection and Enforcement of Intellectual Property Rights. The Company
relies on a combination of copyright, trademark, service mark and trade secret
laws and contractual restrictions to establish and protect certain proprietary
rights in its services. The Company has no patented technology that would
preclude or inhibit competitors from entering the Company's market. The Company
has entered into confidentiality and invention assignment agreements with its
employees and contractors, and nondisclosure agreements with its suppliers,
distributors and certain customers in order to limit access to and disclosure
of its proprietary information. These contractual arrangements or the other
steps taken by the Company to protect its intellectual property may not prove
sufficient to prevent misappropriation of the Company's technology or to deter
independent third-party development of similar technologies. The laws of
certain foreign countries may not protect the Company's services or
intellectual property rights to the same extent as do the laws of the United
States. The Company also relies on certain technologies that it licenses from
third parties. These third-party technology licenses may not continue
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to be available to the Company on commercially reasonable terms. The loss of
the ability to use such technology could require the Company to obtain the
rights to use substitute technology, which could be more expensive or offer
lower quality or performance, and therefore have a material adverse effect on
the Company's business, results of operations and financial condition.
To date, the Company has not been notified that the Company's services
infringe the proprietary rights of third parties, but third parties could
claim infringement by the Company with respect to current or future services.
The Company expects that participants in its markets will be increasingly
subject to infringement claims as the number of services and competitors in
the Company's industry segment grows. Any such claim, whether meritorious or
not, could be time-consuming, result in costly litigation, cause service
installation delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on
terms acceptable to the Company or at all. As a result, any such claim could
have a material adverse effect upon the Company's business, results of
operations and financial condition. See "Business--Intellectual Property
Rights."
Potential Future Capital Needs. The Company expects to invest in the
development of new services. During the next 12 months, the Company expects to
meet its working capital requirements, including such requirements associated
with the Company's planned expansion, with existing cash and cash equivalents
and short-term investments, the net proceeds from this offering and cash
generated from operations. However, the Company may not be successful in
generating sufficient cash from operations or in raising capital in sufficient
amounts on acceptable terms. The failure to generate sufficient cash flows or
to raise sufficient funds may require the Company to delay or abandon some or
all of its development and expansion plans or otherwise forego market
opportunities and may make it difficult for the Company to respond to
competitive pressures, any of which could have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Year 2000 Risks. The Company recognizes the need to ensure its operations
will not be adversely impacted by Year 2000 software failures. Software
failures due to processing errors potentially arising from calculations using
the dates on or after Year 2000 are a known risk. The Company has established
procedures for evaluating and managing the risks and costs associated with
this problem. However, the Company could incur significant operating expenses
or be required to invest in improved computer systems to be Year 2000
compliant. Such expenditures could have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, the Company maintains most of its customers' Web pages on UNIX-based
servers, which may be impacted by Year 2000 complications. The failure of such
servers could have a material adverse effect on the Company's customers, which
in turn could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Possible Volatility of Stock Price. The market price of the shares of Common
Stock is likely to be highly volatile and could be subject to wide
fluctuations in response to factors such as actual or anticipated variations
in the Company's results of operations, announcements of technological
innovations, new products or services introduced by the Company or its
competitors, changes in financial estimates by securities analysts, conditions
and trends in the Internet, general market conditions and other factors.
Further, the stock markets, and in particular the Nasdaq National Market, have
experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies
and that often have been unrelated or disproportionate to the operating
performance of such companies. The trading prices of many technology
companies' stocks are at or near historical highs and reflect price to
earnings ratios substantially above historical levels. These trading prices
and price to earnings ratios may not be sustained. Market fluctuations, as
well as general economic, political and market conditions such as recessions,
interest rate changes or
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international currency fluctuations, may adversely affect the market price of
the Common Stock. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such companies. Such litigation, if instituted, could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on the Company's
business, results of operations and financial condition.
Control by Principal Stockholders, Executive Officers and Directors. Upon
completion of this offering, the Company's executive officers, directors and
existing greater than 5% stockholders (and their affiliates) will, in the
aggregate, beneficially own approximately % of the Company's outstanding
Common Stock ( % if the Underwriters' over-allotment option is exercised
in full). As a result, such persons, acting together, will have the ability to
control all matters submitted to stockholders of the Company for approval
(including the election and removal of directors and any merger, consolidation
or sale of all or substantially all of the Company's assets) and to control
the management and affairs of the Company. Accordingly, such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company, impeding a merger, consolidation, takeover or other
business combination involving the Company or discouraging a potential
acquirer from making a tender offer or otherwise attempting to obtain control
of the Company, which in turn could have a material adverse effect on the
market price of the Company's Common Stock. See "Management" and "Principal
Stockholders."
Shares Eligible for Future Sale. Sales of substantial amounts of the
Company's Common Stock (including shares issued upon the exercise of
outstanding warrants and options) in the public market after this offering
could adversely affect the market price of the Common Stock. Such sales also
might make it more difficult for the Company to sell equity or equity-related
securities in the future at a time and price that the Company deems
appropriate. In addition to the shares of Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment option), as
of the date of this Prospectus, there will be shares of Common
Stock outstanding, all of which are restricted shares ("Restricted Shares")
under the Securities Act of 1933, as amended (the "Securities Act") as of the
date of this Prospectus. As of such date, Restricted Shares will be
eligible for sale in the public market. Following the expiration of 120-day
and 180-day lock-up agreements with the Company that arise pursuant to
arrangements entered into prior to the Merger, and
Restricted Shares, respectively, will be available for sale in the public
market, and the remaining Restricted Shares will become eligible for sale on
May 27, 1999. In addition, as of May 31, 1998, there were outstanding warrants
to purchase 3,115,123 shares of Common Stock and options to purchase 1,871,789
shares of Common Stock. In addition, the holders of Restricted Shares and
warrants to purchase 1,656,285 shares of Common Stock are entitled to certain
rights with respect to registration of such shares for sale in the public
market. If such holders sell in the public market, such sales could have a
material adverse effect on the market price of the Company's Common Stock.
Immediately after this offering, the Company intends to register
approximately 3,461,162 shares of Common Stock subject to outstanding options
and reserved for issuance under the 1995 Plan, 1996 Plan, Hiway Florida Plan,
1998 Plan, the Directors Option Plan and the Purchase Plan. See "Shares
Eligible for Future Sale."
Broad Management Discretion in Allocation of Proceeds. The primary purposes
of this offering are to obtain additional capital, create a public market for
the Common Stock and facilitate future access to public markets. The Company
expects to use the net proceeds primarily for working capital and other
general corporate purposes. A portion of the net proceeds also may be used to
acquire or invest in complementary businesses or products and services or to
obtain the right to use complementary technologies. Accordingly, the Company's
management will retain broad discretion as to the allocation of most of the
proceeds of this offering. The failure of management to apply such funds
effectively could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Use of Proceeds."
15
<PAGE>
Anti-Takeover Effects of Charter Provisions and Delaware Law. Upon
completion of this offering, the Company's Board of Directors will have the
authority to issue up to 10,000,000 shares of Preferred Stock and to determine
the price, powers, designations, preferences, rights and qualifications,
limitations or restrictions of those shares without any further vote or action
by the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. The Company has no current plans to issue shares of
Preferred Stock. In addition, the Company's certificate of incorporation and
bylaws contain certain provisions that, together with the ownership position
of the Company's executive officers and directors and their affiliates, could
discourage potential takeover attempts and make more difficult attempts by
stockholders to change management which could adversely affect the market
price of the Company's Common Stock. For example, the Company's charter
documents contain a provision eliminating the ability of the Company's
stockholders to take any action by written consent effective upon the closing
of this offering. This provision is designed to reduce the vulnerability of
the Company to an unsolicited acquisition proposal and to render the use of
stockholder written consent unavailable as a tactic in a proxy fight. However,
such provision could have the effect of discouraging others from making tender
offers for the Company's shares, thereby inhibiting increases in the market
price of the Company's shares that could result from actual or rumored
takeover attempts. Such provision also may have the effect of preventing
changes in the management of the Company. The Company is also subject to
certain provisions of Delaware law that could have the effect of delaying,
deterring or preventing a change in control of the Company, including Section
203 of the Delaware General Corporation Law, which prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years from the date the person became an
interested stockholder unless certain conditions are met. See "Description of
Capital Stock."
No Prior Market for Common Stock. Prior to this offering, there has been no
public market for the Company's Common Stock, and an active public market may
not develop or be sustained after this offering and investors may not be able
to sell the Common Stock should they desire to do so. The initial public
offering price will be determined by negotiations between the Company and the
representatives of the Underwriters and may bear no relationship to the price
at which the Common Stock will trade upon completion of this offering. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
Immediate and Substantial Dilution. Purchasers of the Common Stock in this
offering will suffer immediate and substantial dilution of $ per share
in the net tangible book value of the Common Stock from the initial public
offering price. To the extent that outstanding warrants or options to purchase
the Company's Common Stock are exercised, there will be further dilution. See
"Dilution."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered by the Company hereby (at an assumed initial public
offering price of $ per share) are estimated to be $ million ($
million if the Underwriters' over-allotment option is exercised in full), after
deducting the estimated underwriting discounts and commissions and offering
expenses. The primary purposes of this offering are to obtain additional
capital, create a public market for the Common Stock and facilitate future
access to public markets. The Company expects to use the net proceeds, over
time, for working capital and other general corporate purposes. A portion of
the proceeds also may be used to acquire or invest in complementary businesses,
products or services or to obtain the right to use complementary technologies.
However, the Company has no present understandings, commitments or agreements
with respect to any acquisition of businesses, products, services or
technologies. Pending use of the net proceeds for the above purposes, the
Company intends to invest such funds in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
Neither the Company nor its California predecessor has paid any cash
dividends on its capital stock. The Company's Florida predecessor made
distributions of $125,000 and $2,794,435 (net of a refund of $180,000 in May
1998) to its stockholders in 1996 and 1997, respectively, in connection with
taxes incurred by the shareholders of Hiway Florida as a result of Hiway
Florida's status as a Subchapter S corporation and its generation of net income
in 1996, 1997 and the first five months of 1998. The Company does not
anticipate paying any cash dividends in the foreseeable future, since the
Company intends to retain any earnings to finance the Company's operations and
to expand its business. Moreover, under the Company's banking arrangement with
Silicon Valley Bank, the Company is not permitted to declare or pay any
dividends without the bank's prior consent. See "Certain Transactions."
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on a pro forma basis to reflect the conversion of all outstanding
shares of Preferred Stock into shares of Common Stock, and the Merger and the
issuance of 21,836,302 shares of Common Stock in the Merger, and (ii) the pro
forma capitalization as adjusted to reflect the receipt of the net proceeds
from the sale of the shares of Common Stock offered by the Company
hereby, at an assumed initial public offering price of $ per share and
after deducting the estimated underwriting discounts and commissions and
offering expenses:
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
PRO FORMA AS ADJUSTED
--------- -----------
(in thousands)
<S> <C> <C>
Short-term debt:
Current portion of notes payable........................ $ 225 $ 225
Current portion of capital lease obligations............ 257 257
------- -------
Total short-term debt.................................. $ 482 $ 482
======= =======
Notes payable, less current portion...................... $ 4,995 $ 4,995
Capital lease obligations, less current portion.......... 193 193
Stockholders' equity (1):
Preferred Stock, $0.001 par value per share:
10,000,000 shares authorized, no shares issued or
outstanding........................................... -- --
Common Stock, $0.001 par value per share:
60,000,000 shares authorized; 34,759,377 shares issued
and outstanding, pro forma; shares issued and
outstanding, as adjusted............................... 35
Additional paid-in capital.............................. 8,485
Notes receivable from stockholders...................... (889) (889)
Retained earnings....................................... 2,595 2,595
------- -------
Total stockholders' equity............................. 10,226
------- -------
Total capitalization.................................. $15,414 $
======= =======
</TABLE>
- --------
(1) Based on shares outstanding as of March 31, 1998. Does not include (i)
1,934,409 shares of Common Stock issuable upon the exercise of stock
options outstanding as of that date under the 1995 Plan, 1996 Plan or Hiway
Florida Plan, with a weighted average per share exercise price of $0.88,
(ii) 1,000,000 shares of Common Stock available as of that date for future
grant under the Company's 1998 Plan, (iii) 600,000 shares of Common Stock
available for future grant or issuance immediately after this offering
under the Directors Plan and the Purchase Plan or (iv) 3,115,123 shares of
Common Stock issuable upon the exercise of warrants outstanding as of March
31, 1998, with a weighted average per share exercise price of $2.69. See
"Management--Director Compensation," "Management--Employee Benefit Plans,"
"Description of Capital Stock" and Notes 9-11 and 13 of Notes to
Supplemental Consolidated Financial Statements.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company, as of March 31, 1998,
was $9.1 million, or $0.26 per share of Common Stock, assuming the conversion
of all outstanding shares of Preferred Stock into shares of Common Stock and
the issuance of 21,836,302 shares of Common Stock in the Merger. "Pro forma net
tangible book value per share" is determined by dividing the number of
outstanding shares of Common Stock into the net tangible book value of the
Company (total tangible assets less total liabilities). After giving effect to
the receipt of the estimated net proceeds from the sale by the Company of the
shares of Common Stock offered by the Company hereby (at an assumed
initial public offering price of $ per share and after deducting the
estimated underwriting discounts and commissions and offering expenses), the
pro forma net tangible book value of the Company as of March 31, 1998 would
have been approximately $ million, or $ per share. This represents an
immediate increase in pro forma net tangible book value of $ per share to
existing stockholders and an immediate dilution of $ per share to new
investors purchasing shares at the initial public offering price. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $
Pro forma net tangible book value per share as of March
31, 1998................................................ $
Increase per share attributable to new investors.........
--------
Pro forma net tangible book value per share after this of-
fering...................................................
--------
Dilution per share to new investors....................... $
========
</TABLE>
The following table summarizes, as of March 31, 1998 on the pro forma basis
described above, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price per
share paid by the existing stockholders and by the investors purchasing shares
of Common Stock in this offering (before deducting the estimated underwriting
discounts and commissions and offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -----------------------AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ -----------------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 34,759,377 % $ 6,345,000 % $0.18
New investors........... $
---------- ----- ------------ -------
Total................. 100.0% $ 100.0%
========== ===== ============ =======
</TABLE>
The foregoing table assumes (i) the May 1998 conversion of all outstanding
shares of Preferred Stock into Common Stock, (ii) the Merger and the issuance
of 21,836,302 shares of Common Stock in the Merger in May 1998, (iii) no
exercise of the Underwriters' over-allotment option and (iv) no exercise of
warrants and stock options outstanding as of March 31, 1998. As of March 31,
1998, there were warrants and options outstanding to purchase a total of
3,115,123 shares and 1,934,409 shares of Common Stock, at weighted average
exercise prices of $2.69 and $0.88 per share, respectively. To the extent that
any of these warrants or options are exercised, there will be further dilution
to new investors. See "Capitalization," "Management--Employee Benefit Plans,"
"Description of Capital Stock" and Notes 9-11 and 13 of Notes to Supplemental
Consolidated Financial Statements.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Company's Supplemental Consolidated Financial Statements
and Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
The supplemental consolidated statement of operations data for each of the
years in the three-year period ended December 31, 1997, and the supplemental
consolidated balance sheet data as of December 31, 1996 and 1997, are derived
from supplemental consolidated financial statements of the Company which,
except as they relate to the financial statements of Hiway Florida for the
period from April 6, 1995 (inception) to December 31, 1995 and for the year
ended December 31, 1996, have been audited by Coopers & Lybrand L.L.P.,
independent accountants, and, insofar as they relate to the financial
statements of Hiway Florida for the period from April 6, 1995 (date of
inception) to December 31, 1995 and for the year ended December 31, 1996, by
De Meo, Young, McGrath & Company, P.A., independent accountants, and are
included elsewhere in this Prospectus. The supplemental consolidated statement
of operations data for the three months ended March 31, June 30, September 30
and December 31, 1997 and March 31, 1998, and the supplemental consolidated
balance sheet data as of December 31, 1995 and March 31, 1998, are derived
from unaudited supplemental consolidated financial statements that are not
included herein. The unaudited supplemental consolidated financial statements
have been prepared on substantially the same basis as the audited supplemental
consolidated financial statements and, in the opinion of management, include
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the results of operations for such periods.
Historical results are not necessarily indicative of the results to be
expected in the future and results of interim periods are not necessarily
indicative of results for the entire year.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, THREE MONTHS ENDED
------------------------- ---------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31 MAR. 31
1995 1996 1997 1997 1997 1997 1997 1998
------- ------- ------- -------- -------- --------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues................ $ 2,011 $12,217 $26,185 $ 5,371 $ 6,164 $ 6,918 $ 7,732 $ 8,844
------- ------- ------- ------- ------- ------- ------- -------
Operating costs and
expenses:
Cost of revenues....... 231 3,233 6,798 1,476 1,689 1,667 1,966 2,348
Sales and marketing.... 154 2,555 4,032 714 885 1,009 1,424 1,492
Product development and
systems engineering... 97 1,005 2,113 355 484 581 693 717
General and
administrative........ 2,068 4,641 8,371 1,590 1,786 2,227 2,768 3,027
------- ------- ------- ------- ------- ------- ------- -------
Total operating costs
and expenses......... 2,550 11,434 21,314 4,135 4,844 5,484 6,851 7,584
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations............. (539) 783 4,871 1,236 1,320 1,434 881 1,260
Interest and other
income (expense), net. (11) (118) (75) (18) 9 (6) (60) 62
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision for income
taxes.................. (550) 665 4,796 1,218 1,329 1,428 821 1,322
Provision for income
taxes................. 1 1 361 91 103 107 60 176
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ (551) $ 664 $ 4,435 $ 1,127 $ 1,226 $ 1,321 $ 761 $ 1,146
======= ======= ======= ======= ======= ======= ======= =======
Pro forma net income
(loss) (1)............. $ (551) $ 632 $ 2,871 $ 737 $ 794 $ 848 $ 492 $ 792
======= ======= ======= ======= ======= ======= ======= =======
Pro forma basic net
income (loss) per share
(2).................... $ (0.03) $ 0.02 $ 0.10 $ 0.02 $ 0.03 $ 0.03 $ 0.02 $ 0.03
Pro forma diluted net
income (loss) per share
(2).................... $ (0.03) $ 0.02 $ 0.08 $ 0.02 $ 0.02 $ 0.02 $ 0.02 $ 0.02
Shares used in computing
pro forma basic net
income (loss) per share
(2).................... 16,871 25,878 30,021 29,599 29,966 29,968 30,549 31,158
Shares used in computing
pro forma diluted net
income (loss) per share
(2).................... 16,871 28,122 34,842 33,765 34,678 35,137 35,656 36,044
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1995 1996 1997 1998
------ ------ ------- ---------
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET DATA: (in thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents..................... $ 55 $1,588 $ 5,672 $ 6,531
Working capital (deficiency).................. (503) 389 4,169 4,216
Total assets.................................. 1,243 9,539 19,467 22,360
Long-term debt and capital lease obligations,
less current portion......................... 22 778 5,197 5,188
Total stockholders' equity ................... 487 4,969 8,957 10,226
</TABLE>
- -------
(1) See Note 17 of Notes to Supplemental Consolidated Financial Statements for
an explanation of the determination of pro forma net income (loss).
(2) See Note 18 of Notes to Supplemental Consolidated Financial Statements for
an explanation of the computation of per share data.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Supplemental
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ materially
from those anticipated in these forward-looking statements. Factors that may
cause such a difference include, but are not limited to, those set forth under
"Risk Factors."
OVERVIEW
Hiway is a leading global provider of Web hosting and related enhanced
Internet services to small and medium sized businesses. With over 87,000 Web
hosting accounts worldwide, the Company believes that it is currently the
largest provider of business Web hosting services, as measured by number of
Web hosting accounts. The Company focuses on delivering high-quality, reliable
and flexible services that are backed by 24x7 customer support and can be
scaled to host millions of Web sites.
The Company was formed in May 1998 through the merger of Best, which was
incorporated in September 1994, and Hiway Florida, which was incorporated in
April 1995. Prior to the Merger, Hiway Florida was a leading provider of
shared server Web hosting domestically and, through its established network of
VARs, internationally. Hiway Florida had also begun to expand its distribution
channels by entering into relationships with RBOCs and other OEMs. Best was a
leading provider of shared server Web hosting bundled with dial-up Internet
access in the California market prior to the Merger, and also offered stand-
alone high-speed Internet connectivity services and co-location Web hosting
services. In 1997 and the first quarter of 1998, Hiway Florida had revenues of
$10.4 million and $4.3 million, respectively, and Best had revenues of $15.8
million and $4.5 million, respectively. At March 31, 1998, Hiway Florida had
approximately 49,000 Web hosting accounts and Best had approximately 29,000
Web hosting accounts. The merged Company currently expects to focus on shared
server Web hosting, both stand-alone and bundled with dial-up Internet access,
and to deemphasize stand-alone high-speed Internet connectivity and co-
location Web hosting services. The Merger was accounted for as a pooling of
interests, and accordingly all prior financial statements have been restated
to combine the results of Best and Hiway Florida. Primarily as a direct or
indirect result of the Merger, the Company expects to write off up to
approximately $1.0 million of related Merger costs in the second quarter of
1998. See "Risk Factors--Limited Operating History," "Risk Factors--Recent
Merger; Risk Associated with Integration of Operations" and Notes 1 and 4 of
Notes to Supplemental Consolidated Financial Statements.
The Company is in the process of completing leasehold improvements in a
70,000 square foot state-of-the-art data center and headquarters facility in
Boca Raton, Florida, which will replace its existing facility in Boca Raton.
Leasehold improvements, equipment and other capital expenditures for this
facility are expected to aggregate up to $4.5 million, of which $1.1 million
had been spent by March 31, 1998. Most of the remaining expenditures,
including relocation costs, will be spent by August 1998. Following the
completion of this facility, the Company will maintain two Network Operations
Centers, one in Boca Raton and one in Mountain View, California. The Company
believes that its two data centers will be adequate to scale its domestic
business for at least the next two years. Rather than build international data
centers, the Company expects to lease data center space in Europe, Japan and
South America as the Company's customer base grows in these geographic
regions. As a result, the Company expects that future capital expenditures
will occur only incrementally as the Company's business expands.
21
<PAGE>
The Company derived approximately 18.5% of its revenues internationally in
the first quarter of 1998 and expects that this percentage will increase over
the next several years. Although a portion of international customers purchase
services online directly from the Company, the Company markets and sells shared
server Web hosting to international customers and services these customers
primarily through its indirect distribution channel comprised of Premier
Partners and VARs. Premier Partners are VARs that are responsible for building
the Company's brand in their local markets through marketing programs and by
establishing a network of additional VARs. The Company has ownership stakes in
four of its 11 Premier Partners -- Germany (20%), Japan (35%), France (25%) and
the United Kingdom (60%)-- for which it has paid an aggregate of $370,000. The
Company grants its Premier Partners and VARs substantial discounts from the
Company's retail prices on the services they resell to their customers, and the
Premier Partners and VARs are responsible for localizing the Company's services
and providing technical support and other services to their customers. The
Company denominates its sales to VARs and Premier Partners in U.S. dollars.
Thus, fluctuations in the value of the U.S. dollar relative to the currency of
a given country may make the Company's services more or less profitable and
therefore more or less attractive to VARs selling in that country. See "Risk
Factors--Risks Associated With International Expansion and Operations."
The Company derives its revenues primarily from ongoing monthly fees and one-
time setup fees for Web hosting and, to a lesser extent, from similar fees for
high-speed Internet connectivity and enhanced Internet services. The Company
advertises in traditional and online media to attract potential customers. As a
result, to date, the Company has derived a significant majority of its accounts
from inbound requests from potential customers. The Company also markets its
services through over 1,800 international and domestic VARs and through OEMs,
including two RBOCs and SwissCom (a European telecommunications company), which
offer the Company an opportunity to derive revenue from the large established
customer bases of these companies. In addition, the Company is in discussions
with a number of other telecommunications companies regarding possible
establishment of distribution relationships. Although the Company contemplates
significant increases in advertising in order to attempt to grow sales through
its direct sales channel, the Company anticipates that an increasing percentage
of its revenues will be derived from sales through its VARs and OEMs. Because
sales to VARs and OEMs are made at a discount to the Company's retail prices
for similar services, they result in lower gross margins to the Company than
direct sales; however, sales and marketing expenses for these reseller channels
are significantly less than such expenses for direct sales. As a result, the
Company expects that, to the extent the portion of its new customer base from
these indirect reseller channels increases, this increase will have a positive
effect on its operating margin. See "Risk Factors--Dependence Upon Channel
Partners."
22
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain selected items in the Company's
supplemental consolidated statements of operations as a percentage of revenues
for the periods indicated. This information has been derived from the Company's
unaudited supplemental consolidated financial statements, which, in
management's opinion, have been prepared on substantially the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
financial information for the quarters presented. This information should be
read in conjunction with the Supplemental Consolidated Financial Statements and
Notes thereto included elsewhere in this Prospectus. The operating results in
any quarter are not necessarily indicative of the results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1997 1998
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Operating costs and expenses:
Cost of revenues................ 27.5 27.4 24.1 25.4 26.6
Sales and marketing............. 13.3 14.3 14.6 18.4 16.9
Product development and systems
engineering.................... 6.6 7.9 8.4 9.0 8.1
General and administrative...... 29.6 29.0 32.2 35.8 34.2
----- ----- ----- ----- -----
Total operating costs and
expenses...................... 77.0 78.6 79.3 88.6 85.8
----- ----- ----- ----- -----
Income from operations........... 23.0 21.4 20.7 11.4 14.2
Interest and other income
(expense), net................. (0.3) 0.2 (0.1) (0.8) 0.7
----- ----- ----- ----- -----
Income before provision for in-
come taxes...................... 22.7 21.6 20.6 10.6 14.9
Provision for income taxes...... 1.7 1.7 1.5 0.8 2.0
----- ----- ----- ----- -----
Net income....................... 21.0% 19.9% 19.1% 9.8% 12.9%
===== ===== ===== ===== =====
</TABLE>
Revenues. Revenues consist primarily of customer fees for Web hosting and, to
a lesser extent, customer fees for high-speed Internet connectivity and
enhanced Internet services. Customers typically pay recurring monthly fees and
one-time set-up fees for Web hosting and enhanced Internet services and for
high-speed Internet connectivity. Monthly fees are generally billed for, and
recognized ratably over, the one or three-month billing period selected by a
customer, and one-time set-up fees are typically recognized at the time that
installation is completed.
The Company's revenues increased sequentially each quarter from $5.4 million
to $6.2 million to $6.9 million to $7.7 million and to $8.8 million in the
quarters ended March 31, June 30, September 30 and December 31, 1997 and March
31, 1998, respectively. International revenues increased sequentially each
quarter from $809,000 to $952,000 to $1.2 million to $1.3 million and to $1.6
million, a compound quarterly growth rate of 19.3%, while domestic revenues
increased sequentially from $4.6 million to $5.2 million to $5.7 million to
$6.4 million and to $7.2 million, a compound quarterly growth rate of 12.1%. As
a result, the percentage of the Company's revenues derived internationally
increased from 15.1% to 15.4% to 17.7% to 17.5% and to 18.5% during the
comparison periods.
Substantially all of this growth in revenues resulted from increases in the
number of the Company's Web hosting accounts, which totaled approximately
44,000, 52,000, 59,000, 68,000 and 78,000 at March 31, June 30, September 30
and December 31, 1997 and March 31, 1998, respectively. The Company did not
materially alter the pricing of its various Web hosting or high-speed Internet
connectivity services during the comparison periods; however, certain shifts in
distribution and service mix served to reduce the Company's overall average
selling price. During these periods, shared server Web hosting revenues from
direct sales, which are made at the Company's retail prices, grew less rapidly
than shared server Web hosting sales to VARs and OEMs, which are made at a
significant discount from
23
<PAGE>
the Company's retail prices. Sales to VARs and OEMs represented 10.5%, 13.0%,
15.3%, 18.7% and 19.1% of the Company's revenues in the quarters ended March
31, June 30, September 30 and December 31, 1997 and March 31, 1998,
respectively, while revenues from direct sales represented 89.5%, 87.0%,
84.7%, 81.3% and 80.9%, respectively. Sales to OEMs, although growing, still
did not represent a material portion of revenues in the quarter ended March
31, 1998. Overall average selling price during the comparison periods was also
reduced by the fact that revenues from shared server Web hosting (with or
without dial-up access) grew more rapidly than revenues from high-speed
Internet connectivity, which have higher monthly fees. Shared server Web
hosting revenues increased from 73.3% of the Company's revenues in the first
quarter of 1997 to 80.1% of its revenues in the first quarter of 1998, while
high-speed Internet connectivity revenues decreased from 17.8% of the
Company's revenues in the first quarter of 1997 to 12.8% of its revenues in
the first quarter of 1998. The Company does not plan to devote significant
resources to marketing stand-alone high-speed Internet connectivity services.
In the future, as competition for Web hosting services becomes more intense,
the Company may find that competitive pressures will force it to reduce the
prices of its services, although the Company may be able to mitigate such
pressures by incorporating more features into those services. See "Risk
Factors--Competition." Also, if OEMs and VARs, as expected, continue to
represent an increasing percentage of the Company's revenues, the Company's
average revenues per shared server Web hosting account will decline.
Cost of Revenues. The Company's cost of revenues is comprised primarily of
the Company's Internet connectivity costs, salaries and benefits for Company
personnel responsible for provisioning customer accounts and providing
customer service and technical support, depreciation of the Company's servers
and network equipment, the cost of third-party equipment sold by the Company
and merchant fees on credit card transactions. The Company's cost of revenues
increased from $1.5 million to $1.7 million to $1.7 million to $2.0 million to
$2.3 million in the quarters ended March 31, June 30, September 30 and
December 31, 1997 and March 31, 1998, respectively, and represented 27.5%,
27.4%, 24.1%, 25.4% and 26.6% of revenues, respectively. The increases in cost
of revenues in absolute dollars were primarily the result of increased
Internet connectivity costs, increased salaries and benefits for customer
support personnel and increased depreciation of server and network equipment,
all of which tend to grow as revenues grow. The Company's cost of revenues
remained relatively constant as a percentage of revenues during the comparison
periods. The increase in percentage from the third quarter of 1997 to the
first quarter of 1998 was primarily the result of increased headcount in the
customer support organization in anticipation of growth in the number of Web
hosting accounts. The Company expects that its cost of revenues may continue
to increase as a percentage of revenues to the extent competitive pressures
cause it to reduce prices or increase features and as the Company derives a
greater percentage of its revenues from OEMs and VARs, which purchase at
discounts from the Company's retail prices. The decreases in gross margin that
would result may be offset in part by the fact that the depreciation on the
Company's leasehold improvements and equipment at its new data center and
headquarters in Boca Raton, Florida will decrease as a percentage of revenues
as revenues grow and that, if the Company develops significantly more Internet
traffic, it may be able to negotiate lower costs for certain types of Internet
connectivity.
Sales and Marketing. The Company's sales and marketing expenses are
comprised primarily of salaries and benefits for the Company's sales and
marketing personnel, print and online advertising costs associated with the
Company's marketing efforts and costs for trade shows. After increasing
gradually in absolute dollar terms in the quarters ended March 31, June 30 and
September 30, 1997, the Company's sales and marketing expenses jumped
significantly in the quarter ended December 31, 1997 both in absolute dollars
and as a percentage of total revenues as a result of increased advertising
designed to accelerate the rate of customer growth. The Company's sales and
marketing expenses continued to increase in absolute dollars in the first
quarter of 1998 but declined as a percentage of revenues as Best reduced its
advertising in anticipation of the Merger. The Company has found that its cost
of acquiring
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new direct sales customers has increased each quarter as it seeks to attract
not only technologically sophisticated "early adopters" but also more
mainstream small and medium sized businesses. The Company expects sales and
marketing expenses to continue to increase significantly in absolute dollar
terms and, at least through the end of 1998, as a percentage of revenues, as
the Company continues to focus on customer growth and to advertise more
heavily and in more expensive broadbased publications and online. To the
extent revenue growth does not justify continued increases in advertising and
promotion expenses, the Company may elect to reduce the rate of growth of such
expenses.
Product Development and Systems Engineering. The Company's product
development and systems engineering expenses are comprised almost entirely of
salaries and benefits for the Company's product development and systems
engineering organizations, which focus on enhancing and administering the
functionality and breadth of the Company's Web hosting and enhanced Internet
service offerings. Product development and systems engineering expenses
increased each quarter in absolute dollars, primarily as a result of hiring
additional personnel, but have remained relatively constant as a percentage of
revenues since the second quarter of 1997. The Company expects that product
development and systems engineering expenses will increase significantly in
absolute dollars as the Company continues to develop new service offerings and
enhance its network infrastructure and operations but will not increase
significantly as a percentage of revenues if revenues increase at the rate
expected.
General and Administrative. The Company's general and administrative
expenses are comprised primarily of salaries and benefits for the Company's
executive, administrative, human resources, financial and accounting
personnel, the Company's occupancy costs and other overhead, depreciation on
the Company's leasehold improvements, furniture and fixtures, fees for the
Company's outside professional advisers and the allowance for bad debts. The
increases in general and administrative expenses in absolute dollars and as a
percentage of revenues during 1997 were primarily the result of increased
salaries and benefits for personnel as well as increases in fees for outside
professional advisers and depreciation. In the first quarter of 1998, the
Company experienced a significant increase in rent as a result of its new Blue
Lake facility, but general and administrative expenses still declined as a
percentage of revenues. The Company expects that general and administrative
expenses will increase in absolute dollars but will continue to decline as a
percentage of revenues if revenues increase at the rate expected.
Provision for Income Taxes. The Company's effective income tax rate during
1997 approximated 7.5%. The effective income tax rate differed from the
statutory federal rate of 34% as Hiway Florida did not pay taxes at the
corporate level during the comparison periods because it operated as a
Subchapter S corporation. Best had an effective tax rate of 18.0% throughout
1997, which differed from the statutory rate primarily as a result of a change
in the deferred tax valuation allowance. In the first quarter of 1998, the
Company's effective tax rate was 13.3%, which differed from the federal
statutory rate primarily as a result of the use of net operating loss
carryforwards. The Company anticipates that its effective rate for the
remainder of 1998 and for 1999 will be approximately 44.0%.
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Revenues. The Company's revenues increased 508% from $2.0 million in 1995 to
$12.2 million in 1996 and increased an additional 114% to $26.2 million in
1997. The rapid revenue increases from 1995 to 1997 resulted primarily from
the Company's success in increasing its number of Web hosting accounts, which
totaled approximately 35,000 and 68,000 at the end of 1996 and 1997,
respectively. Best also acquired the assets and ongoing operations of two
Internet service providers in July 1996, which resulted in incremental
revenues of approximately $900,000 in 1996. Price and service mix changes did
not have significant effects on revenues between the comparison periods.
Cost of Revenues. Cost of revenues increased from $231,000 in 1995 to $3.2
million in 1996 and to $6.8 million in 1997. The rapid increase in costs of
revenues from 1995 to 1996 resulted primarily from (i) increased connectivity
costs necessary to support a rapidly growing customer base and implement
redundancy in the Company's network connectivity, (ii) increased depreciation
of servers and network
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equipment and (iii) increased technical support personnel. In 1997, the
Company continued to increase its connectivity and support costs in absolute
dollars but began to experience a slight decrease in such costs as a
percentage of revenues as the Company achieved some operating leverage in its
support personnel.
Sales and Marketing. The Company's sales and marketing expenses increased
from $154,000 in 1995 to $2.6 million in 1996 and $4.0 million in 1997. These
increases were primarily the result of hiring additional sales and marketing
personnel and expanding marketing and advertising programs in connection with
the Company's efforts to create national, international and regional brands.
The decline in sales and marketing expenses as a percentage of revenues from
20.9% in 1996 to 15.4% in 1997 was primarily a result of a slowing in the
growth rate of the Company's advertising and promotion expenses.
Product Development and Systems Engineering. Product development and systems
engineering expenses increased from $97,000 in 1995 to $1.0 million in 1996
and $2.1 million in 1997. These increases were primarily the result of payroll
increases. Product development and systems engineering expenses increased as a
percentage of revenues from 4.8% in 1995 to 8.2% in 1996 and then remained
relatively constant at 8.1% in 1997.
General and Administrative. General and administrative expenses increased
from $2.1 million in 1995 to $4.6 million in 1996 to $8.4 million in 1997.
These increases were primarily the result of increases in headcount, occupancy
costs and the provision for bad debts, which generally increases as a
percentage of revenues. General and administrative expenses decreased as a
percentage of revenues from 102.8% in 1995 to 38.0% in 1996 and 32.0% in 1997.
Provision for Income Taxes. The Company recorded a $1,000 tax provision for
both 1995 and 1996 for minimum state income taxes. No other income taxes were
payable since Best incurred losses during these periods and Hiway Florida
operated as a Subchapter S corporation. During 1997, Hiway Florida continued
to operate as a Subchapter S corporation and therefore paid no tax at the
corporate level. In 1997, Best had a provision for income taxes of $361,000,
which represented an effective tax rate of 18.0% for Best and 7.5% for the
combined Company. The effective tax rate differed from the federal statutory
rate of 34.0% primarily as a result of a change in the Company's deferred tax
valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of equity securities and debt issuances, cash generated from
operating activities and various types of equipment loans and lease lines.
The Company generated $92,000, $1.9 million, $6.5 million and $2.4 million
in cash from operations in the years ended December 31, 1995, 1996 and 1997
and the quarter ended March 31, 1998, respectively. Net cash provided by
operations in 1995 resulted primarily from increases in accounts payable and
other liabilities mostly offset by the Company's net loss for the year. For
each of the other periods, net cash provided by operations resulted primarily
from the Company's net income plus non-cash depreciation, amortization and
doubtful accounts expenses, coupled with increases in deferred revenue,
partially offset by increases in accounts receivable.
Net cash used in investing activities in 1995, 1996, 1997 and the quarter
ended March 31, 1998 was $1.0 million, $4.8 million, $5.5 million and $1.6
million, respectively. Net cash used for investing activities in these periods
resulted almost entirely from expenditures for network and computer equipment
and leasehold improvements and investments in the Company's network
infrastructure and, in 1996, cash used to acquire two Internet service
products.
Cash provided by financing activities in 1995, 1996 and 1997 was $1.0
million, $4.4 million and $3.1 million, respectively, and was almost entirely
the result of private sales of equity securities and, in 1996 and 1997, $0.8
million and $5.9 million, respectively, of net debt issuances, offset in 1996
and 1997 by
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distributions to shareholders of $125,000 and $3.0 million, respectively. The
distributions were made so that shareholders of Hiway Florida, a Subchapter S
corporation, could pay taxes on Hiway Florida's earnings that were attributed
to them. The Company did not have any material financing activities in the
quarter ended March 31, 1998.
At March 31, 1998, the principal source of liquidity for the Company was $6.5
million of cash and cash equivalents. As of that date, the Company also had
aggregate principal amount of $5 million in 5% Senior Unsecured Notes (the
"Notes") outstanding. The Notes bear interest at 5% until January 1, 2000 and
then bear interest at 9% through maturity at December 31, 2002. Interest
payments on the Notes are due quarterly, and the outstanding principal balance
is due at maturity. The Notes may be prepaid at the option of the Company after
December 1999, subject to certain conditions, at a premium of ten percent. At
March 31, 1998, the Company had no material commitments for capital
expenditures but expects such expenditures to be at least $6.5 million in the
remainder of 1998. Such expenditures will primarily be for property and
equipment in connection with the Company's investments in its network
infrastructure and buildout of its Blue Lake facilities in Boca Raton, Florida.
The Company also has minimum lease obligations of between $800,000 and $1.2
million annually for the next five years. The Company believes that its
existing cash and cash equivalents, the net proceeds from this offering and any
cash generated from operations will be sufficient to fund its operating
activities, capital expenditures and other obligations through at least the
next 18 months. The Company may not be successful in generating sufficient cash
flow from operations or in raising additional capital when required in
sufficient amounts on terms acceptable to the Company. The failure of the
Company to raise capital when needed could have a material adverse effect on
the Company's business, results of operations and financial condition. If
additional funds are raised through the issuance of equity securities, the
percentage ownership of its then-current stockholders would be reduced.
Furthermore, such equity securities might have rights, preferences or
privileges senior to those of the Company's Common Stock.
FACTORS AFFECTING RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company has experienced significant fluctuations in its results of
operations on a quarterly and an annual basis. The Company expects to continue
to experience significant fluctuations in its quarterly and annual results of
operations due to a variety of factors, many of which are outside the Company's
control. These factors include: (i) demand for and market acceptance of the
Company's services; (ii) introductions of products or services by the Company
and its competitors; (iii) reliable continuity of service and network
availability; (iv) the ability to increase bandwidth as necessary; (v) the mix
of services sold by the Company; (vi) provisions for customer discounts and
credits; (vii) customer retention; (viii) the timing and success of marketing
efforts and service introductions by the Company and its VARs and OEMs; (ix)
the timing and magnitude of capital expenditures, including construction costs
relating to the expansion of operations; (x) the introduction by third parties
of new Internet and networking technologies; (xi) increased competition in the
Company's markets; (xii) changes in the pricing policies of the Company and its
competitors; (xiii) fluctuations in bandwidth used by customers; (xiv) the
timing and magnitude of expenditures on advertising and promotion; (xv)
economic conditions specific to the Internet industry; and (xvi) other general
economic factors. In addition, a relatively large portion of the Company's
expenses are fixed in the short-term, and therefore the Company's results of
operations are particularly sensitive to fluctuations in revenues. Also, if the
Company were unable to continue using third-party products in the Company's
services offerings, the Company's service development costs could increase
significantly. Although the Company has not encountered significant
difficulties in collecting accounts receivable in the past, many of the
Company's customers are individuals and small businesses, and the Company may
not be able to collect accounts receivable on a timely basis. For these and
other reasons, in some future quarters, the Company's results of operations may
not meet or exceed the expectations of securities analysts or investors, which
could have a material adverse effect on the market price of the Company's
Common Stock.
The market for Web hosting and related enhanced Internet services has only
recently begun to develop and is evolving rapidly. There is significant
uncertainty regarding whether this market ultimately
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will prove to be viable or, if it becomes viable, whether it will grow. The
Company's future growth, if any, will depend upon the willingness of businesses
and consumers to outsource Web hosting services and the Company's ability to
market its services in a cost-effective manner to a sufficiently large number
of customers. The market for the Company's services may not develop further,
the Company's services may not be more widely adopted, and significant numbers
of businesses, organizations or consumers may not use the Internet for commerce
and communication. If this market fails to develop further or develops more
slowly than expected, or if the Company's services do not achieve broader
market acceptance, the Company's business, results of operations and financial
condition would be materially and adversely affected. In addition, to be
successful in this emerging market, the Company must be able to differentiate
itself from its competition through its service offerings and brand
recognition. The Company may not be successful in differentiating itself or
achieving market acceptance of its services, and the Company may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of these services. If the Company incurs increased
costs or is unable, for technical or other reasons, to develop and introduce
new services or products or enhancements to existing services in a timely
manner, or if new services do not achieve market acceptance in a timely manner
or at all, the Company's business, results of operations and financial
condition could be materially adversely affected.
An important element of the Company's strategy for growth is to continue to
develop its reseller channel through RapidSite, which manages the Company's
network of over 1,800 domestic and international VARs, and through the
Company's OEM relationships. The Company's VARs typically are Web development
or Web consulting companies that also sell the Company's Web hosting services
but that do not generally have established customer bases to which they can
market the Company's services. Therefore, in those markets, primarily
international, where the Company does not focus its direct marketing efforts,
the Company is dependent on third parties to stimulate demand for the Company's
services. Although the Company attempts to incentivize its VARs by providing
them with price discounts on the Company's services that the VARs seek to
resell at a profit, the failure of the Company's services to be commercially
accepted in certain markets, whether as a result of a VAR's performance or
otherwise, could cause the Company's current channel partners to discontinue
their relationships with the Company, and the Company may not be successful in
establishing additional channel partner relationships as required. The Company
has also developed strategic relationships with certain of its international
VARs through its "Premier Partner" program. Each of the Company's Premier
Partners is responsible for building and supporting a VAR channel, which allows
the Company to leverage the Premier Partner's local marketing and distribution
expertise, and for helping the Company build the RapidSite brand
internationally. In addition, the Company recently has established OEM
relationships with several large companies and is pursuing OEM relationships
with additional companies. The Company's OEM relationships have not generated a
material amount of revenue to date, and, in order for the Company to be
successful, revenues generated by OEMs must increase significantly. OEMs and
VARs have no obligation to market or resell the Company's Web hosting services,
and OEMs can terminate their relationships with the Company with limited or no
penalty with as little as 30 days' notice. The loss of Premier Partners, other
VARs or OEMs, the failure of such parties to perform under agreements with the
Company or the Premier Partner or the inability of the Company to attract and
retain new Premier Partners, VARs or OEMs with the industry experience required
to market the Company's Web hosting services successfully in the future could
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company's direct sales efforts may conflict with
the efforts of its indirect channel partners, which may adversely affect the
Company's relationships with such partners. In addition, to the extent that the
Company succeeds in increasing its sales through indirect channels such as
Premier Partners, VARs or OEMs, those sales will be at discounted rates, and
revenue and gross margin to the Company for each such sale will be less than if
the Company had sold the same services to the customer directly.
In 1996, 1997 and the first three months of 1998, revenues derived from
customers outside the United States, primarily in Europe and Asia, represented
approximately 9.5%, 14.0% and 18.5%,
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respectively, of the Company's revenues. The Company's success is dependent in
part on expanding its international presence, primarily through the Company's
VARs and RapidSite's Premier Partners and their VARs. As a result, the Company
will depend upon its VAR network to market and sell its services and manage the
accounts of customers internationally. The Company's VARs may not be able to
continue to market and sell the Company's Web hosting services successfully.
The Company denominates its sales to VARs and Premier Partners in U.S. dollars.
Thus, fluctuations in the value of the U.S. dollar relative to the currency of
a given country may make the Company's services more or less profitable and
therefore more or less attractive to VARs selling in that country. In addition,
there are certain risks inherent in conducting business internationally, such
as changes in regulatory requirements, export restrictions, tariffs and other
trade barriers, differing technology standards, longer payment cycles,
political and economic instability, fluctuations in currency exchange rates,
imposition of currency exchange controls, seasonal reductions in business
activity, increased difficulty in enforcing contracts and potentially adverse
tax consequences, any of which could adversely affect the Company's
international operations. Furthermore, certain foreign governments, such as
Germany, have enforced laws and regulations related to content distributed over
the Internet that are more strict than those currently in place in the United
States. One or more of these factors could have a material adverse effect on
the Company's current or future international operations and, consequently, on
the Company's business, results of operations and financial condition. To the
extent that the Company does business in foreign markets directly, the Company
will also be subject to risks such as challenges in staffing and managing
foreign operations, employment laws and practices in foreign countries and
problems in collecting accounts receivable. In addition, the Company or its
channel partners may not be able to compete effectively in international
markets.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure about Segments of
an Enterprise and Related information." SFAS No. 131 establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The Company has determined that it does not
have any separately reportable business segments.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The Company is reviewing the impact of SOP 98-1, which will be
effective for the year ending December 31, 1999.
YEAR 2000 ISSUES
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the dates on or
after Year 2000 are a known risk. The Company has established procedures for
evaluating and managing the risks and costs associated with this problem.
However, the Company could incur significant operating expenses or be required
to invest in improved computer systems to be Year 2000 compliant. Such
expenditures could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, the Company
maintains most of its customers' Web pages on UNIX-based servers, which may be
impacted by Year 2000 complications. The failure of such servers could have a
material adverse effect on the Company's customers, which in turn could have a
material adverse effect on the Company's business, results of operations and
financial condition.
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BUSINESS
THE COMPANY
Hiway is a leading global provider of Web hosting and related enhanced
Internet services to small and medium sized businesses. With over 87,000 Web
hosting accounts worldwide, the Company believes that it is currently the
largest provider of business Web hosting services, as measured by number of Web
hosting accounts. The Company focuses on delivering high-quality, reliable and
flexible services that are backed by 24x7 customer support and can be scaled to
host millions of Web sites. Hiway's services enable its customers to deploy,
expand and update Web sites more rapidly and cost-effectively than internally
developed solutions. The Company offers its solutions directly and through VARs
and OEMs. Hiway's OEMs include two of the five RBOCs, which two in the
aggregate provide telecommunications services to approximately 30% of the U.S.
business market.
The Company was formed in May 1998 through the merger of Best, which was
incorporated in September 1994, and Hiway Florida, which was incorporated in
April 1995. Prior to the Merger, Hiway Florida was a leading provider of shared
server Web hosting domestically and, through its established network of VARs,
internationally. Hiway Florida was also seeking to expand the distribution of
its services prior to the Merger by entering into relationships with OEMs. Best
was a leading provider of shared server Web hosting bundled with dial-up
Internet access in the California market prior to the Merger, and also offered
stand-alone high-speed Internet connectivity and co-location Web hosting
services. In 1997 and the first quarter of 1998, Hiway Florida had revenues of
$10.4 million and $4.3 million, respectively, and Best had revenues of $15.8
million and $4.5 million, respectively. At March 31, 1998, Hiway Florida had
approximately 49,000 Web hosting accounts and Best had approximately 29,000 Web
hosting accounts. Because the Merger was only recently completed, the Company
faces a number of risks related to the integration of differing Web hosting
services, platforms and technologies, distribution channels, marketing efforts,
information systems and management teams. See "Risk Factors--Recent Merger;
Risks Associated with Integration of Operations."
INDUSTRY BACKGROUND
Use of the Internet has grown rapidly in recent years, driven by a number of
factors, including the large and growing installed base of personal computers,
improvements in network architectures, increasing numbers of network-enabled
applications, the emergence of compelling content and commerce-enabling
technologies, and easier, faster and cheaper Internet access. IDC estimates
that the number of Web users in the United States will increase from
approximately 39 million in 1997 to 136 million in 2002, a 28% compound annual
growth rate, and that the number of Web users outside the United States will
increase even more rapidly from approximately 30 million users in 1997 to 184
million in 2002, a 44% compound annual growth rate. As a result of this growing
usage, the Internet has become an important global communications and commerce
medium and represents a substantial opportunity for enterprises to interact in
innovative ways with a large number of geographically distributed offices,
employees, customers, suppliers and partners.
As use of the Internet grows, enterprises of all sizes are increasingly
recognizing the need to take advantage of the Internet in connection with their
business operations and product and service offerings. Specifically,
enterprises are seeking to establish Web sites that provide information about
them and their products and services, and to augment these Web sites with
related enhanced Internet services such as secure electronic commerce, unified
messaging, customer service, and internal and external communications with
geographically distributed offices, employees, customers, suppliers and
partners. As a result, high-performance and reliable Web site hosting combined
with enhanced Internet services has become increasingly critical for many
mainstream enterprises. Many enterprises are seeking to
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outsource this function in order to ensure reliability, high performance,
scalability, sophisticated monitoring and expert management.
Small and medium sized businesses (i.e., businesses with fewer than 1,000
employees) are expected to generate most of the growth in the Web hosting
market. IDC estimates that Web hosting revenues generated by small and medium
sized businesses in the U.S. will grow from approximately $217 million in 1997
to over $3.4 billion, or 95% of total estimated U.S. Web hosting revenue, in
2000, a 150% compound annual growth rate. Often, these companies find an
outsourced Web hosting solution cost-effective because they typically lack the
technology expertise, IT resources, capital, bandwidth needs or ability to bear
the time-to-market risks required to install, maintain and monitor their own
Web servers and Internet connectivity. Currently, many small and medium sized
businesses with a presence on the Internet utilize a Web site to provide basic
information about their products and services. However, competition for Web
traffic has driven businesses to create Web sites with greater functionality.
In addition, Web users expect small and medium sized businesses to continue to
augment their Internet presence with enhanced Internet services. As a result,
companies are increasingly seeking outsourcing arrangements that enable them to
augment their Web sites with related enhanced Internet services such as secure
electronic commerce, unified messaging and email. IDC believes that the market
for enhanced Internet services in the United States, including Web hosting,
will grow from an estimated $352 million in 1997 to over $7 billion in 2000.
Given the growth rate of Internet usage internationally, the Company believes
that the international Web hosting market for small and medium sized businesses
also represents a significant opportunity.
A variety of companies, such as regional Web hosting companies, ISPs, data
center companies and large IT outsourcing firms, offer products and services
that attempt to address enterprises' Internet outsourcing needs. However, the
products and services offered by these companies often do not effectively meet
the needs of small and medium sized businesses. Many regional Web hosting
companies and ISPs do not have the sophistication, scalability, reliability,
expertise or focus required to meet the evolving needs of large numbers of
geographically dispersed and growing small and medium sized businesses. Data
center companies and large IT outsourcing firms tend to focus on large
enterprises and sophisticated Internet companies and lack the expertise to
provide high-quality Web hosting and related enhanced Internet services cost-
effectively to a large number of smaller customers. As a result, Hiway believes
a significant opportunity exists for a highly-focused company to provide end-
to-end, high-quality Web hosting and related enhanced Internet services that
will enable large numbers of small and medium sized business to create or
enhance a Web presence rapidly and cost-effectively.
THE HIWAY SOLUTION
Hiway is a leading provider of Web hosting services to small and medium sized
businesses, with over 87,000 Web hosting accounts worldwide. The Company also
offers a number of related enhanced Internet services. The Company focuses on
delivering high-quality, reliable and flexible Web hosting services that are
backed by 24x7 customer support and can be scaled to host millions of Web
sites. The Company's Web hosting services enable its customers to deploy,
expand and update Web sites more rapidly and cost-effectively than internally
developed solutions. The Hiway solution provides the following key advantages
to its customers:
High-Quality Performance and Reliability. The Company's Web hosting solutions
provide enterprises with mission-critical performance and reliability, ensuring
that Web sites load rapidly and are continuously online and functional. The
Company's solutions are designed to ensure high-quality performance and
reliability through features such as a redundant, high-speed, secure,
proprietary network architecture, data centers that are constantly monitored,
back-up power sources, secure physical
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facilities, spare servers, regular back-ups and a fault tolerant hosting
platform. These features enable Hiway to offer its customers a 99.9% uptime
service level warranty.
Fast and Automated Implementation and Customer Support. The Company has
developed a standardized system for delivering its Web hosting solutions that
enables customers to deploy Web sites rapidly, eliminating the need for
customers to select and purchase costly Web server hardware. This system also
reduces the time and IT resources required for customers to deploy and
maintain Web sites. In addition, the Company's proprietary technology enables
customers to host Web sites on an automated basis, without involvement by
Company personnel. The Company supports its Web hosting and related services
with a customer service organization that can address technical problems on a
24x7 basis. The Company endeavors to provide rapid and accurate responses
through its highly trained service force, which can field questions over the
telephone or via e-mail. The Company also provides Web-based customer services
that enable users to manage their accounts and Web sites directly.
Scalability and Flexibility. The Company's Web hosting solutions are
designed to be scalable to host increasing amounts of traffic to millions of
Web sites, ensuring its customers a consistently high level of performance
without interruption in the quality of service as the Company and its
customers' Internet operations expand. For customers that experience
increasing numbers of visits to their Web sites or that deploy increasingly
data intensive Web-based applications, the Company can quickly increase the
disk storage and bandwidth available and provide the resources for enhanced
Web site functionality. As its customer base grows, the Company also can
rapidly increase its Internet connectivity, number of servers and internal
network resources in a way that is transparent to its customers. To address
the diverse requirements of its customers, the Company offers Web hosting
services on a range of operating systems and computing platforms: (i) IRIX
(Silicon Graphics platform); (ii) UNIX FreeBSD (Intel/PC platform); (iii)
Solaris (Sun Microsystems platform); and (iv) commencing July 1998, Microsoft
Windows NT (Intel/PC platform).
Broad Range of Services. The Company's Web hosting services include Web site
publishing and management tools, e-mail management tools, support for third-
party Web site-related applications and domain name registration. Although the
Company's current revenues are derived primarily from Web hosting services,
Hiway also provides to users of these services related enhanced Internet
services, including electronic commerce solutions for those enterprises that
wish to conduct business on the Web, enhanced disk storage and bandwidth
options, and support for the mSQL database interface and for RealAudio and
RealVideo (multimedia support applications). In addition to its Web hosting
services, the Company offers high-speed Internet access services and co-
located Web servers in the San Francisco Bay Area and plans to offer dedicated
server Web hosting services globally in the third quarter of 1998 for users
that require a higher level of bandwidth or disk storage capacity.
Ease of Use. The Company has implemented proprietary software tools that
allow its customers to order, change and manage their Web sites easily and
flexibly, regardless of their level of technical expertise. The Company's Web
hosting services provide detailed Web statistics, access to raw log files and
tools to provide customers with detailed account and performance information.
In addition, the Company offers tools that enable its customers to update
their Web site easily and remotely. In addition, the Company is developing a
Web site development tool that will enable relatively unsophisticated
customers to use intuitive templates to establish a one-page Web presence
without the use of more complex Web site authoring applications or third-party
Web site development assistance.
Cost-Effective Solution. The Company's customers benefit from its
significant operating experience and the capital and labor investments that it
has made to support Web hosting and related enhanced Internet services in an
automated fashion. Small and medium sized businesses often cannot afford to
develop the hardware, software and IT infrastructure required to deploy a Web
site, particularly given constraints on their IT resources and expertise. The
Company believes that its external Web hosting solutions are significantly
more cost-effective than in-house solutions, especially for users with low
bandwidth and disk storage requirements.
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STRATEGY
Hiway's objective is to be the leading global provider of Web hosting and
related Internet services to small and medium sized businesses. To achieve
this objective, the Company's strategy includes the following key elements:
Increase Recognition of Established Brands. The Company believes that brand
recognition will be an increasingly important decision factor among small and
medium sized businesses that are establishing a Web presence. As a result, the
Company intends to continue to focus on increasing its brand recognition
worldwide. Specifically, the Company intends to market its full range of
services aggressively under the national Hiway brand using print media and
online campaigns and to take advantage of the Best brand in the California
market, where it is well recognized. To avoid channel conflicts, the Company
markets internationally and to VARs through its RapidSite brand. The Company
also has established and intends to continue to establish strategic co-
marketing relationships with leading providers of Web-site creation tools,
including Microsoft, in order to further increase brand awareness.
Deliver High-Quality, Affordable Services. A key element of the Company's
success has been its ability to provide sophisticated Web hosting solutions,
including support for electronic commerce, at prices affordable to small and
medium sized businesses. Establishing a large customer base early in its
history has enabled the Company to make the infrastructure investments and to
develop the expertise required to deliver and scale its services. The Company
intends to continue to take advantage of its established customer base and
infrastructure. In addition, the Company has created and continues to improve
its proprietary technology, which permits the Company to scale its business
without reducing the quality of service or investing in substantial additional
network or support infrastructure. For example, the Company has developed
Autobahn, a proprietary and sophisticated online ordering and provisioning
system that enables customers to set up accounts, change account parameters
and check Web site statistics in an automated fashion, without interaction
with Company personnel.
Maximize Direct and Indirect Distribution Channels. The Company seeks to
maximize market share by utilizing three distribution channels--direct sales,
VARs and OEMs. The Company currently acquires most of its Web hosting
customers through an automated online registration process and inbound calls.
The Company also maintains a network of over 1,800 VARs in more than 130
countries. These VARs resell the Company's solutions to their existing and
potential customers and interface directly with the end user, providing
billing customer support and other services to these customers. In addition,
the Company has recently commenced the distribution of its services through
OEMs. The Company believes that these relationships present a significant
opportunity to penetrate the large, established customer bases of these OEMs.
The Company's OEM partners include two of the five RBOCs, which two in the
aggregate provide telecommunications services to approximately 30% of the
business market.
Expand International Presence. The Company believes that the Web hosting
needs of international small and medium sized businesses are not being
adequately served and therefore represent a significant growth opportunity.
The Company seeks to utilize VARs in local international markets and to
develop strategic relationships, through investment or acquisition, with
certain of its leading VARs through a "Premier Partner" program. Each of the
Company's Premier Partners is responsible for building and supporting a VAR
network, which allows the Company to leverage the Premier Partner's local
marketing and a distribution expertise. The Company also seeks to sign OEM
contracts with international companies with attractive customer bases to
further expand its distribution.
Leverage Innovative and Proprietary Technology. The Company believes that
its innovative and proprietary technology is an important factor in
differentiating its services, and therefore seeks to take advantage of and
improve this technology in order to deliver high-quality Web hosting solutions
and to build market share rapidly. The Company has developed specialized
innovations to Web server
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applications that enhance the customer's ability to deploy, expand and update
their Web sites and the Company's ability to provide complex Web hosting
solutions on a cost-effective and technologically efficient basis. For
example, the Company has developed a high-performance, reliable, secure and
scalable Web hosting platform that can be deployed in remote data centers in
various regions around the world and in OEM customers' local facilities. In
addition, the Company is developing a Web site development tool that will
enable relatively unsophisticated customers to use intuitive templates to
establish a one-page Web presence easily and rapidly.
Provide Enhanced Internet Services. The Company believes that a significant
opportunity exists to provide complementary services to its existing and
potential customers. The Company believes that as use of the Internet
increases, business needs will become more complex and enterprises will seek
more comprehensive Web-based solutions. The Company intends to continue to
meet the needs of its current and potential customers in the future by
offering related enhanced Internet services which may include expanded
electronic commerce capabilities, Web-based faxing and e-mail, unified
messaging and "virtual" offices, audio and video applications, automated Web
site authoring tools and templates, basic automated marketing tools, and
redundant "hot" sites across multiple national and international data centers.
The Company seeks to take advantage of third-party technology and products in
order to manage development costs while upgrading its solutions.
SERVICES
The Company's services are designed to provide its customers with the high
performance, scalability, flexibility and expertise they need to deploy or
expand the functionality of a Web presence. Hiway has designed its services to
meet customers' unique business and technical requirements, and has the
ability to provide enhanced Internet services as customers' needs evolve.
Customers generally pay monthly or quarterly fees for services they utilize,
as well as one-time fees for installation and for any equipment purchased by
the customer.
Web Hosting Services
Shared Server Web Hosting. The Company offers a series of shared server Web
hosting plans that allows individuals and businesses to establish a
sophisticated presence on the Internet at a reasonable cost. The shared server
Web hosting plans allow customers to leverage the expertise and equipment of
the Company to deploy an effective Web site. The Company offers four
standardized Web hosting options at prices ranging from $25-$300 per month.
The basic standardized Web hosting option (Plan 1) offers 1,500 megabytes of
data transfer per month and 20 megabytes of disk storage. This service level
allows customers to store HTML, graphics, video and sound files on a Web site
and generally satisfies customers' bandwidth and disk storage requirements. In
order to allow customers to use their Web site as an effective interface for
communication, the Company provides additional services bundled into its
various shared server hosting plans. For example, customers are provided
autoresponders, which send pre-defined e-mail messages to visitors to their
Web sites, and can establish mailboxes on the Company's server, which allow e-
mail associated with the account to be stored and later accessed by the
customer. In addition, the Company provides e-mail forwarding from the
Company's servers to another location, support for Microsoft FrontPage
extensions and chat room capability as part of the basic Web hosting account.
The higher tier shared server Web hosting offerings (Plans 2-4) provide
customers enhanced services, functionality and resources. Each successive tier
allocates the customer more disk storage and increases the monthly data
transfer limit. In addition, the more advanced plans offer Real Audio, Real
Video and mSQL database support and support for electronic commerce-enabled
Web sites. A majority of the Company's current shared server Web hosting
customers use the entry-level Plan 1 service, which costs $25 per month.
The Company has also implemented a variety of tools to allow its customers
to use their sites more effectively. Customers are able to update Web sites
remotely by sending files through FTP (file transfer
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protocol). All of the four standardized Web hosting plans feature detailed Web
statistics and access to raw log files, giving customers the ability to track
the performance and evaluate the effectiveness of their Web sites. In
addition, the Company provides a number of popular CGI scripts that allow
customers to deploy hit counters, guest books, mail forms and discussion
forums rapidly and easily and also supports custom CGI scripts that enable
customers to build additional functionality into their Web sites. The Control
Panel, a proprietary account interface, increases the control a customer has
over Web site management. For example, customers can use the Control Panel to
change passwords, set e-mail forwarding options and view Web site statistics.
The Company derived 37% and 47% of its revenues in 1997 and the first three
months of 1998, respectively, from its shared server Web hosting services.
Shared Server Web Hosting with Dial-up Internet Access. In the California
market, the Company offers a series of shared server Web hosting plans with
unlimited dial-up Internet access via 36 local access numbers. Currently, the
Company offers the plans in most of the San Francisco Bay Area, including the
Silicon Valley, and in major portions of the Los Angeles Basin. These plans
provide Web hosting on a custom built Intel-based system, using a UNIX
operating system that has been optimized for shared server Web hosting. The
entry-level plan includes 200 megabytes of data transfer per day and 25
megabytes of disk storage, and costs $30 per month. The Company offers higher-
tier bundled plans that provide the customer with more disk storage and an
increased monthly data transfer limit, but most of the Company's customers use
the entry-level bundled plan.
The shared server Web hosting with dial-up Internet access plans offer a
number of the same services as the four standardized shared server Web hosting
plans, including e-mail autoresponders, mailboxes, e-mail forwarding,
unlimited FTP, site statistics, CGI scripting and Microsoft FrontPage
extensions. Additionally the plans allow customers to access the Company's
news and chat servers. Included in the basic plan, customers are provided a
local access number and may choose either 28.8 Kbps, 56 Kbps or single-channel
ISDN dial-up access through the local access number.
The Company derived 32% and 30% of its revenues in 1997 and the first three
months of 1998, respectively, from its shared server Web hosting with dial-up
Internet access services.
Domain Name Reservation. Each business or individual that desires a
personalized Web address must first reserve a domain name. As more individuals
and businesses establish a Web presence, desirable domain names, like trade or
service marks, become more difficult to secure. For a one-time fee, the
Company will register and maintain a domain name for two years or until the
customer decides to use the domain name to host an active Web site. Domain
name registration generates minimal revenue for the Company, but more
importantly provides the Company a marketing advantage when this group of
customers selects a Web hosting company.
Dedicated Server Web Hosting. The Company plans to launch a dedicated server
Web hosting solution in the third quarter of 1998 for customers that prefer
not to host their Web sites on a shared server. The dedicated server Web
hosting solution provides the customer with a Company-owned dedicated server
that is maintained by the Company on a 24x7 basis. A dedicated server will
allow the customer substantially more server and network resources than
available under shared server Web hosting plans. It also will provide
customers with the ability to run complex applications without the additional
IT administration costs and considerations that customers would experience if
they managed their own servers and Web sites internally. The Company will be
responsible for all maintenance and system administration and will house the
server in one of the Company's data centers. The Company intends to maintain
spare equipment and to back up data regularly. The Company expects to offer
the dedicated server service at prices starting at approximately $1,500 per
month. Actual pricing will depend upon the hardware configuration, level of
service and data transfer rates required by the customer.
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Enhanced Internet Services
Electronic Commerce. The Company offers a variety of electronic commerce
solutions to help businesses create and maintain a successful Web storefront.
Different electronic commerce plans enable customers to choose the options and
level of complexity that meet their individual needs. Merchants inexperienced
with the Web can quickly build a simple catalog and begin taking orders via e-
mail, while more experienced developers can choose enhanced features to build
a sophisticated electronic commerce Web site that includes order taking,
credit card processing and order fulfillment. Rather than develop electronic
commerce software internally, the Company provides electronic commerce
software products from third-party software companies.
The Company offers a range of Web hosting options with added features to
enable electronic commerce at prices starting at $50. Lower-tier electronic
commerce Web hosting plans add secure socket layer ("SSL") encryption
capability to the basic Web hosting Plan, while higher-tier plans add
encryption, a personal Verisign certificate and other electronic commerce
features, including support for high-end, third-party electronic commerce
software and access to the Company's specialized Network Services Engineers
("NSEs").
The Company provides a basic shopping cart module that allows customers to
track Web site shopper order and billing information. This module is provided
at no additional charge to the Company's electronic commerce Web hosting
customers. The Company also resells several third-party electronic commerce
software packages that help merchants interact with their customers.
OpenMarket's ShopSite software enables merchants to build an online store
using pre-designed templates, simplifying the creation of the Web site and
reducing start-up costs and complex integration. For more sophisticated
electronic commerce, Hiway offers Mercantec Softcart, which enables merchants
to build customized storefronts that, among other features, allow shoppers to
search the entire Web site for products. Mercantec's product can be integrated
with various payment systems and accounting packages for an end-to-end
electronic commerce solution. Segue Systems provides automated payment
processing from credit card authorization to fund capture and settlement,
allowing merchants increased electronic commerce functionality. Additionally,
the Company supports Cybercash, a product that enables customers to process
credit card transactions on a real-time basis, allowing them to accept credit
card purchases online and to initiate the credit card authorization process at
the time of sale.
OEM Web Hosting. The Company's end-to-end OEM Web hosting solutions enable
OEMs to utilize the Company's proprietary technology, network infrastructure,
expertise and customer support organization to provide outsourced private
label Web hosting services to their customer bases rapidly and cost
effectively. Four tiers of OEM solutions are available depending upon the
OEM's Web hosting requirements. Each solution requires the OEM to purchase at
least one dedicated Web server from the Company. In addition, OEMs can choose
to purchase the additional equipment required to enhance the OEM's private
label branding efforts, including an e-mail server to eliminate routing e-mail
through Hiway, a DNS server to provide domain names based upon the OEM's
brand, and a transaction server to control and customize such events as
customer activations, deletions, statistics, plan changes and notices. Most
OEM Web hosting solutions take advantage of the Company's high-quality
performance and reliability by locating the OEM's equipment in one of the
Company's data centers; however, the most advanced OEM solution allows an OEM
to locate all required hardware and software in its own data center. The
Company has generated minimal revenues to date from its OEM relationships, and
these relationships may not generate significant revenues in the future. See
"Risk Factors--Dependence on Channel Partners."
Future Enhanced Internet Services. The Company is exploring other Web-based
services through internal development and third-party licensing arrangements
to serve the evolving needs of small and medium sized businesses. The Company
has focused its efforts on select areas, including expanded electronic
commerce capabilities, Web-based faxing and e-mail, unified messaging and
"virtual offices,"
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audio and video applications, automated Web site authoring tools and
templates, basic automated marketing tools, and redundant "hot" sites across
multiple national and international data centers. The Company strives to be
market driven, assessing potential opportunities to extend its offerings as
they arise and evaluating its ability to implement these solutions in a cost-
effective way while maintaining quality of service for its customers.
Other Services
Co-location. The Company offers co-location services for customers that
require the resources of a dedicated server, but want to retain access to and
own their server. The Company's co-location facilities in Mountain View, San
Francisco and San Jose, California offer customers a secure location,
environmental control, monitoring and a high-speed connection to the Internet
at prices starting at $500 per month. Each customer is allocated an enclosed
cage and an Ethernet connection to the Company's network. Each co-location
facility provides an uninterruptible power source, a back-up diesel generator,
raised floor, climate control and 24x7 monitoring. This is an appropriate
solution for companies that desire a dedicated server and have the expertise
to maintain the Web site and the server. The Company expects co-location
services to represent a declining portion of the Company's business over time.
High-Speed Internet Connectivity. For customers in the San Francisco Bay
Area, the Company offers stand-alone high-speed Internet connectivity services
independent of the Company's Web hosting services. Customers are able to
purchase point-to-point or frame relay connections to the Company's locations
in Mountain View, San Francisco or San Jose, California, and thereby leverage
the Company's high-speed connections to the Internet. The Company offers
value-added services to those customers that purchase high-speed Internet
connectivity. For example, customers have the option of purchasing hardware
from the Company, and the Company provides engineering support to specifically
configure the customer's equipment and test their local connection. The
Company expects stand-alone Internet connectivity to represent a declining
portion of the Company's business over time.
MARKETING
The Company's 13-person (as of May 31, 1998) marketing organization is
responsible for services management, advertising, marketing communications and
public relations, and focuses on stimulating demand for the Company's services
and extending the Company's brands. Services management includes defining the
Company's services roadmap and bringing to market the portfolio of services
and programs that will enable the Company to meet its business objectives. The
Company stimulates demand for its services and seeks to extend its brands
through a broad range of advertising, marketing communications and public
relations activities. The Company relies upon a combination of traditional
media and online advertising. The Company focuses its traditional media
efforts on advertisements in major business and technical publications, radio
spots and direct mail. The Company's online marketing program consists of
general rotation and keyword-specific Web banner advertisements. Other
marketing vehicles include collateral materials, trade shows, direct response
programs and management of the Company's Web site. Public relations focuses on
cultivating industry analyst and media relationships with the goal of securing
broad media coverage and public recognition of the Company.
The Company aggressively markets the full range of its Web hosting services
under the national Hiway brand using traditional media and online campaigns
and takes advantage of the Best brand in the California market. The Company
markets internationally and to OEMs and VARs through its RapidSite brand,
which the Company established in order to avoid channel conflicts associated
with OEM and VAR pricing structures that differ from the Company's retail
pricing.
The Company enters into strategic marketing relationships in order to expand
its marketing opportunities and increase brand awareness. For example, the
Company, under its Best and Hiway brands, currently represents two of
Microsoft's twelve preferred Web hosting service alternatives for the
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FrontPage 98 Web authoring tool. The Company currently hosts over 25,000 Web
sites created using Microsoft FrontPage, more FrontPage accounts than any of
the Company's competitors. The Company also has relationships with a number of
Internet hardware, software and services companies that refer potential
customers to Hiway. In connection with its marketing relationships, the
Company generally provides incentives to its strategic marketing partners or
customers referred by them.
DISTRIBUTION AND SALES
The Company utilizes multiple distribution channels in order to maximize
market share. These channels include direct sales, VARs and OEMs. As of May
31, 1998, the Company had 40 employees engaged in distribution and sales.
Direct Sales. The Company currently acquires most of its Web hosting
accounts through online registrations and inbound calls generated through
traditional media and online marketing campaigns. The Company offers an
automated online sales interface that allows customers to purchase services 24
hours a day and services its inbound calls through its direct sales force. In
addition, the Company maintains an outbound telesales group that seeks to
generate customer referrals by developing relationships with Web developers.
In order to sell its more complex service offerings, the Company has built a
sales group dedicated to selling commerce, co-location and connectivity
services. These account representatives handle both inbound and outbound
customer calls.
VARs. The Company has established a network of over 1,800 VARs in more than
130 countries that resell the Company's services. These VARs maintain customer
relationships after the initial sale by providing technical support, managing
customer billing and providing value-added services such as Web page design
and system integration. The Company offers its VARs a discount from the
Company's retail price on the services the VARs resell to their customers.
The Company has also developed relationships with Premier Partners in 12
countries. In addition to reselling the Company's services directly to their
customers, the Company's Premier Partners are responsible for building the
RapidSite brand in their local markets through marketing programs and by
recruiting a network of additional VARs. The Company's relationships with its
Premier Partners are generally exclusive within their geographic regions
provided the Premier Partner attains established performance targets. Premier
Partner agreements typically have a duration of one or two years, and Premier
Partners are granted a discount from the Company's retail price that is larger
than the VAR discount on the services they resell to their customers and VARs.
Premier Partners are responsible for all contact with customers including
selling, billing and support. Premier Partner relationships allow the Company
to maintain a cost-effective extended organization, serving foreign customers
in their languages and time zones. The Company has taken an ownership stake in
its Premier Partners in the United Kingdom (60%), Japan (35%), France (25%)
and Germany (20%). The Company has also established Premier Partner
relationships with companies in Brazil, Denmark, Finland, Israel, Norway,
Spain, Sweden and Switzerland.
OEMs. The Company has recently entered into a number of OEM relationships,
including relationships with two of the five RBOCs, which two in the aggregate
provide telecommunications services to approximately 30% of the U.S. business
market. The Company has also entered into an OEM relationship with SwissCom (a
European telecommunications company). The Company is in various stages of
discussion with other potential OEMs in the telecommunications and cable
industries, as well as with companies with attractive target customer bases,
such as online search engine and Internet portal companies, ISPs, marketing
companies, system integrators and others.
CUSTOMER SERVICE
The Company provides a number of different support services to its
customers. Technical questions are handled by the Technical Support and
Network Service Engineering groups, while account and
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billing questions are handled by the Customer Service and Accounts
Receivable/Accounting Solutions groups. Although the Company handles a large
portion of its customer service through e-mail and online FAQs, the Company is
committed to offering customers the opportunity to talk directly with customer
support personnel.
The Company had 47 technical support representatives on staff as of May 31,
1998. This group is responsible for answering technical questions concerning
customers' Web hosting accounts, such as how to transfer Web pages to the
Company's servers or how to use the customer control panel. These individuals
are highly trained and are available on a 24x7 basis. The Company also provides
technical support directly to the customers of certain OEMs.
The Company also has six NSEs trained to deal with the issues that face
customers with more complex services. The NSEs are located in Mountain View,
California and are the contact point for high-end electronic commerce hosting,
co-location and high-speed Internet connectivity customers. The Company
believes that the knowledge and quality of its NSEs provide the Company with an
advantage in selling its enhanced Internet services. The internal support
organizations of VARs and OEMs can also contact the Company's technical support
staff in order to resolve complex Web hosting issues.
Customers are able to contact representatives in the Company's Customer
Service and Accounts Receivable/Accounting Solutions groups during business
hours to obtain information on their accounts and resolve any issues that
arise. As of May 31, 1998, there are 40 individuals in these groups.
TECHNOLOGY AND NETWORK OPERATIONS
The Company has developed a high-performance, reliable, secure and scalable
Web hosting solution, which the Company believes provides it with a significant
competitive advantage. This solution is comprised of multiple proprietary Web
hosting platforms that incorporate automated functionality and a highly
reliable network infrastructure that includes multiple data centers and is
managed on a 24x7 basis by the Company's Network Operations Centers. The
Company's strategy in developing its Web hosting solution focuses on utilizing
proprietary technological innovations that it integrates with third-party
software and hardware.
Web Hosting Platform. The Company has developed multiple proprietary Web
hosting platforms that permit efficient hosting of over two thousand Web sites
on a single server. Although industry-standard Web servers can enable Web
hosting, the Company believes that efficiently managing large numbers of Web
sites and users on a single shared server is technologically difficult and
requires significant technological innovations. Accordingly, the Company has
focused its technology development efforts on creating various proprietary
operating system level tools to facilitate a high-density customer to server
ratio. The Company has also customized or developed Web server applications
designed to improve performance in a shared server environment and resource
monitoring tools designed to report and address scarcity of shared CPU and
memory resources. The Company's solution can scale easily, allowing server
groups to be added seamlessly and to be monitored centrally wherever they are
located. To address the diverse requirements of its customers, the Company
offers Web hosting services on a range of operating systems and computing
platforms: (i) IRIX (Silicon Graphics platforms); (ii) UNIX FreeBSD (Intel/PC
platforms); (iii) Solaris (Sun Microsystems platforms); and (iv) commencing
July 1998, Microsoft Windows NT (Intel/PC platforms).
The Company has developed proprietary software known as Autobahn that allows
the Company to provide its services on an efficient and cost-effective basis by
automating the following back-end functions: (i) order-taking and processing;
(ii) customer billing via credit cards, check, bank transfer and accounts
receivable; (iii) account provisioning and activation; (iv) server management
and monitoring; (v) coordination of the e-mail subsystem to integrate e-mail
forwarding, multiple e-mail accounts on a
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single Web site and autoresponders; (vi) inherent distributor--dealer--
customer hierarchy of all data; and (vii) support for third-party feature
"plug-ins." In addition, Autobahn incorporates the Company's Control Panel, a
front-end interface that allows a customer to set up accounts, change account
parameters and check Web site statistics quickly and easily. Autobahn was
engineered to maximize automation to achieve high levels of scalability, and
the modular design of Autobahn allows additional server groups to be supported
easily. Autobahn's language and branding independence enables international
VARs and OEMs to localize for foreign languages and customize the Control
Panel interface quickly and with minimal effort.
Network Operations. In order to provide its customers with high-quality
service, the Company has invested substantial resources in building its
network infrastructure. The Company has designed its network to avoid single
points of failure and to minimize the effect of any interruptions. The Company
has also implemented security measures to ensure that the Company's network is
protected. Monitoring systems have been put in place to identify potential
sources of failure, limit downtime and notify staff of any problems.
The Company currently has four data centers located in Boca Raton, Florida;
Mountain View, California; San Jose, California; and San Francisco,
California. All of the Company's data centers are fitted with environmental
controls, back-up generators, Cisco routers and switches, and continuous
monitoring capabilities to ensure high-quality service with minimal
interruptions. The San Jose and San Francisco data centers primarily serve the
Company's co-location and high-speed Internet connectivity customers. Both the
Florida location and the locations in California are linked to the Internet
through MCI, UUNet and Sprint via a total of six 45 Mbps T-3 connections. The
Company believes that these full transit, dedicated, diverse connections with
the primary Internet backbone carriers provide the best quality service.
Although the Company peers at the Metropolitan Area Exchange in the San
Francisco Bay Area ("MAE West") to distribute local traffic, the majority of
the Company's traffic is routed over the full transit lines to maintain
quality and avoid packet loss that may occur at the MAEs. The Company also
maintains private peering relationships with Exodus, Frontier/GlobalCenter and
AboveNet.
The Company's Network Operations Centers are located in Boca Raton, Florida
and Mountain View, California. The NOCs are responsible for monitoring the
Company's entire network on a 24x7 basis. The NOCs employ simple network
management protocol ("SNMP") software provided by Hewlett-Packard Openview.
This SNMP software allows the Company to monitor each piece of equipment,
including routers, switches and servers, and determine its load and
temperature. The NOCs also monitor all Internet connections and local
telecommunications connections, ensuring that they are functional and properly
loaded. The design of the NOCs enables NOC staff to be alerted to problems
within five seconds of occurrence, and the Company has established procedures
for rapidly resolving any technical problems that arise.
The Company's bundled shared server Web hosting services with dial-up access
and its high-speed Internet connectivity solution require a local extension of
the network. The Company maintains 13 local access numbers in the San
Francisco Bay Area and 23 local access numbers in the Los Angeles Basin. The
Company deploys Lucent Technologies' Port Master3 technology in its point of
presence ("POP") locations. All of the POPs are managed remotely with remote
power boots and console access. The Company's high-speed Internet connectivity
customers are provided local telecommunications services through either
Pacific Bell or MFS (a division of WorldCom, Inc.). The Company generally does
not maintain telecommunications lines for its high-speed Internet connectivity
customers; rather, it facilitates the customer's installation of local
telecommunications lines.
COMPETITION
The market served by the Company is highly competitive and is becoming more
so. There are few substantial barriers to entry, and the Company expects that
it will face additional competition from
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existing competitors and new market entrants in the future. The principal
competitive factors in this market include: (i) brand name; (ii) Internet
system engineering and technical expertise; (iii) quality of service, including
network capability, scalability, reliability and functionality; (iv) price; (v)
ability to maintain and expand distribution channels; (vi) customer service and
support; (vii) broad geographic presence; (viii) variety of services and
products offered; (ix) timing of introductions of new and enhanced services and
products; (x) network security; (xi) financial resources; and (xii) conformity
with industry standards. The Company may not have the resources, expertise or
other competitive factors to compete successfully in the future.
The Company's current and potential competitors include: (i) other Web
hosting and Internet services companies; (ii) national and regional ISPs; (iii)
global, regional and local telecommunications companies, including the RBOCs;
(iv) large IT outsourcing firms; (v) data center companies; and (vi) cable
companies. Many of the Company's competitors have substantially greater
financial, technical and marketing resources, larger customer bases, longer
operating histories, greater name recognition and more established
relationships in the industry than the Company. As a result, certain of these
competitors may be able to develop and expand their network infrastructures and
service offerings more rapidly, adapt to new or emerging technologies and
changes in customer requirements more quickly, take advantage of acquisition
and other opportunities more readily, devote greater resources to the marketing
and sale of their services and adopt more aggressive pricing policies than can
the Company. In addition, these competitors have entered and will likely
continue to enter into joint ventures or consortiums to provide additional
services competitive with those provided by the Company.
In an effort to gain market share, certain of the Company's competitors have
offered Web hosting services similar to those of the Company at lower prices
than those of the Company or with incentives not matched by the Company,
including free start-up and domain name registration, periods of free service,
low-priced Internet access or free software. In addition, certain of the
Company's competitors may be able to provide customers with additional
benefits, including reduced communications costs, which could reduce the
overall costs of their services relative to those of the Company. The Company
may not be able to reduce the pricing of its services or offer incentives in
response to the actions of its competitors without a material adverse impact on
its operating results. The Company also believes that the market in which it
competes is likely to encounter consolidation in the near future, which could
result in increased price and other competition that could have a material
adverse effect on the Company's business, results of operations and financial
condition.
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of copyright, trademark, service mark and
trade secret laws and contractual restrictions to establish and protect certain
proprietary rights in its services. The Company has no patented technology that
would preclude or inhibit competitors from entering the Company's market. The
Company has entered into confidentiality and invention assignment agreements
with its employees and contractors, and nondisclosure agreements with its
suppliers, distributors and certain customers in order to limit access to and
disclosure of its proprietary information. These contractual arrangements or
the other steps taken by the Company to protect its intellectual property may
not prove sufficient to prevent misappropriation of the Company's technology or
to deter independent third-party development of similar technologies. The laws
of certain foreign countries may not protect the Company's services or
intellectual property rights to the same extent as do the laws of the United
States. The Company also relies on certain technologies that it licenses from
third parties. These third-party technology licenses may not continue to be
available to the Company on commercially reasonable terms. The loss of the
ability to use such technology could require the Company to obtain the rights
to use substitute technology, which could be more expensive or offer lower
quality or performance, and therefore have a material adverse effect on the
Company's business, results of operations and financial condition.
41
<PAGE>
To date, the Company has not been notified that the Company's services
infringe the proprietary rights of third parties, but third parties could claim
infringement by the Company with respect to current or future services. The
Company expects that participants in its markets will be increasingly subject
to infringement claims as the number of services and competitors in the
Company's industry segment grows. Any such claim, whether meritorious or not,
could be time-consuming, result in costly litigation, cause service
installation delays or require the Company to enter into royalty or licensing
agreements. Such royalty or licensing agreements might not be available on
terms acceptable to the Company or at all. As a result, any such claim could
have a material adverse effect upon the Company's business, results of
operations and financial condition.
GOVERNMENT REGULATION
The Company is not currently subject to direct federal, state or local
government regulation, other than regulations that apply to businesses
generally. Only a small body of laws and regulations currently applies
specifically to access to, or commerce on, the Internet. Due to the increasing
popularity and use of the Internet, however, it is possible that laws and
regulations with respect to the Internet may be adopted at federal, state and
local levels, covering issues such as user privacy, freedom of expression,
pricing, characteristics and quality of products and services, taxation,
advertising, intellectual property rights, information security and the
convergence of traditional telecommunications services with Internet
communications. Although sections of the Communications Decency Act of 1996
(the "CDA") that, among other things, proposed to impose criminal penalties on
anyone distributing "indecent" material to minors over the Internet were held
to be unconstitutional by the U.S. Supreme Court, similar laws may be proposed,
adopted and upheld. The nature of future legislation and the manner in which it
may be interpreted and enforced cannot be fully determined and, therefore,
legislation similar to the CDA could subject the Company and/or its customers
to potential liability, which in turn could have a material adverse effect on
the Company's business, results of operations and financial condition. The
adoption of any such laws or regulations might decrease the growth of the
Internet, which in turn could decrease the demand for the services of the
Company or increase the cost of doing business or in some other manner have a
material adverse effect on the Company's business, results of operations and
financial condition. In addition, applicability to the Internet of existing
laws governing issues such as property ownership, copyright and other
intellectual property issues, taxation, libel, obscenity and personal privacy
is uncertain. The vast majority of such laws were adopted prior to the advent
of the Internet and related technologies and, as a result, do not contemplate
or address the unique issues of the Internet and related technologies. Changes
to such laws intended to address these issues could create uncertainty in the
marketplace that could reduce demand for the services of the Company or
increase the cost of doing business as a result of costs of litigation or
increased service delivery costs, or could in some other manner have a material
adverse effect on the Company's business, results of operations and financial
condition. In addition, because the Company's services are available over the
Internet virtually worldwide, and because the Company facilitates sales by its
customers to end users located in multiple states and foreign countries, such
jurisdictions may claim that the Company is required to qualify to do business
as a foreign corporation in each such state or that the Company has a permanent
establishment in each such foreign country. The Company is qualified to do
business in only Delaware, Florida and California, and failure by the Company
to qualify as a foreign corporation in a jurisdiction where it is required to
do so could subject the Company to taxes and penalties for failure to qualify
and could result in the inability of the Company to enforce contracts in such
jurisdictions. Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to the
Company's business, could have a material adverse effect on the Company's
business, results of operations and financial condition.
42
<PAGE>
EMPLOYEES
As of May 31, 1998, the Company had 274 employees, of which 53 were in sales,
distribution and marketing, 62 were in engineering and service development, 93
were in customer service and technical support and 66 were in finance and
administration. The Company believes that its future success will depend in
part upon its continued ability to attract, hire and retain qualified
personnel. The competition for such personnel is intense, and the Company may
not be able to identify, attract and retain such personnel in the future. None
of the Company's employees is represented by a labor union, and management
believes that its employee relations are good.
FACILITIES
The Company's executive offices are located in Boca Raton, Florida and
consist of approximately 8,620 square feet on Congress Road that are leased
pursuant to agreements that expire in 1999 and 2001 and approximately 70,000
square feet at Blue Lake that are leased pursuant to an agreement that expires
in 2005. The Company also leases two buildings in Mountain View, California,
aggregating approximately 23,850 square feet, under agreements that expire in
1999 and 2002. In addition, the Company leases a sales and technical office
consisting of approximately 10,600 square feet in San Francisco, California,
under an agreement that expires in 2004, and a co-location facility consisting
of approximately 4,390 square feet of space in San Jose, California pursuant to
an agreement that expires in 2001. The Company's Network Operations Centers are
located at Blue Lake in Boca Raton and in Mountain View, California. The
Company also leases space in the San Francisco Bay Area for its points of
presence. These sites are located in San Mateo, San Rafael, Pleasanton, Novato,
Rohnert Park, Nicosia and Walnut Creek, California.
43
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---------------------------- --- -----------------------------------------
<C> <C> <S>
Arthur L. Cahoon............ 42 Chairman of the Board of Directors, Chief
Executive Officer and Director
David S. Buzby.............. 38 Executive Vice President, Chief Financial
Officer and Director
Scott H. Adams.............. 34 President and Director
William G. Nesbitt.......... 30 Chief Technical Officer and Director
Steven J. Umberger.......... 37 Chief Marketing Officer and Director
Donald R. Gordon............ 47 Chief Operating Officer-East Coast
Operations
James R. Zarley............. 53 Chief Operating Officer-West Coast
Operations and Director
Thomas C. Barry(1)(2)....... 54 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mr. Cahoon has served as Chairman of the Board of Directors, Chief Executive
Officer and a director of the Company since May 1998. From October 1997 to May
1998, he was Chairman of Hiway Florida. Since March 1993, he has served as
general partner of Rock Creek Partners, Ltd., an investment company, and
executive vice president of James Dahl & Co., an investment banking company.
Since January 1995, Mr. Cahoon also has served as executive vice president of
Timberland Investment Services, LLP, an investment management company, which
he co-founded. In addition, from June 1995 to June 1996, he served as
president of QuinStone Industries, Inc., a manufacturing company. Previously,
Mr. Cahoon served as executive vice president and chief financial officer of
PetroMart, Inc., a petroleum distributor, which he co-founded, and Cain &
Bultman, Inc., a wholesale distributor. Mr. Cahoon holds a B.B.A. in
accounting and finance from Stetson University.
Mr. Buzby has served as Executive Vice President, Chief Financial Officer
and a director of the Company since May 1998. Since August 1995, he has been
Executive Vice President and Chief Financial Officer of Best. From 1992 to
January 1995, Mr. Buzby served as chief executive officer of Recycling
Resource LLC, a multi-material recycler, which he co-founded. He holds a B.A.
in political science from Middlebury College and an M.B.A. from the Harvard
Graduate School of Business.
Mr. Adams has served as President and a director of the Company since May
1998. From April 1995 to May 1998, he served as President, Treasurer and a
director of Hiway Florida, which he co-founded. From 1993 to April 1995, Mr.
Adams served as president of Adams Computer Consulting, Inc., a consulting
company, which he founded. He holds a B.A. in finance from Florida Atlantic
University.
Mr. Nesbitt has served as Chief Technical Officer and a director of the
Company since May 1998. From May 1995 to May 1998, he served in various
positions with Hiway Florida, which he co-founded, including Vice President-
Technology, Secretary and a director. From 1991 to May 1995, he was employed
by Unicom Business Systems, Inc., a computer consulting company, most recently
as president.
Mr. Umberger has served as Chief Marketing Officer and a director of the
Company since May 1998. From April 1996 to May 1998, he was Executive Vice
President--Marketing and a director of Hiway Florida. In 1992, he co-founded
and International Authorized Agents, president, an IBM business partner, where
he served as president until that company was sold in 1998. In 1992, he
founded Acme Barricades Company, a traffic safety rental company, where he
served as vice president until that company was sold
44
<PAGE>
in 1997. Mr. Umberger holds a B.A. in economics from Virginia Military
Institute and an M.B.A. from the College of William and Mary.
Mr. Gordon has served as Chief Operating Officer-East Coast Operations of
the Company since May 1998. From February 1998 to June 1998, he was Chief
Operating Officer of Hiway Florida. From 1992 to January 1998, he was a
principal of Gordon Stewart & Co., a management consulting company with a
focus on the computer industry. From 1991 to December 1997, he served as vice
president of Providence Creative Group, Inc., an advertising and marketing
firm. Mr. Gordon holds a B.A. in political science from Brown University.
Mr. Zarley has served as Chief Operating Officer-West Coast Operations and a
director of the Company since May 1998. Since December 1996, he has been
Chairman, Chief Executive Officer and a director of Best. Since May 1998, Mr.
Zarley has served as chairman of Value Click LLC, an on-line advertising
company. From 1985 to December 1996, he served as president and chief
executive officer of Quantech Corporation, a marketing company, which he
founded, and president and chief executive officer of Quantech Information
Systems, an information services company, until it was sold to Automated Data
Processing, Inc. in 1997. From 1991 to December 1998, Mr. Zarley served as
president and chief executive officer of Quantech Investment Company, which he
founded.
Mr. Barry has served as a director of the Company since May 1998. Since
December 1996, he has been a director of Best. Since December 1993, he has
also served as president of Zephyr Management, L.P., a financial consulting
and investment firm, and chairman of CZ Management/South Africa Capital Growth
Fund, each of which he founded. From 1983 to December 1993, Mr. Barry served
as president and chief executive officer of Rockefeller & Co., Inc., a
registered investment advisor. Mr. Barry is also a director of Banco Finantia,
South Africa Growth Fund Ltd., the France Growth Fund, Inc. and Levco Series
Trust. Mr. Barry holds a B.A. in Latin American studies from Yale University
and an M.B.A. from the Harvard Graduate School of Business.
Each director will hold office until the 1999 Annual Meeting of Stockholders
and until his successor is elected and qualified or until his earlier
resignation or removal. Each officer serves at the discretion of the Board of
Directors (the "Board"). The Company expects to appoint an additional outside
director within 90 days of the date of this Prospectus.
BOARD COMMITTEES
The Audit Committee of the Board consists of Mr. Barry. The Audit Committee
reviews the Company's financial statements and accounting practices, makes
recommendations to the Board regarding the selection of independent auditors
and reviews the results and scope of the audit and other services provided by
the Company's independent auditors. The Compensation Committee of the Board
consists of Mr. Barry. The Compensation Committee makes recommendations to the
Board concerning salaries and incentive compensation for the Company's
officers and employees and administers the Company's employee benefit plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Board was at any time since
the formation of the Company an officer or employee of the Company. No
executive officer of the Company serves as a member of the board of directors
or compensation committee of any entity that has one or more executive
officers serving on the Company's Board or Compensation Committee of the
Board.
DIRECTOR COMPENSATION
Directors of the Company do not receive cash compensation for their services
as directors but are reimbursed for their reasonable expenses in attending
meetings of the Board. No options have been
45
<PAGE>
granted to directors of the Company who are not also employees of the Company.
For a description of option grants to directors who are also employees of the
Company, see "--Executive Compensation."
In June 1998, the Board adopted the 1998 Directors Stock Option Plan and
reserved a total of 300,000 shares of the Company's Common Stock for issuance
thereunder. Stockholders are expected to approve the Directors Plan in July
1998. Members of the Board who are not employees of the Company, or any parent
or subsidiary of the Company, are eligible to participate in the Directors
Plan. Each eligible director who is or becomes a member of the Board on or
after the date of this offering (the "Effective Date") will automatically be
granted an option for 20,000 shares (an "Initial Grant") on the earlier of the
Effective Date or the date such director first becomes a director. Thus, Mr.
Barry is the only current director who will receive an Initial Grant. At each
annual meeting of stockholders thereafter, each eligible director will
automatically be granted an additional option to purchase 10,000 shares (an
"Annual Grant") if such director has served continuously as a member of the
Board since the date of such director's Initial Grant (or since the Effective
Date if such director did not receive an Initial Grant). Initial Grants will
vest as to 25% of the total shares on each annual anniversary of the date of
grant, provided the optionee continues as a member of the Board or as a
consultant to the Company. Annual Grants will vest as to 25% of the total
shares on each annual anniversary of the date of grant, provided the optionee
continues as a member of the Board or as a consultant to the Company. Options
will cease vesting once the individual ceases to provide services as a director
or consultant. Following the individual's cessation of services to the Company,
he or she will have seven months in which to exercise the options granted under
the Directors Plan, 12 months if the cessation of services resulted from the
individual's death or disability. The exercise price of all options granted
under the Directors Plan will be the fair market value of the Common Stock on
the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by or paid
for services rendered to the Company in all capacities during 1997 by (i) the
Chief Executive Officer of Best, (ii) the Chief Executive Officer of Hiway
Florida and (iii) each executive officer of Best or Hiway Florida as of
December 31, 1997 whose annual compensation for 1997 was in excess of $100,000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL
COMPENSATION AWARDS
------------ ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITIONS(1) SALARY($)(2) OPTIONS(#)
- ------------------------------- ------------ ------------
<S> <C> <C>
Scott H. Adams...................................... $119,433(3) --
President and Treasurer of Hiway Florida
David S. Buzby...................................... 150,008 235,010
Executive Vice President and Chief Financial
Officer of Best
William G. Nesbitt.................................. 123,825(3) --
Vice President-Technology of Hiway Florida
Steven J. Umberger.................................. 120,487 --
Executive Vice President-Marketing of Hiway Florida
Robert E. Tomasi (4)................................ 193,492 66,667
Vice President and Chief Operating Officer of Best
James R. Zarley..................................... 125,888 20,000
Chairman and Chief Executive Officer of Best
</TABLE>
- --------
(1) For the current positions of each individual continuing as an executive
officer of the Company, see "--Executive Officers and Directors" above.
(2) The current annual salary rates for Messrs. Adams, Buzby, Zarley, Nesbitt
and Umberger are $160,000, $160,000, $120,000, $160,000 and $160,000,
respectively. The current annual salary rate for Arthur L. Cahoon, the
Company's Chief Executive Officer, is $160,000.
46
<PAGE>
(3) The compensation of Messrs. Adams, Nesbitt and Umberger does not include
Subchapter S corporation distributions from Hiway Florida of $1.0 million,
$1.1 million and $528,000, respectively. See "Certain Transactions."
(4) Mr. Tomasi took a seven-month leave of absence from Best in December 1997
and is not expected to be an executive officer of the Company following
this Offering.
The following table sets forth further information regarding option grants to
each of the Named Executive Officers during 1997. In accordance with the rules
of the Securities and Exchange Commission, the table sets forth the
hypothetical gains or "option spreads" that would exist for the options at the
end of their respective terms. These gains are based on assumed rates of annual
compound stock price appreciation of 5% and 10% from the date the option was
granted to the end of the option term.
OPTION GRANTS IN 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
NUMBER OF PERCENTAGE OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED(#)(1) 1997 PER SHARE DATE 5% 10%
- ------------------------ ------------- ------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Scott H. Adams.......... -- --% $ -- -- $ -- $ --
David S. Buzby.......... 200,000 21.1 0.75 6/10/2007 94,334 239,061
35,010 3.7 0.50 6/10/2007 11,009 27,898
William G. Nesbitt...... -- -- -- -- -- --
Steven J. Umberger...... -- -- -- -- -- --
Robert E. Tomasi........ 66,667 7.0 0.75 2/24/2007 31,445 79,688
James R. Zarley......... 20,000 2.1 0.25 6/25/2007 3,144 7,969
</TABLE>
- --------
(1) These options generally are incentive stock options that were granted at
fair market value and vest over a four-year period. These options all
accelerated and became fully vested upon the closing of the Merger in May
1997.
(2) The 5% and 10% assumed annual rates of stock price appreciation are
mandated by the rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of future Common Stock
prices. The potential realizable value is based on the term of the option
at the time of grant, which is ten years for each of the options set forth
in this table.
The following table sets forth the number of shares acquired upon the
exercise of stock options during 1997 and the number of shares covered by both
exercisable and unexercisable stock options held by each of the Named Executive
Officers at December 31, 1997. Also reported are values of "in-the-money"
options, which represent the positive spread between the respective exercise
prices of outstanding stock options and $3.00, the fair market value of the
shares at December 31, 1997 as determined by the Board.
AGGREGATE OPTION EXERCISES IN 1997 AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT YEAR-END AT YEAR-END
ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ -------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Scott H. Adams.......... -- $ -- -- -- $ -- $ --
David S. Buzby (1)...... 240,780 421,365 79,937 52,367 186,381 122,584
William G. Nesbitt...... -- -- -- -- -- --
Steven J. Umberger...... -- -- -- -- -- --
Robert E. Tomasi (1).... -- -- 46,875 125,000 105,469 281,250
James R. Zarley (1)..... 333,333 583,333 1,048,085 33,333 969,585 74,583
</TABLE>
- --------
(1) The closing of the Merger on May 27, 1998 caused all of the remaining
options of Messrs. Tomasi, Buzby and Zarley to become exercisable.
47
<PAGE>
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
Best had an employment agreement with James R. Zarley, pursuant to which Mr.
Zarley held the position of Chairman of the Board, President and Chief
Executive Officer of Best, and received a salary of $10,000 per month. In
addition, pursuant to such agreement, Mr. Zarley received an option to
purchase 780,000 shares at an exercise price of $0.75 per share and 20,000
shares at an exercise price of $1.25 per share under the 1996 Plan, which vest
over a 24-month period, ending December 31, 1998. The agreement also provided
that, in the event of an initial public offering or the transfer of ownership
of 51% or more of Best, these options would become fully vested and
exercisable. As a result of the Merger, the options became fully vested on May
27, 1998. This agreement is terminable by either party upon 10 days' notice.
Best had an employment agreement with David S. Buzby, pursuant to which Mr.
Buzby held the position of Chief Financial Officer and Senior Vice President
of Business Development of Best and received a salary of $12,500 per month
plus 2% of all net private equity funding raised by Mr. Buzby prior to a
public offering. In addition, pursuant to such agreement Mr. Buzby received an
option to purchase 80,000 shares at an exercise price of $0.25 per share, and
every three months is entitled to receive "evergreen" options to purchase a
sufficient number of shares such that he will have the right to purchase 1% of
the outstanding Common Stock of Best on a fully diluted basis, capped at
145,010 shares, at an exercise price of $0.50 per share. The Company further
agreed to grant an additional option to purchase 200,000 shares at an exercise
price of $0.75 per share. The agreement also provided that these options would
vest over a 50-month period, with full acceleration upon (i) sale of all or
substantially all of Best's assets, (ii) sale of Best, (iii) a merger of Best,
(iv) a change in control of greater than 50% of Best's outstanding stock or
(v) an initial public offering of the Best's securities. As a result of the
Merger, the options became fully vested on May 27, 1998. This agreement is
terminable at will by either party.
Best had an employment agreement with Robert E. Tomasi, pursuant to which
Mr. Tomasi held the position of Chief Operating Officer at an annual salary of
$200,000. In addition, pursuant to such agreement, Mr. Tomasi received an
immediately vested option to purchase 66,667 shares of Common Stock at an
exercise price of $0.75 per share and an option to purchase 250,000 shares
under the 1996 Plan at an exercise price of $0.75 per share, which latter
option vests ratably over 48 months ending December 3, 2000. The agreement
also provided that, in the event of an initial public offering or the transfer
of ownership of 51% or more of Best, these options would become fully vested.
As a result of the Merger, the options became fully vested on May 27, 1998.
This agreement is terminable by either party upon 10 days' notice. If Mr.
Tomasi is terminated without cause, he will receive severance pay equal to one
week's salary for every four weeks of service to Best, with a minimum of 16
weeks and a maximum of 26 weeks of severance pay. In December 1997, Best
granted an unpaid leave of absence for seven months to Robert E. Tomasi.
Pursuant to the agreement whereby such leave of absence was granted, Best will
continue to provide full regular employee benefits to Mr. Tomasi, and the
options to purchase Common Stock held by him continue to vest during the leave
period. In addition, the severance provisions of Mr. Tomasi's employment
agreement were eliminated.
Hiway Florida had employment agreements with Scott H. Adams, Arthur L.
Cahoon, William G. Nesbitt and Steven J. Umberger, pursuant to which they held
the positions of President, Chairman, Vice President-Technology and Executive
Vice President-Marketing, respectively, of Hiway Florida, each at an annual
salary of $160,000. In addition, each employment agreement provides that these
individuals will receive a bonus starting in 1998 equal to the lesser of 5% of
Hiway Florida's earnings before interest and taxes (before bonus) or $140,000.
Pursuant to his employment agreement, Mr. Cahoon also purchased a warrant to
purchase 280,409 shares of Hiway Common Stock. See "Certain Transactions--
Hiway Florida Transactions"
EMPLOYEE BENEFIT PLANS
1995 Stock Option Plan. In August 1995, the Board adopted, and in October
1995 the stockholders approved, the 1995 Plan. The 1995 Plan provided for the
grant of stock options by the Company to
48
<PAGE>
employees, officers, directors, consultants, independent contractors and
advisors of the Company or any parent or subsidiary of the Company. A total of
200,000 shares of Common stock were reserved for issuance under the 1995 Plan.
Shares that are subject to issuance upon exercise of an option granted under
the 1995 Plan that cease to be subject to such option for any reason other
than exercise were again available for grant and issuance under the 1995 Plan.
The 1995 Plan is administered by the Compensation Committee of the Board. The
Compensation Committee has the authority to construe and interpret the 1995
Plan and any agreement made thereunder and make all other determinations
necessary or advisable for the administration of the 1995 Plan. The maximum
term of an option is ten years and they typically vest over a four-year
period. Vesting will stop if the optionee ceases to provide services to the
Company or any parent or subsidiary of the Company, but options will generally
remain exercisable for a period of three months following the termination of
services. If the optionee's termination is for cause, his or her options will
generally terminate immediately. If the optionee's termination is due to death
or disability, the optionee or his or her estate will generally have twelve
months in which to exercise. In the event of certain change of control
transactions, outstanding options may be assumed or substituted by the
successor corporation. If the successor corporation does not assume or
substitute the awards, the options will terminate prior to the effectiveness
of the transaction. Options granted under the 1995 Plan before its termination
in May 1996 continue to remain outstanding in accordance with their terms, but
no further options may be granted under the 1995 Plan.
1996 Stock Option Plan. In May 1996, the Board adopted and the stockholders
approved the 1996 Plan, which served as the successor to the 1995 Plan. The
1996 Plan provided for the grant of stock options by the Company to employees,
officers, directors, consultants, independent contractors and advisors of the
Company or any parent or subsidiary of the Company. A total of 4,000,000
shares of Common stock were reserved for issuance under the 1996 Plan. Shares
that are subject to issuance upon exercise of an option granted under the 1996
Plan that cease to be subject to such option for any reason other than
exercise were again available for grant and issuance under the 1996 Plan. The
1996 Plan is administered by the Compensation Committee of the Board. The
Compensation Committee has the authority to construe and interpret the 1996
Plan and any agreement made thereunder and make all other determinations
necessary or advisable for the administration of the 1996 Plan. The 1996 Plan
permits the grant of incentive stock options ("ISOs") and nonqualified stock
options ("NQSOs"). ISOs may be granted only to employees of the Company or of
any parent or subsidiary of the Company. NQSOs, stock bonuses and restricted
stock may be granted to all individuals eligible to receive grants under the
1996 Plan. The exercise price of ISOs must be at least equal to the fair
market value of the Company's Common Stock on the date of grant. The exercise
price of NQSOs must be at least equal to 85% of the fair market value of the
Company's Common Stock on the date of grant. The maximum term of an option is
ten years and they typically vest over a four-year period. Vesting will stop
if the optionee ceases to provide services to the Company or any parent or
subsidiary of the Company, but options will generally remain exercisable for a
period of one month following the termination of services. If the optionee's
termination is for cause, his or her options will generally terminate
immediately. If the optionee's termination is due to death or disability, the
optionee or his or her estate will generally have six months in which to
exercise. In the event of certain change of control transactions, outstanding
options may be assumed or substituted by the successor corporation. If the
successor corporation does not assume or substitute the awards, the vesting of
the options will accelerate prior to the effectiveness of the transaction and
such options will terminate if not exercised with three months of the
transaction. Options granted under the 1996 Plan before its termination in
March 1998 continue to remain outstanding in accordance with their terms, but
no further options may be granted under the 1996 Plan.
Hiway Florida Stock Option Plan. In January 1997, the Board of Hiway Florida
adopted, and in June 1997 the shareholders of Hiway Florida approved, the
Hiway Florida Plan. The Hiway Florida Plan provided for the grant of stock
options by the Company to employees, officers and consultants of the Hiway
Florida or any parent or subsidiary of Hiway Florida. A total of 500,000
shares of Common stock were reserved for issuance under the Hiway Florida
Plan. Shares that are subject to issuance upon exercise of an option granted
under the Hiway Florida Plan that cease to be subject to such option for
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<PAGE>
any reason other than exercise were again available for grant and issuance
under the Hiway Florida Plan. The Hiway Florida Plan is administered by the
Compensation Committee of the Board. The Compensation Committee has the
authority to construe and interpret the Hiway Florida Plan and any agreement
made thereunder and make all other determinations necessary or advisable for
the administration of the Hiway Florida Plan. The Hiway Florida Plan permits
the grant of incentive stock options ("ISOs") and nonqualified stock options
("NQSOs"). ISOs may be granted only to employees of the Company or of any
parent or subsidiary of the Company. NQSOs, stock bonuses and restricted stock
may be granted to all individuals eligible to receive grants under the Hiway
Florida Plan. The exercise price of ISOs must be at least equal to the fair
market value of the Company's Common Stock on the date of grant. The maximum
term of an option is ten years and they typically vest over a three-year
period. Vesting will stop if the optionee ceases to provide services to the
Company or any parent or subsidiary of the Company, but options will generally
remain exercisable for a period of three months following the termination of
services. If the optionee's termination is for cause, his or her options will
generally terminate immediately. If the optionee's termination is due to death
or disability, the optionee or his or her estate will generally have twelve
months in which to exercise. In the event of certain change of control
transactions, outstanding options may be assumed or substituted by the
successor corporation. If the successor corporation does not assume or
substitute the awards, the options will terminate prior to the effectiveness
of the transaction. Upon the Merger, the options outstanding under the Hiway
Florida Plan were assumed by the Company and converted into options to
purchase Common Stock of the Company. Options granted under the Hiway Florida
Plan before its termination in May 1998 continue to remain outstanding in
accordance with their terms, but no further options may be granted under the
Hiway Florida Plan.
1998 Equity Incentive Plan. In March 1998, the Board adopted, and in April
1998 the stockholders approved, the 1998 Plan. The 1998 Plan became effective
in April 1998 and serves as the successor to the 1996 Plan. Options granted
under the 1996 Plan before its termination in March 1998 continue to remain
outstanding in accordance with their terms, but no further options may be
granted under the 1996 Plan. The 1998 Plan provides for the grant of stock
options and the issuance of restricted stock by the Company to employees,
officer, directors, consultants, independent contractors and advisors of the
Company or any parent or subsidiary of the Company. A total of 1,000,000
shares of Common stock are reserved for issuance under the 1998 Plan. Shares
that are subject to (i) issuance upon exercise of an option granted under the
1998 Plan that cease to be subject to such option for any reason other than
exercise, (ii) awards granted under the 1998 Plan that are forfeited or are
repurchased by the Company at the original issue price and (iii) awards that
otherwise terminate without shares being issued will again be available for
grant and issuance under the 1998 Plan.
The 1998 Plan will terminate in March 2008, unless earlier terminated by the
Board. No person will be eligible to receive more than 500,000 shares in any
calendar year pursuant to equity awards under the 1998 Plan, other than a new
employee who will be eligible to receive no more than 800,000 shares in the
calendar year in which such employee commences employment. The 1998 Plan will
be administered by the Compensation Committee of the Board. The Compensation
Committee has the authority to construe and interpret the 1998 Plan and any
agreement made thereunder, grant equity awards and make all other
determinations necessary or advisable for the administration of the 1998 Plan.
The 1998 Plan permits the grant of incentive stock options ("ISOs") and
nonqualified stock options ("NQSOs"). ISOs may be granted only to employees of
the Company or of any parent or subsidiary of the Company. NQSOs, stock
bonuses and restricted stock may be granted to all individuals eligible to
receive grants under the 1998 Plan. The exercise price of ISOs must be at
least equal to the fair market value of the Company's Common Stock on the date
of grant. The exercise price of NQSOs must be at least equal to 85% of the
fair market value of the Company's Common Stock on the date of grant. The
purchase price of restricted stock will be determined by the Compensation
Committee. The maximum term of an option is ten years. Option typically vest
over a four-year period. Vesting will stop
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<PAGE>
if the optionee ceases to provide services to the Company or any parent or
subsidiary of the Company, but options will generally remain exercisable for a
period of three months following the termination of services. If the optionee's
termination is for cause, his or her options will generally terminate
immediately. If the optionee's termination is due to death or disability, the
optionee or his or her estate will generally have twelve months in which to
exercise. In the event of certain change of control transactions, outstanding
equity awards may be assumed or substituted by the successor corporation. If
the successor corporation does not assume or substitute the awards, the awards
will terminate prior to the effectiveness of the transaction.
1998 Employee Stock Purchase Plan. In June 1998, the Board adopted the
Purchase Plan, reserving a total of 300,000 shares of the Company's Common
Stock for issuance thereunder. Stockholders are expected to approve the
Purchase Plan in July 1998. The Purchase Plan will become effective on the
first business day on which price quotations for the Company's Common Stock are
available on the Nasdaq National Market. The Purchase Plan permits eligible
employees to acquire shares of the Company's Common Stock through payroll
deductions. The Purchase Plan is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Code. Except for the initial offering,
each offering under the Purchase Plan will be for a period of 24 months (the
"Offering Period") commencing on February 1 and August 1 of each year and
ending on July 31 and January 31 of the second year thereafter. The first
Offering Period will begin on the date on which price quotations for the
Company's Common Stock are first available on the Nasdaq National Market and
will end on July 31, 2000, unless otherwise determined by the Board. Except for
the first Offering Period, each Offering Period will consist of four purchase
periods, each six months in length ("Purchase Period"). The Board has the power
to change the duration of Offering Periods or Purchase Periods without
stockholder approval, provided that the change is announced at least 15 days
prior to the scheduled beginning of the first Offering Period or Purchasing
Period to be affected. Eligible employees may select a rate of payroll
deduction between 2% and 10% or 15% of their base compensation, subject to
certain limits set forth in the Purchase Plan. The purchase price for the
Company's Common Stock purchased under the Purchase Plan is 85% of the lesser
of the fair market value of the Company's Common Stock on the first day of the
applicable Offering Period or on the last day of the respective Purchase
Period.
401(k) Plan. The Company sponsors the Hiway Technologies, Inc. 401(k) Plan
(the "401(k) Plan"). Employees who complete three months of service with the
Company are eligible to participate ("Participants"). Participants may
contribute up to 15% of their current compensation, up to a statutorily
prescribed annual limit, to the 401(k) Plan. Each Participant is fully vested
in his or her salary reduction contributions. Participant contributions are
held in trust as required by law. Individual Participants may direct the
trustee to invest their accounts in authorized investment alternatives. The
401(k) Plan is intended to qualify under Section 401(a) of the Internal Revenue
Code so that contributions to the 401(k) Plan, and income earned on such
contributions, are not taxable to Participants until withdrawn or distributed
from the 401(k) Plan.
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<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1995, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company was or
is to be a party in which the amount involved exceeds $60,000 and in which any
director, executive officer or holder of more than 5% of the Common Stock of
the Company had or will have a direct or indirect interest other than (i)
compensation arrangements, which are described where required under
"Management," and (ii) the transactions described below.
BEST TRANSACTIONS
In July 1995, Robert D. Leppo, a greater than 5% stockholder of the Company,
and David S. Buzby, the Executive Vice President, Chief Financial Officer and a
director of the Company, purchased 600,000 shares and 100,000 shares,
respectively, of the Company's Common Stock for $150,000 and $25,000,
respectively.
In January 1996, Best issued a warrant to purchase 133,000 shares of the
Company's Common Stock, with an exercise price of $0.50 per share, to Mr. Leppo
in consideration for his guaranteeing the repayment of $800,000 loaned to Best.
In March 1997, Best repaid this loan in full and Mr. Leppo surrendered his
warrant to Best for cancellation.
In January 1996, Best issued a warrant to purchase 100,000 shares of Common
Stock to BI Partners, LLC, an affiliate of Thomas C. Barry, a director of the
Company, in connection with the loan by BI Partners, LLC of $200,000 to the
Company. The loan bore interest at 6% and was convertible into Series A
Preferred Stock of Best at the rate of $2.00 per share. The Company repaid this
loan in July 1996. The warrant, which continues to be outstanding, has an
exercise price of $0.50 and expires in January 2001.
In July 1996 and March 1997, Mr. Leppo, in July 1996 BI Partners, LLC, and in
March 1997 James R. Zarley, the Chief Operating Officer-West Coast and a
director of the Company, and Mr. Buzby purchased 2,200,000 shares, 240,000
shares, 240,000 shares and 200,000 shares of Series B Common Stock of Best,
respectively, for $2.75 million, $300,000, $300,000 and $250,000, respectively.
Each share of Series B Common Stock was converted into one share of the
Company's Common Stock prior to the Merger. See "Description of Capital Stock--
Registration Rights."
In November 1997, Best loaned Mr. Zarley and the Buzby-Vasan 1997 Trust, of
which Mr. Buzby is a trustee, $254,161 and $128,516, respectively, in
connection with their purchase of 333,333 shares and 240,781 shares,
respectively, of Best Common Stock pursuant to the exercise of options. The
notes are full recourse, bear simple interest at the rate of 8.5% per annum,
are secured by the shares that were purchased, and become due on the earliest
of (i) 30 days after the borrower's resignation or termination for cause, (ii)
the sale of any of the shares purchased with the note or (iii) November 4,
1998.
In May 1998, the Board of Best approved loans to Mr. Zarley and Mr. Buzby in
the amounts of $355,824 and $88,045 in connection with the purchase of 466,667
shares and 132,340 shares, respectively, of the Company's Common Stock pursuant
to the exercise of options. The loans bear interest at the floating rate equal
to the prime rate plus 2%. All principal of and interest on these loans become
due upon the earlier of May 1999 or three months following the Company's
initial public offering.
HIWAY FLORIDA TRANSACTIONS
In April 1995, Scott H. Adams, President and a director of the Company, and
William G. Nesbitt, Chief Technical Officer and a director of the Company, each
purchased shares which subsequently split into 1,900,000 shares of Hiway
Florida Common Stock for $100 at the founding of the Company. In the
52
<PAGE>
Merger, Mr. Nesbitt's 1,900,000 shares and Mr. Adams' 1,749,206 shares
remaining after the sales described below were exchanged for 7,861,070 shares
and 7,237,174 shares, respectively, of the Company's Common Stock.
In May 1996, Steven J. Umberger, Chief Marketing Officer and a director of
the Company, purchased 950,000 shares of Hiway Florida Common Stock for
$225,000. In the Merger, these shares were exchanged for 3,930,535 shares of
the Company's Common Stock.
During 1997, Arthur L. Cahoon, Chairman of the Board of Directors and Chief
Executive Officer of the Company, and James H. Dahl, a greater than 5%
stockholder of the Company, purchased 197,917 shares and 329,861 shares,
respectively, of Hiway Florida's Common Stock for $187,500 and $312,500. In the
Merger, these shares were exchanged for 818,862 and 1,364,768 shares of the
Company's Common Stock, respectively.
In conjunction with the employment of Mr. Cahoon as Chairman of the Board of
Directors of Hiway Florida in November 1997, Hiway Florida sold to Mr. Cahoon
for a $280,409 promissory note warrants to purchase 280,409 shares of Hiway
Florida Common Stock at an exercise price of $11.50 per share. As a result of
the Merger and the reincorporation, the warrant represents the right to
purchase 1,160,165 shares of the Company at an exercise price of approximately
$2.78.
In October 1997, Scott H. Adams, President and a director of the Company,
sold 98,016 shares, 37,699 shares and 15,079 shares of Hiway Florida Class A
Common Stock to the Dahl Children Trust, Mr. Cahoon and William L. Dahl for
$649,999, $250,003 and $99,998, respectively. In the Merger, these shares were
exchanged for 405,531 shares, 155,976 shares and 62,387 shares, respectively,
of the Company's Common Stock.
In 1996 and 1997, in connection with taxes incurred by Hiway Florida's
shareholders as a result of Hiway Florida's status as a Subchapter S
corporation and its generation of net income in 1996, 1997 and the first five
months of 1998, Hiway Florida made the following net distributions: Mr. Adams--
$52,000 in 1996 and $1.0 million in 1997; Mr. Cahoon--$12,000 in 1997; Mr.
Dahl--$148,000 in 1997 (including $5,000 in distributions to trusts for the
benefit of Mr. Dahl's children); Mr. Nesbitt--$52,000 in 1996 and $1.1 million
in 1997; and Mr. Umberger--$21,000 in 1996 and $528,000 in 1997. Of the
aggregate amounts paid in 1997, $800,000 related to the shareholders' 1996 tax
liability.
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<PAGE>
PRINCIPAL STOCKHOLDERS
Except as otherwise noted, the following table sets forth certain information
known to the Company with respect to beneficial ownership of the Company's
Common Stock as of May 31, 1998 (assuming the conversion of all Preferred Stock
to Common Stock and the issuance of Common Stock in exchange for Hiway stock
upon the Merger) by (i) each stockholder known by the Company to be the
beneficial owner of more than 5% of the Company's Common Stock, (ii) each
director of the Company, (iii) each of the Named Executive Officers and (iv)
all current executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED (2)
NUMBER OF SHARES ---------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED (1) OFFERING OFFERING(3)
- ------------------------ ---------------- ----------- ------------
<S> <C> <C> <C>
William G. Nesbitt (4).......... 7,861,070 22.6%
Scott H. Adams (4)(5)........... 7,237,174 20.8
Steven J. Umberger (4)(6)....... 3,930,535 11.3
Robert D. Leppo (7)............. 2,943,047 8.5
Arthur L. Cahoon (4)(8)......... 2,135,003 5.9
James H. Dahl (9)............... 1,770,298 5.1
Eugene P. Jarvis (10)........... 1,730,000 5.0
James R. Zarley (11)............ 1,250,150 3.5
David S. Buzby (12)............. 748,121 2.1
Thomas C. Barry
BI Partners, LLC (13).......... 620,000 1.8
Robert E. Tomasi (14)........... 516,667 1.5
All current executive officers
and directors as a group
(8 persons) (15)............... 25,571,011 69.8
</TABLE>
- --------
(1) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all
shares beneficially owned, subject to community property laws where
applicable.
(2) Percentage ownership is based on 34,794,494 shares outstanding as of May
31, 1998 and shares outstanding after this offering. Shares of
Common Stock subject to options or warrants that are currently exercisable
or exercisable within 60 days of March 31, 1998 are deemed to be
outstanding and to be beneficially owned by the person holding such
options or warrants for the purpose of computing the percentage ownership
of such person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.
(3) Assumes that the Underwriters' over-allotment option to purchase up to
shares from the Company is not exercised.
(4) The address of Messrs. Nesbitt, Adams, Umberger and Cahoon is c/o Hiway
Technologies, Inc., 5050 Blue Lake Drive, Suite 100, Boca Raton, Florida,
33431.
(5) Represents 1,000,000 shares held of record by Franklin H. Adams as Trustee
of the Scott H. Adams Grantor Retained Annuity Trust dated May 29, 1998
and 6,237,174 shares held of record by Mr. Adams.
(6) Represents 3,180,535 shares held of record by Mr. Umberger, 500,000 shares
held of record by Margaret Norine Davis as Trustee of the Steven J.
Umberger Grantor Retained Annuity Trust III dated May 29, 1998, 175,000
shares held of record by Timothy D. Umberger as Trustee of the Steven J.
Umberger Grantor Retained Annuity Trust I dated May 29, 1998 and 75,000
shares held of record by Carolyn Davis Oates as Trustee of the Steven J.
Umberger Grantor Retained Annuity Trust II dated May 29, 1998.
(7) The address of Mr. Leppo is 5655 College Ave., #250, Oakland, California
94618.
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<PAGE>
(8) Represents 250,000 shares held of record by Pam Fitch as Trustee of the
Arthur Logan Cahoon Grantor Retained Annuity Trust dated May 29, 1998,
1,885,003 shares subject to immediately exercisable warrants held of
record by Mr. Cahoon.
(9) Represents 1,364,768 shares held of record by William L. Dahl as Trustee
of the James H. Dahl Grantor Retained Annuity Trust dated May 29, 1998,
202,765 shares held of record by the Dahl Children Trust for the benefit
of James A. Dahl; 202,765 shares held of record by the Dahl Children Trust
for the benefit of Kathryn W. Dahl. The address of each individual and
entity is c/o James H. Dahl, 1200 Riverplace Blvd., Suite 902,
Jacksonville, Florida 32207.
(10) The address of Mr. Jarvis is 3401 N. California Street, Chicago, IL 60618.
(11) Represents 388,150 shares held of record by Mr. Zarley, 333,333 shares
held of record by The Zarley Family Trust dated as of May 1, 1994, 62,000
shares held of record by Quantech Investment Co., which was founded by Mr.
Zarley, and 466,667 shares subject to immediately exercisable options held
of record by Mr. Zarley. See "Certain Transactions."
(12) Represents 615,781 shares held of record by David S. Buzby and Susheela D.
Vasan, Trustees of the Buzby-Vasan 1997 Trust and 132,340 shares subject
to immediately exercisable options held of record by Mr. Buzby. See
"Certain Transactions."
(13) Represents 520,000 shares and 100,000 shares subject to warrant held of
record by BI Partners, LLC of which Mr. Barry is the founder and manager.
See "Certain Transactions."
(14) Represents 334,792 shares held of record by Mr. Tomasi, 10,000 shares held
of record by Mr. Tomasi's children and 171,875 shares subject to
immediately exercisable options held of record by Mr. Tomasi. See
"Management--Employment Agreements and Change in Control Arrangements."
(15) Includes the shares subject to options that are identified in footnotes
(11), (12) and (14).
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 60,000,000 shares of
Common Stock, $0.001 par value per share, and 10,000,000 shares of Preferred
Stock, $0.001 par value per share. As of May 31, 1998, there were outstanding
34,794,494 shares of Common Stock held of record by 149 stockholders, warrants
to purchase 3,115,123 shares of Common Stock and options to purchase 1,861,162
shares of Common Stock.
COMMON STOCK
Subject to preferences that may apply to shares of Preferred Stock
outstanding at the time, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board of Directors may from time to time
determine. Each stockholder is entitled to one vote for each share of Common
Stock held on all matters submitted to a vote of stockholders. Cumulative
voting for the election of directors is not provided for in the Company's
Certificate of Incorporation, which means that the holders of a majority of the
shares voted can elect all of the directors then standing for election. The
Common Stock is not entitled to preemptive rights and is not subject to
conversion or redemption. Upon a liquidation, dissolution or winding-up of the
Company, the assets legally available for distribution to stockholders are
distributable ratably among the holders of the Common Stock and any
participating Preferred Stock outstanding at that time after payment of
liquidation preferences, if any, on any outstanding Preferred Stock and payment
of other claims of creditors. Each outstanding share of Common Stock is, and
all shares of Common Stock to be outstanding upon completion of this offering
will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to limitations prescribed by
Delaware law, to provide for the issuance of additional shares of Preferred
Stock in one or more series, to establish from time to time the number of
shares to be included in each such series, to fix the powers, designations,
preferences and rights of the shares of each wholly unissued series and
designate any qualifications, limitations or restrictions thereon and to
increase or decrease the number of shares of any such series (but not below the
number of shares of such series then outstanding) without any further vote or
action by the stockholders. The issuance of Preferred Stock with voting or
conversion rights could adversely affect the voting power or other rights of
the holders of Common Stock and may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no current plan
to issue any shares of Preferred Stock.
WARRANTS
As of March 31, 1998, the Company had outstanding warrants to purchase
3,115,123 shares of Common Stock at a weighted average per share exercise price
of $2.69. These warrants will expire in 2001 and 2002. See "Certain
Transactions."
ANTI-TAKEOVER PROVISIONS
Delaware Law
Section 203 ("Section 203") of the Delaware General Corporation Law is
applicable to corporate takeovers of Delaware corporations. Subject to certain
exceptions set forth therein, Section 203 provides that a corporation shall not
engage in any business combination with any "interested stockholder" for a
three-year period following the date that such stockholder becomes an
interested stockholder unless (a) prior to such date, the board of directors of
the corporation approved either the business combination or the transaction
that resulted in the stockholder's becoming an interested stockholder,
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<PAGE>
(b) upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding certain shares) or (c) on or subsequent to
such date, the business combination is approved by the board of directors of
the corporation and by the affirmative votes of at least two-thirds of the
outstanding voting stock that is not owned by the interested stockholder.
Except as specified in Section 203, an interested stockholder is generally
defined to include any person that is the owner of 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within three years immediately prior to
the relevant date, and the affiliates and associates of such person. Under
certain circumstances, Section 203 makes it more difficult for an interested
stockholder to effect various business combinations with a corporation for a
three-year period, although the stockholders may, by adopting an amendment to
the corporation's certificate of incorporation or bylaws, elect not to be
governed by Section 203, effective 12 months after adoption. The Company's
Certificate of Incorporation and Bylaws do not exclude the Company from Section
203. It is anticipated that the provisions of Section 203 may encourage
companies interested in acquiring the Company to negotiate in advance with the
Board since the stockholder approval requirement would be avoided if a majority
of the directors then in office approve either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder. These provisions may have the effect of deterring hostile
takeovers or delaying changes in control of the Company, which could depress
the market price of the Common Stock and which could deprive the stockholders
of opportunities to realize a premium on shares of the Common Stock held by
them.
Charter and Bylaw Provisions
The Company's Certificate of Incorporation and Bylaws contain certain
provisions that could discourage potential takeover attempts and make more
difficult attempts by stockholders to change management. The Company's
Certificate of Incorporation provides that stockholders may not take action by
written consent but may only act at a stockholders' meeting, and that special
meetings of the stockholders of the Company may only be called by the Chairman
of the Board or a majority of the Board. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal
and to render the use of stockholder written consent unavailable as a tactic in
a proxy fight. However, such provision could have the effect of discouraging
others from making tender offers for the Company's shares, thereby inhibiting
increases in the market price of the Company's shares that could result from
actual or rumored takeover attempts. Such provision also may have the effect of
preventing changes in the management of the Company.
REGISTRATION RIGHTS
Following this Offering, the holders of approximately 5,315,123 shares of
Common Stock (issued upon conversion of Preferred Stock or issuable upon the
exercise of warrants) and their permitted transferees are entitled to certain
rights with respect to the registration of such shares ("Registrable
Securities") under the Securities Act. All such registration rights are subject
to certain conditions and limitations, including the right of the underwriters
of an offering to limit the number of shares to be included in such
registration.
Under the terms of agreements between Hiway Florida and certain individuals
and entities (the "Hiway Holders") holding warrants to purchase approximately
2,815,123 shares of Common Stock (the "Hiway Securities"), if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders exercising
registration rights, the Hiway Holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein.
At any time after the first anniversary date of the effectiveness of the
registration
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<PAGE>
of the Company's Common Stock under the Exchange Act, the Hiway Holders may
require the Company, on one occasion, to register all or a portion of their
Registrable Securities on Form S-3 (or any successor form). If a Hiway Holder
is able to sell his Hiway Securities under Rule 144 in a three-month period,
the rights of that Hiway Holder to request inclusion in any Company
registration terminate.
Under the terms of an agreement between Best and Robert D. Leppo, an 8.5%
stockholder of the Company (the "Best Preferred Holder"), of approximately
2,200,000 shares of Common Stock (the "Best Preferred Securities") issued upon
conversion of Preferred Stock, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, other than
the Company's initial public offering, the Best Preferred Holder is entitled to
notice of such registration and are entitled to include shares of such Common
Stock therein. Further, the Best Preferred Holder may require the Company to
maintain the effectiveness of such registration for approximately 180 days. The
right of the Best Preferred Holder to request inclusion in such registration
will terminate upon the earlier of (i) three years following this Offering or
(ii) such time that the Best Preferred Holder holds less than 2% of the
outstanding stock of the Company.
Under the terms of agreements between Best and the holders (the "Best Warrant
Holders") of warrants to purchase approximately 300,000 shares of Common Stock
(the "Best Warrant Securities"), if the Company proposes to register any of its
securities under the Securities Act (other than registrations related solely to
employee benefit plans or Rule 145 under the Securities Act), either for its
own account or for the account of other security holders exercising
registration rights, other than the Company's initial public offering, the Best
Warrant Holders are entitled to notice of such registration and are entitled to
include shares of such Common Stock therein. In the event the registration
Represents at least two million shares, the Best Warrant Holders may request
inclusion of 50% of the Best Warrant Securities. In the event the registration
Represents fewer than two million shares, the Best Warrant Holders may request
inclusion of the lesser of 50% of the Best Warrant Securities or 10% of the
total number of shares registered. If, at any time on or after the closing of
this Offering, all shares of Best Securities may immediately be sold under Rule
144 (or any other applicable exemption that allows for resale free of
registration) during any 3-month period, the right of Best Warrant Holders to
request inclusion in such registration will terminate.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
. Its telephone number is .
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company, and a significant public market for the Common Stock may not develop
or be sustained after this offering. Future sales of substantial amounts of
Common Stock (including shares issued upon exercise of outstanding options and
warrants) in the public market after this offering could adversely affect
market prices prevailing from time to time and could impair the Company's
ability to raise capital through sale of its equity securities. As described
below, no shares currently outstanding will be available for sale immediately
after this offering due to certain contractual restrictions on resale that
arise pursuant to arrangements entered into prior to the Merger. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price and
the Company's ability to raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding
shares of Common Stock, assuming no exercise of the Underwriters' over-
allotment option and no exercise of outstanding warrants or options. Of these
shares, the shares sold in this offering will be freely tradable without
restriction under the Securities Act unless purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act.
shares held by existing stockholders (the "Restricted Shares") are subject to
various lock-up agreements with the Company providing that, with certain
limited exceptions, the stockholder will not offer, sell, contract to sell,
grant an option to purchase, make a short sale or otherwise dispose of or
engage in any hedging or other transaction that is designed or reasonably
expected to lead to a disposition of any shares of Common Stock or any option
or warrant to purchase shares of Common Stock or any securities exchangeable
for or convertible into shares of Common Stock for a period of 120 days or 180
days after the date of this Prospectus. As a result of these lock-up
agreements, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, none of these shares will be salable
until 121 days after the date of this Prospectus. Beginning 121 days after the
date of this Prospectus, Restricted Shares and beginning 181 days after
the date of this Prospectus, Restricted Shares will be eligible for sale
in the public market, although all but shares will be subject to
certain volume limitations. The remaining Shares will become eligible for
sale in the public market, subject to certain volume limitations, on May 27,
1999. In addition, as of March 31, 1998, there were outstanding warrants and
options to purchase 5,049,532 shares of Common Stock (of which approximately
shares are expected to be issued prior to the closing of the offering
upon the exercise of warrants, and warrants to purchase approximately
shares are expected to remain outstanding following the closing of the
offering). All of such options and warrants will be subject to lock-up
agreements with the Company. Beginning 181 days after the date of this
Prospectus, 1,230,652 shares issuable upon exercise of such options will be
eligible for sale in the public market.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) 1% of the number of shares of Common Stock then
outstanding (which will equal approximately shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the filing of a Form 144 with respect
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed
to have been an affiliate of the Company at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years (including the holding period of any prior owner
except an affiliate), is entitled to sell such shares without complying with
the manner of sale, public information, volume limitation or notice provisions
of Rule 144.
Rule 701 permits resales of shares in reliance upon Rule 144 but without
compliance with certain restrictions, including the holding period
requirement, of Rule 144. Any employee, officer or director of
59
<PAGE>
or consultant to the Company who purchased his or her shares pursuant to a
written compensatory plan or contract may be entitled to rely on the resale
provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701
shares under Rule 144 without complying with the holding period requirements of
Rule 144. Rule 701 further provides that non-affiliates may sell such shares in
reliance on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until 90 days after the date of this
Prospectus before selling such shares. However, shares issued pursuant to
Rule 701 are subject to lock-up agreements with the Company and will only
become eligible for sale at the earlier of the expiration of the 180-day lock-
up agreements or no sooner than 90 days after the offering.
Immediately after this offering, the Company intends to file a registration
statement under the Securities Act covering shares of Common Stock subject to
outstanding options under the 1995 Plan, the 1996 Plan, the Hiway Florida Plan
and the 1998 Plan and reserved for issuance under the 1998 Plan, the Directors
Plan and the Purchase Plan, as well as certain shares of Common Stock subject
to outstanding warrants granted outside of such plans. Based on the number of
shares subject to outstanding options and warrants at March 31, 1998 and
currently reserved for issuance under all such plans, such registration
statement would cover approximately shares. Such registration
statement will automatically become effective upon filing. Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to affiliates of the Company, be available for sale in
the open market immediately after the 180-day lock-up agreements expire. Also
beginning 12 months after the date of this offering, holders of warrants to
purchase 2,815,123 shares of Common Stock of the Company will be entitled to
certain rights with respect to registration of such shares of Common Stock for
sale in the public market. See "Description of Capital Stock--Registration
Rights."
60
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
BT Alex. Brown Incorporated, Donaldson, Lufkin & Jenrette Securities
Corporation and Bear, Stearns & Co. Inc., have severally agreed to purchase
from the Company the following respective numbers of shares of Common Stock at
the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
BT Alex. Brown Incorporated....................................
Donaldson, Lufkin & Jenrette Securities Corporation............
Bear, Stearns & Co. Inc........................................
-----------
Total........................................................
===========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession of not in
excess of $ per share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per share to certain other dealers.
After the initial public offering, the offering price and other selling terms
may be changed by the Representatives of the Underwriters.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to , and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same
terms as those on which the shares of Common Stock offered hereby
are being offered.
Subject to applicable limitations, the Underwriters, in connection with this
offering, may place bids for or make purchases of the Common Stock in the open
market or otherwise, for long or short account or cover short positions
incurred, to stabilize, maintain or otherwise affect the price of the Common
Stock, which may be higher than the price that might otherwise prevail in the
open market. There can be no assurance that the price of the Common Stock will
be stabilized, or that stabilizing, if commenced, will not be discontinued at
any time.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil, liabilities, including
liabilities under the Securities Act of 1933, as amended.
61
<PAGE>
The Company has agreed that until 180 days after the date of this Prospectus,
it will not, without the prior written consent of BT Alex. Brown Incorporated,
sell, offer to sell, issue, distribute or otherwise dispose of any shares of
Common Stock or any options, rights or warrants with respect to any Common
Stock or register for sale under the Securities Act, any Common Stock, except
for shares issued pursuant to securities granted or issued under the 1996 Plan,
the 1998 Plan, the Directors Plan or the Purchase Plan. See "Shares Eligible
for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
Prior to the offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined through negotiations between the Company and the
Representatives of the Underwriters. Among the factors to be considered in such
negotiations are the prevailing market conditions, the price earnings ratios of
publicly traded companies that the Company and the Representatives of the
Underwriters believe to be comparable to the Company, revenues and earnings of
the Company in recent periods, estimates of the business potential of the
Company, the present state of the Company's business operations and other
factors deemed relevant.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Fenwick & West LLP, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Venture Law Group, A Professional
Corporation, Menlo Park, California.
EXPERTS
The supplemental consolidated financial statements included in this
Prospectus, except as they relate to the financial statements of Hiway Florida
as of December 31, 1996 and for the period from April 6, 1995 (date of
inception) to December 31, 1995 and for the year ended December 31, 1996, have
been audited by Coopers & Lybrand L.L.P., independent accountants, and, insofar
as they relate to the financial statements of Hiway Florida as of and for the
periods so indicated, by De Meo, Young, McGrath & Company, P.A., independent
accountants, whose reports thereon appear herein. The report of Coopers &
Lybrand L.L.P. presents their opinion on the supplemental consolidated
financial statements prepared in conformity with generally accepted accounting
principles applicable after financial statements are issued for a period which
includes the date of consummation of the Merger. Such financial statements have
been so included in reliance on the reports of such independent accountants
given on the authority of said firms as experts in auditing and accounting.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective January 20, 1998, Hiway Florida selected Coopers & Lybrand L.L.P.
as its principal auditors to replace De Meo, Young, McGrath & Company, P.A.,
who were dismissed as auditors of Hiway Florida on that date. The decision to
change independent accountants was approved by the Hiway Florida Board of
Directors and was made to facilitate the combination of the financial
statements of Hiway Florida and Best because Coopers & Lybrand L.L.P. were
Best's independent accountants. In connection with the audits for the years
ended December 31, 1995 and 1996, there were no disagreements with De Meo,
Young, McGrath & Company, P.A., on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures that,
if not resolved to the satisfaction of De Meo, Young, McGrath & Company, P.A.,
would have caused them to make reference to the matter in their report.
62
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedule thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and the exhibits and schedule thereto. Statements
contained in this Prospectus regarding the contents of any contract or any
other document to which reference is made are not necessarily complete, and, in
each instance, reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. A copy of the Registration
Statement and the exhibits and schedule thereto may be inspected without charge
at the offices of the Commission at Judiciary Plaza, 450 Fifth Street,
Washington, D.C. 20549, and copies of all or any part of the Registration
Statement may be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549 upon the payment of the fees prescribed by the
Commission. The Commission maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission. Information concerning the Company is also available for inspection
at the offices of the Nasdaq National Market, Reports Section, 1735 K Street,
N.W., Washington, D.C. 20006.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited by its independent accountants and to make
available to its stockholders quarterly reports containing unaudited financial
data for the first three quarters of each fiscal year.
63
<PAGE>
HIWAY TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Coopers &
Lybrand L.L.P.,
Independent
Accountants............ F-2
Report of De Meo, Young,
McGrath & Company,
P.A., Independent
Accountants............ F-4
Supplemental
Consolidated Balance
Sheets................. F-5
Supplemental
Consolidated Statements
of Operations.......... F-6
Supplemental
Consolidated Statements
of Stockholders'
Equity................. F-7
Supplemental
Consolidated Statements
of Cash Flows.......... F-8
Notes to Supplemental
Consolidated Financial
Statements............. F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Hiway Technologies, Inc.:
We have audited the accompanying supplemental consolidated balance sheets of
Hiway Technologies, Inc. (the Company), formerly Best Internet Communications,
Inc., as of December 31, 1996 and 1997, and the related supplemental
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying supplemental consolidated financial statements give
retroactive effect to the merger of Best Internet Communications, Inc. (Best)
and Hiway Technologies, Inc. (Hiway Florida) on May 27, 1998, which has been
accounted for as a pooling of interests as described in Notes 1 and 4 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted by the pooling of interests method in financial statements that do
not include the date of consummation. These financial statements do not extend
through the date of consummation; however, they will become the historical
consolidated financial statements of the Company after financial statements
covering the date of consummation of the business combination are issued.
We did not audit the balance sheet of Hiway Florida as of December 31, 1996,
and the statements of operations, stockholders' equity and cash flows for the
period from April 6, 1995 (date of inception) to December 31, 1995 and for the
year ended December 31, 1996, which have been included in these supplemental
consolidated financial statements. The assets of Hiway Florida represented 23%
of the Company's total supplemental consolidated assets as of December 31,
1996. The revenues of Hiway Florida represented 2% and 22% of the Company's
total supplemental consolidated revenues for the years ended December 31, 1995
and 1996, respectively. The net income of Hiway Florida was $15,000 compared to
the Company's total supplemental consolidated net loss of $551,000 for the year
ended December 31, 1995, and $1,138,000 compared to total supplemental
consolidated net income of $664,000 for the year ended December 31, 1996. The
financial statements of Hiway Florida as of December 31, 1996 and for the
period from April 6, 1995 (date of inception) to December 31, 1995 and for the
year ended December 31, 1996 were audited by other auditors whose unqualified
reports have been furnished to us and our opinion, insofar as it relates to
amounts included for Hiway Florida for such periods, is based solely on the
report of the other auditors.
In our opinion, based on our audits and the report of other auditors, the
supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles applicable after
financial statements are issued for a period which includes the date of
consummation of the business combination.
San Jose, California
May 27, 1998
F-2
<PAGE>
To the Board of Directors and Stockholders
Hiway Technologies, Inc.
The supplemental consolidated financial statements included herein have been
adjusted to give effect to the reincorporation of the Company in Delaware as
described more fully in Note 20 to the financial statements. The above report
is in the form that will be signed by Coopers & Lybrand L.L.P. upon the
effectiveness of such reincorporation assuming that, from May 27, 1998 to the
effective date of such reincorporation, no other events shall have occurred
that would affect the accompanying supplemental consolidated financial
statements or notes thereto.
Coopers & Lybrand L.L.P.
San Jose, California
May 27, 1998
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Hiway Technologies, Inc.
Boca Raton, Florida
We have audited the accompanying balance sheet of Hiway Technologies, Inc. as
of December 31, 1996 and the related statements of income, retained earnings
and cash flows for the period from April 6, 1995 (date of inception) to
December 31, 1995 and the year ended December 31, 1996. These financial
statements are the responsibility of Hiway Technologies, Inc.'s management. Our
responsibility is to express an opinion on the financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hiway Technologies, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for the
period from April 6, 1995 (date of inception) to December 31, 1995 and for the
year ended December 31, 1996, in conformity with generally accepted accounting
principles.
De meo, Young, McGrath & Company,
P.A.
September 17, 1997
Fort Lauderdale, Florida
F-4
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
--------------- MARCH 31, MARCH 31,
1996 1997 1998 1998
------ ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............ $1,588 $ 5,672 $ 6,531
Accounts receivable, net of allowance
for doubtful accounts of $373,
$1,072 and $1,198, respectively..... 1,380 2,550 3,139
Note receivable...................... -- 160 160
Inventory--equipment held for resale. 71 35 29
Prepaid expenses and other current
assets.............................. 237 297 422
Deferred taxes....................... -- 342 342
------ ------- -------
Total current assets............... 3,276 9,056 10,623
Property and equipment, net........... 4,813 8,706 9,925
Deposits and other.................... 68 196 330
Investments........................... -- 344 370
Intangible assets, net of accumulated
amortization of $101, $318 and $371,
respectively......................... 1,382 1,165 1,112
------ ------- -------
Total assets....................... $9,539 $19,467 $22,360
====== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................... $1,165 $ 1,234 $ 1,652
Accrued payroll and related
liabilities......................... 265 458 734
Other accrued liabilities............ 201 141 293
Deferred revenue..................... 981 2,578 3,246
Current portion of notes payable..... 140 225 225
Current portion of capital lease
obligations......................... 135 251 257
------ ------- -------
Total current liabilities.......... 2,887 4,887 6,407
Deferred rent......................... 105 119 232
Deferred taxes........................ -- 307 307
Notes payable, less current portion... 541 4,944 4,995
Capital lease obligations, less
current portion...................... 237 253 193
Convertible note payable.............. 800 -- --
------ ------- -------
Total liabilities.................. 4,570 10,510 12,134
------ ------- -------
Commitments (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, convertible and
redeemable, $0.001 par value:
Authorized: 10,000,000 shares;
Series B:
Authorized: 4,000,000 shares;
Issued and outstanding: 2,822,000,
3,462,000, 3,462,000 and no
shares pro forma (Note 17),
respectively..................... 3,441 4,229 4,229 $ --
Liquidation preference: $3,528,
$4,328 and $4,328, respectively
Common stock, $0.001 par value:
Authorized: 60,000,000 shares;
Issued and outstanding: 27,776,620,
31,120,237, 31,297,377 and
34,759,377 shares pro forma,
respectively...................... 28 31 31 35
Additional paid-in capital........... 1,512 4,137 4,260 8,485
Notes receivable from stockholders... -- (889) (889) (889)
Retained earnings (accumulated
deficit)............................ (12) 1,449 2,595 2,595
------ ------- ------- -------
Total stockholders' equity....... 4,969 8,957 10,226 $10,226
------ ------- ------- =======
Total liabilities and
stockholders' equity........... $9,539 $19,467 $22,360
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-5
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER THREE MONTHS ENDED
31, MARCH 31,
------------------------ ----------------------
1995 1996 1997 1997 1998
------ ------- ------- ----------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues..................... $2,011 $12,217 $26,185 $5,371 $8,844
------ ------- ------- ------ ------
Operating costs and expenses:
Cost of revenues........... 231 3,233 6,798 1,476 2,348
Sales and marketing........ 154 2,555 4,032 714 1,492
Product development and
systems engineering....... 97 1,005 2,113 355 717
General and administrative. 2,068 4,641 8,371 1,590 3,027
------ ------- ------- ------ ------
Total operating costs and
expenses................ 2,550 11,434 21,314 4,135 7,584
------ ------- ------- ------ ------
Income (loss) from
operations.................. (539) 783 4,871 1,236 1,260
Other income (expense)....... (7) -- 67 12 193
Interest expense............. (4) (118) (142) (30) (131)
------ ------- ------- ------ ------
Income (loss) before
provision for income taxes.. (550) 665 4,796 1,218 1,322
Provision for income taxes... 1 1 361 91 176
------ ------- ------- ------ ------
Net income (loss)............ $ (551) $ 664 $ 4,435 $1,127 $1,146
====== ======= ======= ====== ======
Pro forma net income data
(unaudited) (Note 17):
Income (loss) before
provision for income
taxes..................... $ (550) $ 665 $ 4,796 $1,218 $1,322
Pro forma provision for
income taxes.............. 1 33 1,925 481 530
------ ------- ------- ------ ------
Pro forma net income
(loss).................. $ (551) $ 632 $ 2,871 $ 737 $ 792
====== ======= ======= ====== ======
Pro forma basic net income
(loss) per share.......... $(0.03) $ 0.02 $ 0.10 $ 0.02 $ 0.03
====== ======= ======= ====== ======
Pro forma diluted net
income (loss) per share... $(0.03) $ 0.02 $ 0.08 $ 0.02 $ 0.02
====== ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-6
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997 AND THREE MONTHS ENDED MARCH 31,
1998
(in thousands, except share amounts)
<TABLE>
<CAPTION>
SERIES B NOTES RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE EARNINGS TOTAL
---------------- ------------------ PAID-IN FROM (ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS DEFICIT) EQUITY
--------- ------ ---------- ------ ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1995................... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of common stock
for cash, net of
issuance costs of $7... -- -- 22,622,141 22 990 -- -- 1,012
Issuance of common stock
for services rendered.. -- -- 510,000 1 25 -- -- 26
Net loss................ -- -- -- -- -- -- (551) (551)
--------- ------ ---------- ---- ------ ----- ------- -------
BALANCES, DECEMBER 31,
1995................... -- -- 23,132,141 23 1,015 -- (551) 487
Issuance of common stock
and exercise of stock
options for cash, net
of issuance costs of
$3..................... -- -- 4,509,479 5 430 -- -- 435
Issuance of common stock
for acquisitions....... -- -- 135,000 -- 67 -- -- 67
Issuance of preferred
stock for cash, net of
issuance costs of $86.. 2,822,000 3,441 -- -- -- -- -- 3,441
Net income.............. -- -- -- -- -- -- 664 664
Distributions by Hiway
Florida (a Subchapter S
corporation)........... -- -- -- -- -- -- (125) (125)
--------- ------ ---------- ---- ------ ----- ------- -------
BALANCES, DECEMBER 31,
1996................... 2,822,000 3,441 27,776,620 28 1,512 -- (12) 4,969
Issuance of common stock
and exercise of stock
options for cash....... -- -- 2,279,503 2 544 -- -- 546
Issuance of common stock
and exercise of stock
options for notes...... -- -- 1,084,114 1 608 (609) -- --
Repurchase of common
stock.................. -- -- (20,000) -- (40) -- -- (40)
Issuance of warrants for
note................... -- -- -- -- 280 (280) -- --
Issuance of warrant..... -- -- -- -- 1,233 -- -- 1,233
Issuance of preferred
stock for cash, net of
issuance costs of $12.. 640,000 788 -- -- -- -- -- 788
Net income.............. -- -- -- -- -- -- 4,435 4,435
Distributions by Hiway
Florida (a Subchapter S
corporation)........... -- -- -- -- -- -- (2,974) (2,974)
--------- ------ ---------- ---- ------ ----- ------- -------
BALANCES, DECEMBER 31,
1997................... 3,462,000 4,229 31,120,237 31 4,137 (889) 1,449 8,957
Exercise of stock
options for cash....... -- -- 177,140 -- 123 -- -- 123
Net income.............. -- -- -- -- -- -- 1,146 1,146
--------- ------ ---------- ---- ------ ----- ------- -------
BALANCES, MARCH 31, 1998
(unaudited)............ 3,462,000 $4,229 31,297,377 $ 31 $4,260 $(889) $ 2,595 $10,226
========= ====== ========== ==== ====== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-7
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
---------------------- ----------------------
1995 1996 1997 1997 1998
------ ------ ------ ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss)............. $ (551) $ 664 $4,435 $1,127 $1,146
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and
amortization................. 87 608 1,371 256 314
Amortization of intangibles... -- 101 217 58 53
Services rendered in exchange
for common stock............. 26 -- -- -- --
Provision for doubtful
accounts..................... 8 365 699 212 126
Loss on sale of property and
equipment.................... -- 39 2 -- --
Accretion of interest on
convertible debt............. -- -- -- -- 78
Deferred taxes................ -- -- (35) -- --
Changes in operating assets
and liabilities:
Accounts receivable.......... (92) (1,660) (1,869) (417) (715)
Inventory.................... (30) (41) 36 (8) 6
Prepaid expenses and other
current assets.............. (4) (233) (60) 105 (125)
Deposits..................... (34) (15) (128) (15) (134)
Accounts payable............. 360 804 69 (407) 418
Accrued liabilities.......... 150 316 133 191 428
Deferred revenue............. 115 866 1,597 427 668
Deferred rent................ 57 48 14 3 113
------ ------ ------ ------ ------
Net cash provided by
operating activities....... 92 1,862 6,481 1,532 2,376
------ ------ ------ ------ ------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of property
and equipment................ -- 47 7 -- 2
Purchases of property and
equipment.................... (1,047) (3,491) (4,955) (918) (1,535)
Issuance of note receivable... -- -- (160) -- --
Purchase of investments....... -- -- (344) -- (26)
Acquisitions.................. -- (1,312) -- -- --
------ ------ ------ ------ ------
Net cash used in investing
activities................... (1,047) (4,756) (5,452) (918) (1,559)
------ ------ ------ ------ ------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from issuance of
common stock................. 1,012 422 500 500 --
Proceeds from exercise of
stock options................ -- 13 46 6 123
Proceeds from issuance of
preferred stock.............. -- 3,441 788 788 --
Repurchase of common stock.... -- -- (40) -- --
Proceeds from (repayment of)
convertible notes............ -- 800 (800) (800) --
Proceeds from notes payable... -- 43 5,912 -- --
Principal payments on notes
payable...................... -- (79) (190) (40) (27)
Proceeds from stockholder
loans........................ 9 -- -- -- --
Repayment of stockholder
loans........................ (8) (21) -- -- --
Principal payment on capital
lease obligations............ (3) (67) (187) (45) (54)
Distributions to stockholders. -- (125) (2,974) (800) --
------ ------ ------ ------ ------
Net cash provided by (used
in) financing activities..... 1,010 4,427 3,055 (391) 42
------ ------ ------ ------ ------
Net increase in cash and cash
equivalents................... 55 1,533 4,084 223 859
Cash and cash equivalents,
beginning of period........... -- 55 1,588 1,588 5,672
------ ------ ------ ------ ------
Cash and cash equivalents, end
of period..................... $ 55 $1,588 $5,672 $1,811 $6,531
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-8
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
1. COMPANY BACKGROUND
Hiway Technologies, Inc. (the Company), formerly Best Internet
Communications, Inc. (Best), was incorporated in California on September 21,
1994. Activity from September 21, 1994 (date of inception) to December 31, 1994
was not significant and has been included in the results for the year ended
December 31, 1995. On May 27, 1998, Best merged with Hiway Technologies, Inc.
(Hiway Florida), a company based in Florida, and will change its name to Hiway
Technologies, Inc. in July 1998. Hiway Florida was formed on April 6, 1995 and
operated as a Subchapter S corporation.
The Company is a leading global provider of Web hosting and related enhanced
Internet services to small and medium sized businesses. The Company focuses on
delivering high-quality, reliable and flexible services that are backed by 24x7
customer support.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
The supplemental consolidated financial statements of the Company have been
prepared to give retroactive effect to the merger with Hiway Florida on May 27,
1998. Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted by the pooling of interests method
in financial statements that do not include the date of consummation. These
financial statements do not extend through the date of consummation; however,
they will become the historical consolidated financial statements of the
Company after financial statements covering the date of consummation of the
business combination are issued.
Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
The Company has minority investments in certain of its foreign resellers. Due
to the Company's inability to exercise significant influence over these
entities, the investments are accounted for under the cost method of
accounting.
Management Estimates:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make 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 amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-9
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with original
maturities of three months or less, and short-term borrowings from banks and
other financial institutions which are due on demand to be cash equivalents.
These instruments are stated at cost, which approximates fair value.
Fair Value of Financial Instruments:
Carrying amounts of certain financial instruments held by the Company
including cash and cash equivalents, accounts receivable, accounts payable and
other accrued liabilities approximate fair value due to their short maturities.
Based on borrowing rates currently available to the Company for loans with
similar terms, the carrying value of the notes payable and capital lease
obligations approximates fair value.
Inventory:
Inventory is stated at the lower of cost (determined on a first-in, first-out
basis) or market, and consists primarily of third party equipment for resale.
Property and Equipment:
Property and equipment is stated at cost and is depreciated on a straight
line basis over their estimated useful lives of five to seven years. Leasehold
improvements are amortized over the length of the lease or estimated useful
life, whichever is less. Major additions and betterments are capitalized, while
replacements, maintenance, and repairs that do not improve or extend the life
of the assets are charged to expense. In the period assets are retired or
otherwise disposed of, the costs and related accumulated depreciation and
amortization are removed from the accounts, and any gain or loss on disposal is
included in results of operations.
Intangible Assets:
Intangible assets consist of goodwill which arose from the acquisition of two
Internet service providers in 1996 (see Note 4) and are amortized on a
straight-line basis over their estimated useful lives of seven years. The
Company reviews the carrying value of goodwill for impairment whenever events
or changes in circumstance indicate that the carrying amount may not be
recoverable.
Revenue Recognition:
Revenues consist primarily of Web hosting and Internet service fees, set-up
fees and equipment sales. The Company generally sells its Web hosting services
for contractual periods ranging from one to three months. Revenues from these
services are recognized ratably over the contractual period. Internet service
fees consist of fixed monthly amounts that are recognized as the service is
provided. Payments received in advance of providing services are deferred until
the period such services are provided. Set-up fees and equipment sales are
recognized when installation is completed.
F-10
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
Advertising:
The Company charges advertising costs to expense as they are incurred.
Advertising expense for the years ended December 31, 1995, 1996 and 1997 was
$113, $988 and $1,353, respectively.
Product Development:
Product development expenses are charged to operations as incurred.
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes." Under SFAS 109, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to affect taxable income. Valuation
allowances are established when, in management's estimate, there is uncertainty
over the recovery of deferred tax assets. The provision for income tax is
comprised of taxes payable for the current period, plus the net change in
deferred tax amounts during the period.
Income taxes are recognized in these consolidated financial statements for
the operations of Best which was a C Corporation during all periods presented.
Because Hiway Florida was a Subchapter S corporation during all periods
presented, the income taxes for Hiway Florida's operations were the
responsibility of that company's stockholders. Pro forma income tax expenses,
as though both Best and Hiway Florida reported on a combined basis as a C
corporation is disclosed in Note 17.
Unaudited Interim Financial Information:
The accompanying interim balance sheet as of March 31, 1998 and the
statements of operations and cash flows for the three months ended March 31,
1997 and 1998 together with the related notes are unaudited but include all
adjustments, consisting of only normal recurring adjustments, which the Company
considers necessary to present fairly, in all material respects, the financial
position, as of March 31, 1998 and the results of operations and cash flows for
the three months ended March 31, 1997 and 1998. Results for the three months
ended March 31, 1997 and 1998 are not necessarily indicative of results for an
entire year.
Recent Accounting Pronouncements:
In 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which is
effective for the year ending December 31, 1998.
In March 1998, the AICPA issued Statement of Position (SOP) 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use." The
Company is reviewing the impact of SOP 98-1, which will be effective for the
year ending December 31, 1999.
F-11
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
3. BUSINESS RISKS AND CREDIT CONCENTRATION
The Company operates in the intensely competitive Internet industry which is
characterized by rapid technological change, short product life cycles, and
heightened competition. Significant technological changes in the industry could
affect operating results adversely.
Financial instruments that potentially subject the Company to concentrations
of credit risk comprise principally cash and cash equivalents, trade accounts
receivable, and other receivables and deposits. As of December 31, 1997, the
Company's cash and cash equivalents are deposited with numerous domestic
financial institutions. With respect to accounts receivable, the Company's
customer base is dispersed across many different geographic areas. The Company
monitors customers' payment history and establishes reserves for bad debt as
warranted. In addition to individual customers, the Company also provides Web
hosting services to resellers who in turn provide services to their own
customers.
4. MERGERS AND ACQUISITIONS
Merger with Hiway Florida:
On May 27, 1998, the Company merged with Hiway Florida, a provider of Web
hosting services. Under the terms of the merger agreement, each share of Hiway
Florida common stock was exchanged for 4.1374 shares of the Company's common
stock. The Company issued approximately 21.8 million shares of common stock in
exchange for all the outstanding shares of Hiway Florida. The Company also
assumed and exchanged all options and warrants to purchase Hiway Florida stock
for options and warrants to purchase approximately 3 million shares of the
Company's common stock. The transaction was accounted for as a pooling of
interest and accordingly all prior financial statements have been restated to
combine the results of Best and Hiway Florida for all periods presented.
Separate and combined results of operations for the periods prior to the
merger are as follows:
<TABLE>
<CAPTION>
THREE
YEAR ENDED DECEMBER MONTHS
31, ENDED
------------------------ MARCH 31,
1995 1996 1997 1998
------ ------- ------- ---------
<S> <C> <C> <C> <C>
Revenues:
Best................................... $1,965 $ 9,517 $15,785 $4,554
Hiway Florida.......................... 46 2,700 10,400 4,290
------ ------- ------- ------
Combined............................... $2,011 $12,217 $26,185 $8,844
====== ======= ======= ======
Net income (loss)--historical:
Best................................... $ (566) $ (474) $ 1,662 $ 311
Hiway Florida.......................... 15 1,138 2,773 835
------ ------- ------- ------
Combined............................... $ (551) $ 664 $ 4,435 $1,146
====== ======= ======= ======
</TABLE>
Other Acquisitions:
In July 1996, the Company acquired certain assets and the ongoing operations
of two Internet service providers for a total of $2,076. The aggregate purchase
price comprised $1,312 in cash, $697 in
F-12
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
notes payable to sellers, and 135,000 shares of common stock valued at $67. The
purchase price was allocated to the net tangible assets acquired ($593) and to
goodwill ($1,483).
5. NOTE RECEIVABLE
The note receivable is due from one of the Company's partners in a foreign
reseller. The note is uncollateralized, bears interest at the rate of 12% and
is due on demand.
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Network and computer equipment................................ $4,661 $8,841
Furniture and fixtures........................................ 124 471
Leasehold improvements........................................ 566 1,199
Other......................................................... 148 252
------ ------
5,499 10,763
Less accumulated depreciation and amortization................ 686 2,057
------ ------
$4,813 $8,706
====== ======
</TABLE>
Included in network and computer equipment are $490 and $776 of equipment
acquired under capital leases at December 31, 1996 and 1997, respectively.
Accumulated amortization related to such capital leases was $40 and $158 at
December 31, 1996 and 1997, respectively. Network and computer equipment also
includes $1,064 of equipment not yet placed in service at December 31, 1997.
7. CAPITAL LEASE OBLIGATIONS
The Company leases network equipment under several capital leases. The
agreements require the Company to maintain liability and property insurance.
Capital leases at December 31, 1997 expire at various dates through September
2000 and bear interest ranging from 5.8% to 18.5%. Future minimum lease
payments as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998................................................................... $284
1999................................................................... 209
2000................................................................... 58
----
551
Less amount representing interest...................................... 47
----
Present value of minimum lease payments................................ 504
Less current portion................................................... 251
----
$253
====
</TABLE>
F-13
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
8. COMMITMENTS
The Company rents office facilities and equipment under several operating
leases which expire at various times through May 2005. Rent expense charged to
operations was $155, $345 and $634 for the years ended December 31, 1995, 1996,
and 1997, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 786
1999.................................................................. 861
2000.................................................................. 1,148
2001.................................................................. 1,140
2002.................................................................. 977
Thereafter............................................................ 1,818
------
Total commitments..................................................... $6,730
======
</TABLE>
9. NOTES PAYABLE
Notes payable comprise the following:
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1996 1997
---- ------
<S> <C> <C>
Seller notes..................................................... $649 $ 475
Bank notes....................................................... 32 927
Senior unsecured notes........................................... -- 3,767
---- ------
681 5,169
Less current portion............................................. 140 225
---- ------
$541 $4,944
==== ======
</TABLE>
The seller notes bear interest at 8% per annum and are repayable in monthly
equal installments through July 2001. These notes resulted from the
acquisitions made in 1996 (see Note 4).
The bank notes bear interest at 9.75% to 10% per annum and are repayable in
equal monthly installments through October 2001. The bank notes are
collateralized by the Company's assets and require the Company to comply with
certain covenants including a minimum quick ratio, a minimum tangible net
worth, a maximum ratio of total liabilities to tangible net worth, a minimum
monthly subscriber additions to disconnections ratio, and minimum cash
requirements. The Company also has an unused line of credit with this bank in
the amount of $500. The line of credit bears interest at 1% above the bank's
prime rate, and advances are limited to 75% of eligible accounts receivable.
On December 19, 1997, the Company issued $5,000 of 5% Senior Unsecured Notes
(the Notes) with detachable warrants to purchase 1,654,962 shares of common
stock. The warrants can be exercised for $3.02 per share, at any time after
December 19, 1997. The Notes are uncollateralized and bear interest at 5% from
December 19, 1997 until January 1, 2000 and then bear interest at 9% through
maturity on
F-14
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
December 31, 2002. Quarterly payments of interest only are due beginning March
31, 1998 with the outstanding principal balance due on December 31, 2002. The
notes may be prepaid at the option of the Company, subject to certain
conditions, at a premium of ten percent.
In connection with the issuance of the Notes and warrants, the Company
attributed a portion of the proceeds to the warrants, which has been recorded
as additional paid in capital and as a reduction to the face amount of the
Notes, thereby increasing effective interest to 13.895% and increasing interest
expense for the year ended December 31, 1997 to $42.
Future payments of the notes payable as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.................................................................. $ 225
1999.................................................................. 437
2000.................................................................. 448
2001.................................................................. 292
2002.................................................................. 3,767
------
$5,169
======
</TABLE>
10. CONVERTIBLE NOTE
The convertible note was repaid in March 1997 and warrants issued to the
noteholder were canceled. In addition, a warrant, held by a guarantor of the
note, to purchase 266,667 shares of common stock was replaced by a warrant to
purchase 200,000 shares of common stock at $0.50 per share which was
immediately exercisable. The cost related to the issuance of the warrant was
not significant.
11. NOTES RECEIVABLE FROM STOCKHOLDERS
Notes receivable from stockholders comprise loans made to stockholders in
connection with the exercise of options for the Company's common stock or to
purchase the Company's common stock. The loans are with full recourse and bear
interest at rates from 2% above prime to 8.5%. The loans are due between 1998
to 2000.
The Company also issued a warrant to purchase 1,160,166 shares of common
stock at $2.78 per share to a shareholder in return for a promissory note in
the amount of $280. The note bears interest at prime and is due in 2000.
12. STOCKHOLDERS' EQUITY
In connection with the issuance of convertible promissory notes in 1996, the
Board of Directors designated 500,000 shares of the Serial preferred stock as
Series A preferred stock. As at December 31, 1997, the convertible promissory
notes had been repaid by the Company and there were no conversions into the
Series A preferred stock.
In 1996, the Board of Directors designated 4,000,000 shares of the Serial
preferred stock as Series B preferred stock.
F-15
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
Series B preferred stock is convertible into common stock at the option of
the holder on a one-for-one basis, provides for voting rights equal to the
number of shares of common stock into which it converts, and entitles the
holder to receive annual dividends at the rate of $.0625 per share when and if
declared by the Board of Directors (and after any Series A dividends have been
paid). The dividends are noncumulative.
Conversion is automatic upon either the consent of two-thirds of the
outstanding shares of the Series B preferred stock, or upon the conversion of
at least two-thirds of the shares of the Series B preferred stock, or
immediately prior to the closing of a public offering of the Company's common
stock for which the aggregate proceeds are not less than $5,000 or the offering
price is not less than $5.00 per share. At December 31, 1997, 4,000,000 shares
of the Company's common stock have been reserved for conversion.
The holders of Series B preferred stock are also entitled to a liquidation
distribution preference of $1.25 per share plus all accrued and unpaid
dividends. Any remaining assets are distributed to the holders of common stock
on a pro rata basis.
The shares of Series B preferred stock are redeemable in cash at any time at
the option of the Board of Directors, in whole or in part, at a price per share
equal to the initial sales price plus all declared but unpaid dividends.
13. STOCK OPTION PLAN
Under the Company's 1996 Stock Option Plan, as amended, (the Plan) the
Company may issue incentive options to purchase up to 4,000,000 shares of
common stock to employees at prices not lower than fair market value at the
date of grant, as determined by the Board of Directors. Supplemental stock
options (options that do not qualify as incentive stock option) may be granted
to employees, directors and consultants, at prices not lower than 85% of fair
market value at the date of grant, as determined by the Board of Directors. The
Board also has the authority to set the term of the options (no longer than ten
years from date of grant). Options granted generally vest over three to four
years. Unexercised options expire at least 30 days after termination of
employment with the Company.
F-16
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER AVERAGE
FOR OF EXERCISE AGGREGATE EXERCISE
GRANT SHARES PRICE PRICE PRICE
---------- ---------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Options reserved at Plan
inception.............. 4,000,000
Options granted......... (1,156,500) 1,156,500 $0.05-$0.50 $ 150,750 $0.13
---------- ---------- ----------
Balances, December 31,
1995................... 2,843,500 1,156,500 150,750 $0.13
Options granted......... (2,721,500) 2,721,500 $0.50-$0.75 1,562,250 $0.57
Options exercised....... -- (124,175) $0.05-$0.50 (13,713) $0.11
Options canceled........ 592,827 (592,827) $0.10-$0.50 (215,713) $0.36
---------- ---------- ----------
Balances, December 31,
1996................... 714,827 3,160,998 1,483,574 $0.47
Options granted......... (1,508,157) 1,508,157 $0.36-$3.00 1,470,659 $0.98
Options exercised....... -- (1,135,166) $0.05-$1.25 (454,548) $0.40
Options canceled........ 1,418,913 (1,418,913) $0.50-$1.25 (733,337) $0.52
---------- ---------- ----------
Balances, December 31,
1997................... 625,583 2,115,076 1,766,348 $0.84
Options granted......... (47,500) 47,500 $3.00 142,500 $3.00
Options exercised....... (164,640) $0.50-$1.25 (123,207) $0.75
Options canceled........ 63,527 (63,527) $0.50-$3.00 (86,179) $1.36
---------- ---------- ----------
Balances, March 31,
1998................... 641,610 1,934,409 $1,699,462 $0.88
========== ========== ==========
</TABLE>
The following table summarizes information with respect to stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS CURRENTLY
OPTIONS OUTSTANDING EXERCISABLE
-----------------------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.10................... 140,000 7.07 $0.10 140,000 $0.10
$0.25................... 46,000 7.50 $0.25 46,000 $0.25
$0.36................... 206,870 9.45 $0.36 68,958 $0.36
$0.50................... 240,122 8.62 $0.50 81,199 $0.50
$0.75................... 1,054,334 9.04 $0.75 212,033 $0.75
$1.25................... 108,750 9.47 $1.25 10,681 $1.25
$1.75................... 172,500 9.84 $1.75 1,980 $1.75
$2.00................... 128,000 9.84 $2.00 -- --
$3.00................... 18,500 9.92 $3.00 -- --
--------- -------
2,115,076 560,851 $0.48
========= =======
</TABLE>
The following information concerning the Company's stock option plan is
provided in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company accounts for the plan in accordance with APB No. 25
and related Interpretations.
F-17
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Risk-free interest rates..................................... 6.25% 6.55%
Expected volatility.......................................... 0% 0%
Expected life................................................ 5 years 5 years
Dividends.................................................... None None
</TABLE>
The weighted average fair value of the options granted in 1996 and 1997 was
$0.42 and $0.72, respectively.
The following pro forma net income (loss) information has been prepared as if
the Company had followed the provisions of SFAS No. 123:
<TABLE>
<CAPTION>
1996 1997
----- ------
<S> <C> <C>
Net income:
As reported (pro forma)...................................... $ 632 $2,871
Pro forma.................................................... $ 582 $2,587
Basic net income per share:
As reported (pro forma)...................................... $0.02 $ 0.10
Pro forma.................................................... $0.02 $ 0.09
Diluted net income per share:
As reported (pro forma)...................................... $0.02 $ 0.08
Pro forma.................................................... $0.02 $ 0.07
</TABLE>
These pro forma amounts may not be representative of the effects on reported
net income (loss) for future years as options vest over several years and
additional awards are generally made each year.
14. INCOME TAXES
The Company's provision for income taxes for the year ended December 31, 1997
is as follows:
<TABLE>
<S> <C>
Current provision:
Federal............................................................ $(314)
State.............................................................. (81)
-----
(395)
-----
Deferred benefit:
Federal............................................................ 33
State.............................................................. 1
-----
34
-----
Provision for income taxes........................................... $(361)
=====
</TABLE>
The Company recorded a $1 tax provision for both years ended December 31,
1995 and 1996 for minimum state income tax. No other income taxes were payable
since Best incurred losses during these periods and Hiway Florida operated as a
Subchapter S corporation (see Note 17 for pro forma provision for income tax).
F-18
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
The Tax Reform Act of 1986 limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. Since the Company underwent a change in ownership
during 1996 as defined in the Internal Revenue Code, the net operating loss
carryforwards of $995 and $940 at December 31, 1996 for Federal and California
purposes, respectively, could not be fully utilized in 1997. At December 31,
1997 the Company had net operating loss carryforwards of approximately $49 and
$47 for Federal and California purposes, respectively. These carryforwards
expire in 2003 through 2012 if not utilized beforehand.
The Company's deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Deferred tax assets (current):
Net operating losses....................................... $ 426 $ 21
Allowance for doubtful accounts............................ 144 208
Deferred rent.............................................. 45 51
Accrued liabilities........................................ 33 35
Other...................................................... 1 28
Deferred tax assets (non-current):
Amortization............................................... 30 72
------ ------
Deferred tax assets...................................... 679 415
Deferred tax liabilities (non-current):
Depreciation............................................... (239) (380)
Other...................................................... (30) --
------ ------
Deferred tax liabilities................................. (269) (380)
Valuation allowance...................................... (410) --
------ ------
Net deferred tax asset................................... $ -- $ 35
====== ======
</TABLE>
The deferred tax valuation allowance decreased by $410 in 1997. Management
believes that realizability of the net deferred tax asset as of December 31,
1997 is more likely than not.
The following schedule reconciles the differences between the federal income
tax rate and the effective income tax rate for the year ended December 31,
1997:
<TABLE>
<S> <C>
Statutory rate....................................................... 34.0%
State taxes, net..................................................... 1.1
Change in valuation allowance........................................ (8.5)
Effect of income not subject to income taxes due to Hiway Florida's
Subchapter S status................................................. (19.7)
Other................................................................ 0.6
-----
Effective tax rate................................................... 7.5%
=====
</TABLE>
F-19
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
15. EMPLOYEE BENEFIT PLAN
In September 1995, the Company adopted a 401(k) Plan which qualifies under
Section 401(k) of the Internal Revenue Code of 1986. The Plan provides
retirement benefits through tax deferred salary deductions for all eligible
employees meeting certain age and service requirements. The Company may make
discretionary matching contributions on behalf of employees. All employee
contributions are 100% vested. The Company did not make any contribution to the
Plan during the years ended December 31, 1995, 1996 or 1997.
16. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Taxes paid............................................... $ 1 $ 56 $ 283
Interest paid............................................ 4 103 122
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITY:
Note payable issued for rent deposit..................... 18 406 --
Equipment purchased under capital lease.................. 36 490 286
Common stock issued in acquisitions...................... -- 67 --
Note issued in acquisitions.............................. -- 697 --
Shareholders contributions of equipment in exchange for
stockholder loans payable............................... 21 -- --
Allowances on trade in of equipment...................... -- 34 --
Exercise of stock options for notes...................... -- -- 409
Issuance of common stock for note........................ -- -- 200
Issuance of warrant for note............................. -- -- 280
Issuance of warrant...................................... -- -- 1,233
</TABLE>
F-20
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
17. UNAUDITED PRO FORMA DATA
The statement of operations includes a pro forma provision for income taxes
to reflect income tax expense as if both entities in the merged company, Best
and Hiway Florida (which operated as a Subchapter S corporation), had been a C
corporation on a combined basis for all periods presented. The components of
the pro forma provision for income taxes consisted of:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------- ----------------
1995 1996 1997 1997 1998
------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Current provision:
Federal...................... $ -- $ 79 $ 1,636 $ 409 $ 337
State........................ 1 22 428 107 125
------ ------ --------- ------- -------
1 101 2,064 516 462
------ ------ --------- ------- -------
Deferred provision (benefit):
Federal...................... -- (58) (138) (34) 75
State........................ -- (10) (1) (1) (7)
------ ------ --------- ------- -------
-- (68) (139) (35) 68
------ ------ --------- ------- -------
Pro forma provision for income
taxes......................... $ 1 $ 33 $ 1,925 $ 481 $ 530
====== ====== ========= ======= =======
</TABLE>
Immediately prior to the closing of the merger, all the convertible preferred
stock outstanding were voluntarily converted into an aggregate of 3,462,000
shares of common stock. At March 31, 1998, the unaudited pro forma
stockholders' equity is adjusted for the conversion of the convertible
preferred stock outstanding at March 31, 1998 and is disclosed on the face of
the balance sheet.
F-21
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
18. EARNINGS PER SHARE (EPS) DISCLOSURES
In accordance with the requirements of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," a reconciliation of the numerator and
denominator of basic and diluted EPS is provided as follows.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Numerator-Basic EPS
Pro forma net income
(loss) (unaudited).... $ (551) $ 632 $ 2,871 $ 725 $ 792
========== ========== ========== ========== ==========
Denominator-Basic EPS
Weighted average
common stock
outstanding........... 16,871,100 25,877,800 29,875,800 29,599,200 31,157,700
========== ========== ========== ========== ==========
Basic earnings (loss)
per share.............. $ (0.03) $ 0.02 $ 0.10 $ 0.02 $ 0.03
========== ========== ========== ========== ==========
Numerator--Diluted EPS
Pro forma net income
(loss) (unaudited).... $ (551) $ 632 $ 2,871 $ 737 $ 792
Interest on
convertible debt (net
of related tax
effect)............... -- -- 6 6 --
---------- ---------- ---------- ---------- ----------
Pro forma net income
(loss) (unaudited)..... $ (551) $ 632 $ 2,877 $ 743 $ 792
========== ========== ========== ========== ==========
Denominator-Diluted EPS
Denominator--Basic
EPS................... 16,871,100 25,877,800 30,020,500 29,599,200 31,157,700
Effect of Dilutive
Securities:
Common stock options. -- 882,100 1,351,100 786,900 1,183,700
Warrants............. -- 68,500 175,000 150,000 240,600
Convertible preferred
stock............... -- 1,293,400 3,212,000 2,895,300 3,462,000
Convertible debt..... -- -- 83,300 333,300 --
---------- ---------- ---------- ---------- ----------
16,871,100 28,121,800 34,841,900 33,764,700 36,044,000
========== ========== ========== ========== ==========
Diluted earnings (loss)
per share.............. $ (0.03) $ 0.02 $ 0.08 $ 0.02 $ 0.02
========== ========== ========== ========== ==========
</TABLE>
For the years ended December 31, 1996 and 1997 and the three months ended
March 31, 1997, certain convertible debt and warrants were excluded from the
determination of the diluted EPS since their effect would have been
antidilutive.
19. SEGMENT REPORTING
The Company operates in one industry segment.
The distribution of revenues by geographic area was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
North America...................................... $ 2,011 $ 11,052 $ 22,507
Europe............................................. -- 593 2,194
Rest of the world.................................. -- 572 1,484
------- -------- --------
$2,011 $ 12,217 $ 26,185
======= ======== ========
</TABLE>
F-22
<PAGE>
HIWAY TECHNOLOGIES, INC.
(FORMERLY BEST INTERNET COMMUNICATIONS, INC.)
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH
31, 1997 AND 1998 IS UNAUDITED)
(in thousands, except for share and per share amounts)
20. SUBSEQUENT EVENTS
In April 1998, the Board of Directors and the stockholders approved the
adoption of a 1998 Equity Incentive Plan (the Plan) which serves as the
successor of the 1996 Stock Option Plan. The Board of Directors also
authorized, and the stockholders approved, the reservation of an additional
1,000,000 shares of common stock for issuance under the Plan. Additionally, the
Board of Directors and the stockholders approved certain amendments to the
Company's Certificate of Incorporation and Bylaws.
In June 1998, the Board of Directors approved the reincorporation of the
Company in Delaware. The reincorporation is subject to the stockholders'
approval. Under the new Certificate of Incorporation in Delaware, the Company
is authorized to issue 60,000,000 shares of common stock at $0.001 par value
and 10,000,000 shares of preferred stock at $0.001 par value.
In June 1998, the Board of Directors authorized management of the Company to
file a Registration Statement with the Securities and Exchange Commission
relating to a public offering of the Company's common stock.
F-23
<PAGE>
Hiway Technologies
Narrative Description of Inside Back Cover
Inside Back Cover Portrait
Top two-thirds of page is a diagram showing a stylized globe of the earth
which has been altered to show the majority of the eastern and western
hemispheres simultaneously (including the continents of North and South
America, Antarctica, Africa, Europe, Asia and a portion of Australia) with
latitude lines tracing from side-to-side and longitude lines tracing from
pole-to-pole; super-imposed over the globe are four captions with headings:
Convenience
Hiway has implemented proprietary software tools that allow its customers to
easily manage their Web sites online. The Company provides direct 24x7
technical support and local support through a global network of value added
resellers.
Performance
Hiway's Web hosting solutions provide enterprises with mission-critical
performance, ensuring that Web sites load rapidly and are continuously online
and functional. The Company has six T-3 fiber optic network connections, Cisco
routers and Silicon Graphics servers.
Reliability
All of Hiway's systems are designed to achieve redundancy. The Company's data
centers protect Web site data through the use of back-up power sources, secure
physical facilities, spare servers, regular back-ups and a fault tolerant
hosting platform. Hiway provides a 99.9% uptime warranty for all of the Web
sites that it hosts.
Global Presence
Hiway's network of value added resellers provides the Company with a local
presence in over 130 countries. These VARs are responsible for building the
RapidSite brand internationally.
Beneath the globe are a list with the heading "RapidSite Countries" above the
left-most column of the list and nine columns listing 132 nations:
Column 1:
United Arab Emirates
Antigua and Barbuda
Netherlands Antilles
Argentina
American Samoa
Austria
Australia
Aruba
Azerbaijan
Bosnia and Herzegowina
Barbados
Bangladesh
Belgium
Bulgaria
Bahrain
Bermuda
Bolivia
Column 2:
Brazil
Bahamas
Belarus
Belize
Canada
Switzerland
Chile
China
Colombia
Costa Rica
Cyprus
Czech Republic
Germany
Denmark
Dominican Republic
Ecuador
Column 3:
Estonia
Egypt
Spain
Finland
France
United Kingdom
Grenada
Georgia
Ghana
Gibraltar
Guadeloupe
Greece
Guatemala
Guam
Guyana
Column 4:
Hong Kong
Honduras
Croatia
Hungary
Indonesia
<PAGE>
Ireland
Israel
India
Iran
Iceland
Italy
Jamaica
Jordan
Japan
Column 5:
Kenya
Saint Kitts and Nevis
Korea, Democratic
Korea, Republic of
Kuwait
Cayman Islands
Lebanon
Saint Lucia
Sri Lanka
Luxembourg
Morocco
Monaco
Column 6:
Moldova, Republic of,
Macedonia, The Former
Macau
Martinique
Malta
Mexico
Malaysia
Namibia
New Caledonia
Nigeria
Nicaragua
Netherlands
Column 7:
Norway
Nepal
New Zealand
Oman
Panama
Peru
French Polynesia
Papua New Guinea
Philippines
Pakistan
Poland
Puerto Rico
Portugal
Paraguay
Column 8:
Qatar
Romania
Russian Federation
Rwanda
Saudi Arabia
Sudan
Sweden
Singapore
Slovenia
Slovakia (Slovak Republic)
Senegal
El Salvador
Swaziland
Turks and Caicos Islands
Thailand
Column 9:
Tunisia
Turkey
Trinidad and Tobago
Taiwan
Ukraine
United States Minor
United States of America
Uruguay
Vatican City See
Saint Vincent
Venezuela
Virgin Islands (British)
Virgin Islands (U.S.)
Viet Nam, Socialist
Yugoslavia
South Africa
Zambia
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 17
Capitalization............................................................ 18
Dilution.................................................................. 19
Selected Consolidated Financial Data...................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 30
Management................................................................ 44
Certain Transactions...................................................... 52
Principal Stockholders.................................................... 54
Description of Capital Stock.............................................. 56
Shares Eligible for Future Sale........................................... 59
Underwriting.............................................................. 61
Legal Matters............................................................. 62
Experts................................................................... 62
Changes in Independent Accountants........................................ 62
Additional Information.................................................... 63
Index to Financial Statements and Schedules............................... F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
[HIWAY TECHNOLOGIES LOGO APPEARS HERE]
Common Stock
-----------
PROSPECTUS
-----------
BT Alex. Brown
Donaldson, Lufkin & Jenrette
Securities Corporation
Bear, Stearns & Co. Inc.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses to be paid by the
Registrant in connection with the sale of the shares of Common Stock being
registered hereby. All amounts are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market filing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $16,963
NASD filing fee..................................................... 6,250
Nasdaq National Market filing fee................................... 50,000
Accounting fees and expenses........................................ *
Legal fees and expenses............................................. *
Road show expenses.................................................. 20,000
Printing and engraving expenses..................................... *
Blue sky fees and expenses.......................................... 10,000
Transfer agent and registrar fees and expenses...................... 5,000
Miscellaneous....................................................... *
-------
Total............................................................... $ *
=======
</TABLE>
- --------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Certificate of Incorporation Represents a provision that
eliminates the personal liability of its directors to the Registrant or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the Delaware General Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit. In
addition, as permitted by Section 145 of the Delaware General Corporation Law,
the Bylaws of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and executive officers to the fullest extent permitted
by the Delaware General Corporation Law; (ii) the Registrant may, in its
discretion, indemnify other officers, employees and agents as set forth in the
Delaware General Corporation Law; (iii) upon receipt of an undertaking to repay
such advances if indemnification is determined to be unavailable, the
Registrant is required to advance expenses, as incurred, to its directors and
executive officers to the fullest extent permitted by the Delaware General
Corporation Law in connection with a proceeding (except if a determination is
reasonably and promptly made by the Board of Directors by a majority vote of a
quorum consisting of directors who were not parties to the proceeding or, in
certain circumstances, by independent legal counsel in a written opinion that
the facts known to the decision-making party demonstrate clearly and
convincingly that such person acted in bad faith or in a manner that such
person did not believe to be in, or not opposed to, the best interests of the
corporation); (iv) the rights conferred in the Bylaws are not exclusive and the
Registrant is authorized to enter into indemnification agreements with its
directors, officers and employees and agents; (v) the Registrant may not
retroactively amend the Bylaw provisions relating to indemnity; and (vi) to the
fullest extent permitted by the Delaware General Corporation Law, a director or
executive officer will be deemed to have acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the Registrant and, with respect to any criminal action or proceeding, to have
had no reasonable cause to believe that his or her conduct was unlawful if his
or her action is based on the records or books of account of the corporation or
on information supplied to him or her by officers of the corporation in the
course of their duties or on the advice of legal counsel for the corporation or
on information or records given or reports made to the corporation by
independent certified public accountants or appraisers or other experts.
II-1
<PAGE>
The Registrant's policy is to enter into indemnity agreements with each of
its directors and executive officers. The indemnity agreements provide that
directors and executive officers will be indemnified and held harmless to the
fullest possible extent permitted by law including against all expenses
(including attorneys' fees), judgments, fines and settlement amounts paid or
reasonably incurred by them in any action, suit or proceeding, including any
derivative action by or in the right of the Registrant, on account of their
services as directors, officers, employees or agents of the Registrant or as
directors, officers, employees or agents of any other company or enterprise
when they are serving in such capacities at the request of the Registrant. The
Registrant will not be obligated pursuant to the agreements to indemnify or
advance expenses to an indemnified party with respect to proceedings or claims
(i) initiated by the indemnified party and not by way of defense, except with
respect to a proceeding authorized by the Board of Directors and successful
proceedings brought to enforce a right to indemnification under the Indemnity
Agreement, (ii) for any amounts paid in settlement of a proceeding unless the
Registrant consents to such settlement, (iii) on account of any suit in which
judgment is rendered against the indemnified party for an accounting of profits
made from the purchase or sale by the indemnified party of securities of the
Registrant pursuant to the provisions of Section 16(b) of the Securities
Exchange Act of 1934 and related laws, (iv) on account of conduct by a director
which is finally adjudged to have been in bad faith or conduct that the
director did not reasonably believe to be in, or not opposed to, the best
interests of the Registrant, (v) on account of any criminal action or
proceeding arising out of conduct that the director had reasonable cause to
believe was unlawful or (vi) if a final decision by a court having jurisdiction
in the matter shall determine that such indemnification is not lawful.
The indemnity agreement also provides for contribution in certain situations
in which the Registrant and a director or executive officer are jointly liable
but indemnification is unavailable, such contribution to be based on the
relative benefits received and the relative fault of the Registrant and the
director or executive officer. Contribution is not allowed in connection with a
Section 16(b) judgment, an adjudication of bad faith or conduct that a director
or executive officer did not reasonably believe to be in, or not opposed to,
the best interests of the Registrant or a proceeding arising out of conduct a
director or executive officer had reasonable cause to believe was unlawful.
The indemnity agreement requires a director or executive officer to reimburse
the Registrant for all expenses advanced only to the extent it is ultimately
determined that the director or executive officer is not entitled, under
Delaware law, the Bylaws, the indemnity agreement or otherwise, to be
indemnified for such expenses. The indemnity agreement provides that it is not
exclusive of any rights a director or executive officer may have under the
Certificate of Incorporation, Bylaws, other agreements, any majority-in-
interest vote of the stockholders or vote of disinterested directors, the
Delaware law or otherwise.
The indemnification provision in the Bylaws, and the indemnity agreements
entered into between the Registrant and its directors and executive officers,
may be sufficiently broad to permit indemnification of the Registrant's
executive officers and directors for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act").
As authorized by the Registrant's Bylaws, the Registrant, with approval by
the Board, expects to purchase director and officer liability insurance.
See also the undertakings set out in response to Item 17.
II-2
<PAGE>
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Underwriting Agreement (draft dated June , 1998)....................... 1.01
Registrant's Certificate of Incorporation............................... 3.01
Registrant's Bylaws..................................................... 3.05
Form of Indemnification Agreement....................................... 10.08
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all securities sold by
the Registrant or its predecessors since June 1, 1995.
<TABLE>
<CAPTION>
AGGREGATE
DATE OF TITLE OF NUMBER OF PURCHASE FORM OF
CLASS OF PURCHASERS SALE SECURITIES SECURITIES PRICE CONSIDERATION
------------------- --------- ------------------------ ---------- ---------- -------------
<C> <C> <S> <C> <C> <C>
SALES BY HIWAY
TECHNOLOGIES, INC. (1)
Steven J. Umberger 5/13/96 Common Stock 3,930,535 $225,000 Cash
James H. Dahl 1/1/97 Class A Common Stock 1,364,768 $312,500 Cash
Arthur L. Cahoon 10/16/97 Class A Common Stock 819,518 $187,500 Cash
7 employees 6/17/97 Options to purchase -- -- Services
206,870 shares of Class
B Common Stock for $0.36
per share
Arthur L. Cahoon 11/3/97 Warrant to purchase -- $280,409 Note
1,160,165 shares of
Class A Common Stock for
$2.78 per share
13 investors 12/19/97 Warrants to purchase -- -- (2)
1,654,958 shares of
Class A Common Stock for
$3.02 per share
SALES BY BEST INTERNET
COMMUNICATIONS, INC.
7 individuals, including 7/15/95 Common Stock 1,230,000 $300,000 Cash
an officer and a direc-
tor
7 individuals 10/18/95 Common Stock 210,000 $105,000 Cash
14 individuals 10/26/95- Common Stock 445,000 $222,500 Cash
11/16/95
1 individual and one en- 1/16/96 Convertible promissory -- $1,000,000(3) Cash
tity notes (3)
The two holders of con- 1/16/96 Warrants to purchase up -- (5) (5)
vertible promissory to 500,000 shares of
notes and the guarantor Common Stock for $0.50
of one of the notes per share (4)
2 entities 7/10/96 Common Stock 535,000 $267,500 Cash (6)
1 individual 3/20/97 Warrants to purchase -- (7) (7)
200,000 shares of Common
Stock for $0.50 per
share
1 individual 11/4/97 Common Stock 100,000 $200,000 Note
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
AGGREGATE
DATE OF TITLE OF NUMBER OF PURCHASE FORM OF
CLASS OF PURCHASERS SALE SECURITIES SECURITIES PRICE CONSIDERATION
------------------- -------- ------------------------ ---------- ---------- -------------
<C> <C> <S> <C> <C> <C>
14 individuals, includ- 7/16/96- Series B Preferred Stock 3,462,000 $4,327,500 Cash
ing two officers and 3/24/97
one non officer direc-
tor
48 employees 1/26/96- Common Stock (option 1,441,721 619,001 Cash and
4/23/98 exercises) notes (8)
8 stockholders of Hiway 6/1/98 Common Stock 21,836,302 (9) (9)
12 investors in Hiway 6/1/98 Warrants to purchase -- (9) (9)
1,654,958 shares of
Common Stock for $3.02
per share
Arthur L. Cahoon 6/1/98 Warrant to purchase -- (9) (9)
1,160,165 shares of
Common Stock for $2.78
per share
7 employees of Hiway 6/1/98 Options to purchase -- (9) (9)
206,870 shares of Class
B Common Stock for $0.36
per share
</TABLE>
SALES BY REGISTRANT
In the reincorporation, Registrant will issue to shareholders, option holders
and warrant holders of Best the numbers of shares, options or warrants
equivalent to the respective numbers of shares, options and warrants that they
hold in Best at the time of the reincorporation. These issuances will not be
considered offers or sales as a result of Rule 145(a)(2) promulgated under the
Securities Act of 1933, as amended.
- --------
(1) All sales by Hiway Florida have been adjusted to reflect (i) the conversion
of each share of Hiway Florida Common Stock outstanding in June 1997 into
19,000 shares of Hiway Florida Class A Common Stock, (ii) the subsequent
exchange of each share of Hiway Florida Class A Common Stock for 4.14071388
shares of the Registrant's Common Stock as a result of the Merger of Hiway
Florida and Best and (iii) the subsequent reincorporation of Best into
Delaware.
(2) Issued in connection with the sale of $5.0 million of 5% senior unsecured
notes due 2002.
(3) Best repaid a $200,000 convertible promissory note to one individual in
July 1996 and an $800,000 convertible promissory note to the other
individual in March 1997.
(4) All but one warrant to purchase 100,000 shares of Common Stock were
cancelled when Best repaid the convertible promissory notes. See footnote
(3) above and footnote (7) below.
(5) Issued in conjunction with the sale of the convertible promissory notes.
(6) Of these shares, 135,000 were issued in partial payment for assets acquired
from North Bay Networks.
(7) This warrant was issued as part of a transaction where warrants to purchase
400,000 shares of Common Stock were cancelled, an $800,000 loan to the
Company was repaid and the guarantee on that loan was cancelled. See
footnotes (3) and (4) above.
(8) Four employees purchased shares with notes aggregating $408,682.
(9) These securities were issued in exchange for Hiway Florida securities in
the Merger.
The securities acquired by Best's and Hiway Florida's officers, directors,
employees and consultants were made in reliance on Rule 701 under the
Securities Act. All other sales of Common Stock and all sales of Preferred
Stock, warrants and notes and the sale of the debentures were made in reliance
on Section 4(2) of the Securities Act and/or Regulation D promulgated under the
Securities Act. The securities were sold to a limited number of people with no
general solicitation or advertising.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 --Underwriting Agreement.*
2.01 --Form of Agreement and Plan of Merger by and between the Registrant
and Best Internet Communications, Inc., a California corporation
("Best").*
2.02 --Agreement and Plan of Merger dated as of April 15, 1998 by and
between Best and Hiway Technologies, Inc., a Florida corporation
("Hiway Florida").
3.01 --Registrant's Certificate of Incorporation.*
3.02 --Amended and Restated Articles of Incorporation of Best.
3.03 --Registrant's Bylaws.*
3.04 --Bylaws of Best.*
4.01 --Form of Specimen Certificate for Registrant's Common Stock.*
5.01 --Opinion of Fenwick & West LLP regarding legality of the securities
being registered.*
10.01 --Warrant registered in the name of Arthur L. Cahoon.*
10.02 --Investors' Rights Agreement, dated as of June 12, 1996 between the
Registrant and Robert D. Leppo.
10.03 --Hiway Florida 1997 Stock Option Plan*
10.04 --Registrant's 1995 Stock Option Plan.*
10.05 --Registrant's Amended and Restated 1996 Stock Option Plan.
10.06 --Registrant's 1998 Equity Incentive Plan.*
10.07 --Registrant's 1998 Directors Stock Option Plan.*
10.08 --Registrant's 1998 Employee Stock Purchase Plan.*
10.09 --Form of Indemnification Agreement entered into by Registration with
each of its directors and executive officers.*
10.10 --Amended and Restated Key Employee Agreement between the Registrant
and David S. Buzby.
10.11 --Key Employee Agreement between the Registrant and James R, Zarley.
10.12 --Key Employee Agreement between the Registrant and Robert E. Tomasi.*
10.13 --Leave of Absence Agreement between the Registrant and Robert E.
Tomasi.*
10.14 --Sublease Agreement between the Registrant and Sysorex International*
10.15 --Lease between the Registrant and Golden Gate Commercial Company*
10.16 --Lease between Blue Lake, LTD. and Hiway Florida*
10.17 --CB Commercial Lease between Champion Leasing, Corp. and Hiway
Florida*
10.18 --Commercial Lease Between Catexor Limited Partnership and Hiway
Florida*
16.01 --Letter re Change in Certifying Accountant from De Meo, Young,
McGrath & Company, P.A., independent accountants
21.01 --List of Subsidiaries
23.01 --Consent of Fenwick & West LLP (included in Exhibit 5.01).*
23.02 --Consent of Coopers & Lybrand L.L.P., independent accountants.
23.03 --Consent of De Meo, Young, McGrath & Company, P.A., independent
accountants.
24.01 --Power of Attorney (see Page II-7 of this Registration Statement).
27.01 --Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
II-5
<PAGE>
(b) The following financial statement schedule is filed herewith:
Schedule II--Valuation and Qualifying Accounts.
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF BOCA RATON, STATE OF
FLORIDA, ON THE 9TH DAY OF JUNE, 1998.
Hiway Technologies, Inc.
/s/ Arthur L. Cahoon
By___________________________________
ARTHUR L. CAHOON CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Arthur L. Cahoon, Scott H. Adams and
David S. Buzby, and each of them, his true and lawful attorneys-in-fact and
agents with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by the Registration
Statement that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act, and all post-effective amendments
thereto, and to file the same, with all exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or his or their
substitute or substitutes, may lawfully do or cause to be done or by virtue
hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
NAME TITLE DATE
PRINCIPAL EXECUTIVE OFFICER:
/s/ Arthur L. Cahoon Chairman of the June 9, 1998
- ------------------------------------- Board, Chief
ARTHUR L. CAHOON Executive Officer
and a Director
PRINCIPAL FINANCIAL OFFICER:
/s/ David S. Buzby Executive Vice June 9, 1998
- ------------------------------------- President, Chief
DAVID S. BUZBY Financial Officer
and a Director
PRINCIPAL ACCOUNTING OFFICER:
/s/ Joel B. Richardson Controller June 9, 1998
- -------------------------------------
JOEL B. RICHARDSON
II-7
<PAGE>
NAME TITLE DATE
/s/ Thomas C. Barry Director June 9, 1998
- -------------------------------------
THOMAS C. BARRY
/s/ Scott H. Adams Director June 9, 1998
- -------------------------------------
SCOTT H. ADAMS
/s/ William G. Nesbitt Director June 9, 1998
- -------------------------------------
WILLIAM G. NESBITT
/s/ Steven J. Umberger Director June 9, 1998
- -------------------------------------
STEVEN J. UMBERGER
/s/ James R. Zarley Director June 9, 1998
- -------------------------------------
JAMES R. ZARLEY
II-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
Our report on the consolidated financial statements of Hiway Technology, Inc.
is included on page F-2 of this Form S-1. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule on page S-2 of the Registration Statement.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
Coopers & Lybrand, L.L.P.
San Jose, California
May 27, 1998
S-1
<PAGE>
HIWAY TECHNOLOGY, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------------ ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Allowance for returns and doubtful
accounts........................... -- 12 (4) 8
Year ended December 31, 1996:
Allowance for returns and doubtful
accounts........................... 8 687 (322) 373
Year ended December 31, 1997:
Allowance for returns and doubtful
accounts........................... 373 1,525 (826) 1,072
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT TITLE
------- -------------
<C> <S>
1.01 --Underwriting Agreement.*
2.01 --Form of Agreement and Plan of Merger by and between the Registrant
and Best Internet Communications, Inc., a California corporation
("Best").*
2.02 --Agreement and Plan of Merger dated as of April 15, 1998 by and
between Best and Hiway Technologies, Inc., a Florida corporation
("Hiway Florida").
3.01 --Registrant's Certificate of Incorporation.*
3.02 --Amended and Restated Articles of Incorporation of Best.
3.03 --Registrant's Bylaws.*
3.04 --Bylaws of Best.*
4.01 --Form of Specimen Certificate for Registrant's Common Stock.*
5.01 --Opinion of Fenwick & West LLP regarding legality of the securities
being registered.*
10.01 --Warrant registered in the name of Arthur L. Cahoon.
10.02 --Investors' Rights Agreement, dated as of June 12, 1996 between the
Registrant and Robert D. Leppo.
10.03 --Hiway Florida 1997 Stock Option Plan*
10.04 --Registrant's 1995 Stock Option Plan.*
10.05 --Registrant's Amended and Restated 1996 Stock Option Plan.
10.06 --Registrant's 1998 Equity Incentive Plan.*
10.07 --Registrant's 1998 Directors Stock Option Plan.*
10.08 --Registrant's 1998 Employee Stock Purchase Plan.*
10.09 --Form of Indemnification Agreement entered into by Registration with
each of its directors and executive officers.*
10.10 --Amended and Restated Key Employee Agreement between the Registrant
and David S. Buzby.
10.11 --Key Employee Agreement between the Registrant and James R, Zarley.
10.12 --Key Employee Agreement between the Registrant and Robert E. Tomasi.*
10.13 --Leave of Absence Agreement between the Registrant and Robert E.
Tomasi.*
10.14 --Sublease Agreement between the Registrant and Sysorex International*
10.15 --Lease between the Registrant and Golden Gate Commercial Company*
10.16 --Lease between Blue Lake, LTD. and Hiway Florida*
10.17 --CB Commercial Lease between Champion Leasing, Corp. and Hiway
Florida*
10.18 --Commercial Lease Between Catexor Limited Partnership and Hiway
Florida*
16.01 --Letter re Change in Certifying Accountant from De Meo, Young,
McGrath & Company, P.A., independent accountants
21.01 --List of Subsidiaries
23.01 --Consent of Fenwick & West LLP (included in Exhibit 5.01).*
23.02 --Consent of Coopers & Lybrand L.L.P., independent accountants.
23.03 --Consent of De Meo, Young, McGrath & Company, P.A., independent
accountants.
24.01 --Power of Attorney (see Page II-7 of this Registration Statement).
27.01 --Financial Data Schedule.
</TABLE>
- --------
* To be supplied by amendment.
<PAGE>
Exhibit 2.02
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement") dated as of April 15, 1998
between Best Internet Communications, Inc., a California corporation ("Best"),
and Hiway Technologies, Inc., a Florida corporation ("Hiway").
Recitals
A. The Boards of Directors of Best and Hiway have determined that it is
in the best interests of their respective companies and their shareholders to
effect a "merger of equals" of Best and Hiway through the consummation of the
business combination transactions provided for in this Agreement.
B. It is the intent of the respective Boards of Directors of Best and
Hiway that Best be the surviving corporation in such business combination
transaction, and that following the consummation of such business combination
transaction, Best and Hiway be governed and operated on the basis of a "merger
of equals" of Best and Hiway.
C. It is the intent of the parties that after the merger, Best (as the
surviving corporation) will change its name as provided in Section 1.6, and will
merge with and into Hiway Technologies, Inc., a Delaware corporation (the
"Redomestication Merger").
Agreement
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement and
in accordance with the California Corporations Code, as amended (the "CCC"), and
the Florida Business Corporations Act, as amended (the "FBCA"), at the Effective
Time, Hiway shall merge with and into Best (the "Merger"). Best shall be the
surviving corporation in the Merger and shall continue its corporate existence
under the laws of the State of California. Upon consummation of the Merger, the
separate existence (corporate and otherwise) of Hiway shall terminate.
1.2 Effective Time. The Merger shall become effective as set forth in
articles of merger (the "Certificate of Merger") filed with the appropriate
authorities of the State of Florida and the State of California on the Closing
Date (as defined in Section 9.1 of this Agreement). The effective date and time
of the Merger specified in the Certificate of Merger shall be no earlier than
the date and time the Certificate of Merger is filed with the appropriate
authorities of the State of Florida and the State of California and shall be as
soon after such filing as is practicable. The term "Effective Time" shall be the
date
<PAGE>
and time when the Merger becomes effective, as set forth in the
Certificate of Merger filed in accordance with the CCC and the FBCA.
1.3 Effects of Merger. At and after the Effective Time, the Merger shall
have the effects set forth in this Agreement, the Certificate of Merger, the CCC
and the FBCA. At the Effective Time, (i) all rights, franchises, licenses and
interests of Hiway in and to every type of property, real, personal and mixed,
and all choses in action of Hiway shall continue unaffected and uninterrupted by
the Merger and shall accrue to Best; (ii) all obligations and liabilities of
Hiway then outstanding shall become and be obligations of Best and shall
continue unaffected and uninterrupted by the Merger; and (iii) no action or
proceeding then pending and to which Hiway is a party shall be abated or
discontinued but may be prosecuted to final judgment by Best.
1.4 Conversion of Hiway Shares, Hiway Options and Hiway Warrants;
Dissenters' Rights.
(a) At the Effective Time, and except as otherwise provided in this
Agreement, by virtue of the Merger and without any action on the part of Best,
Hiway, or any shareholder of Best or Hiway, all outstanding shares of Hiway
Class A Common Stock, par value $.01, and Class B Common Stock, par value $.01
(collectively, "Hiway Shares"), shall be converted into 21,853,769 shares, less
any shares not issued due to the requirement that Best not issue any fractional
shares (collectively, the "Aggregate Merger Shares") of common stock, no par
value per share, of Best ("Best Common Stock"), with each outstanding Hiway
Share being converted into 4.14071388479309 (the "Applicable Fraction") shares
of Best Common Stock. No fractional shares of Best Common Stock shall be issued
to any shareholder of Hiway and, in lieu thereof, all fractional shares shall be
paid the cash equivalent value thereof based on a value of $3.00 per share of
Best Common Stock. No shares of Best Common Stock shall be issuable or issued to
any person or entity other than a shareholder of Hiway in connection with the
Merger.
(b) Each outstanding option to acquire a Hiway Share ("Hiway Option")
that is outstanding immediately prior to the Effective Time will, by virtue of
the Merger at the Effective Time and without further action on the part of any
holder thereof, be assumed by Best and converted into an option to purchase that
number of shares of Best Common Stock which equals the number of Hiway Shares
subject to such option at the Effective Time multiplied by the Applicable
Fraction, and the per share exercise price for each such option will equal the
per share exercise price of each such option immediately prior to the Effective
Time divided by the Applicable Fraction. If the foregoing calculation results in
an assumed option being exercisable for a fraction of a share, then the number
of shares of Best Common Stock subject to such option will be rounded down to
the nearest whole number with no cash being payable for such fractional share.
In addition, if the foregoing calculation results in an assumed option having a
per share exercise price that includes a fraction of a cent, then the per share
exercise price for such option shall be rounded up to the nearest whole cent.
The term, exercisability, vesting schedule, status as an "incentive stock
option" under Section 422 of the Internal
2
<PAGE>
Revenue Code of 1986, as amended (the "Code"), if applicable, and all other
terms of the Hiway Options will otherwise be unchanged. Continuous employment
with Best will be credited to a Hiway optionee based on such optionee's
employment with Hiway for purposes of determining the number of shares subject
to exercise after the Effective Time.
(c) Each outstanding warrant to acquire a Hiway Share ("Hiway Warrant")
that is outstanding immediately prior to the Effective Time will, by virtue of
the Merger at the Effective Time and without further action on the part of any
holder thereof, be assumed by Best and converted into a warrant to purchase that
number of shares of Best Common Stock which equals the number of Hiway Shares
subject to such warrant at the Effective Time multiplied by the Applicable
Fraction, and the per share exercise price for each such warrant will equal the
per share exercise price of each such warrant immediately prior to the Effective
Time divided by the Applicable Fraction. If the foregoing calculation results in
an assumed warrant being exercisable for a fraction of a share, then the number
of shares of Best Common Stock subject to such warrant will be rounded down to
the nearest whole number with no cash being payable for such fractional share.
In addition, if the foregoing calculation results in an assumed warrant having a
per share exercise price that includes a fraction of a cent, then the per share
exercise price for such warrant shall be rounded up to the nearest whole cent.
The term, exercisability and all other terms of the Hiway Warrants will
otherwise be unchanged.
(d) At the Effective Time, and except as otherwise provided in this
Agreement, by virtue of the Merger and without any action on the part of Best,
Hiway, or any shareholder of Best or Hiway: (i) all shareholders of Hiway shall
cease to have any rights as shareholders of Hiway (including the right to elect
directors, the right to vote as to other matters, and all rights with respect to
the distribution of surplus in liquidation); and (ii) all Hiway Shares shall no
longer be outstanding, and shall automatically be canceled and shall cease to
exist; provided, however, that at and after the Effective Time, each individual
Hiway Share shall represent the right to receive a certificate representing a
number of shares of Best Common Stock equal to the Applicable Fraction and cash
in lieu of any fractional share of Best Common Stock into which such Hiway Share
has been converted pursuant to this Agreement.
(e) If, immediately prior to the Effective Time, the number of outstanding
shares of Best Common Stock plus outstanding options or other rights to acquire
Best Common Stock ("Best Options" and, collectively with the outstanding shares
of Best Common Stock, the "Best Share Equivalents") does not equal 14,926,910
and/or the number of outstanding Hiway Shares plus outstanding Hiway Options or
other rights to acquire Hiway Shares (collectively, the "Hiway Share
Equivalents") does not equal 6,008,187, then, notwithstanding anything to the
contrary in this Agreement, (i) the Aggregate Merger Shares shall be revised to
equal (x) the result of (A) Best Share Equivalents divided by 0.375, rounding
down, minus (B) the Best Share Equivalents, divided by (y) the Hiway Share
Equivalents, times (z) the number of outstanding Hiway Shares, rounded down, and
(ii) the Applicable Fraction shall equal (x) the result of (A) Best Share
Equivalents divided by 0.375, rounding down, minus (B) the Best Share
Equivalents, divided by (y) the Hiway Share Equivalents.
3
<PAGE>
(f) Hiway Shares to which dissenters' rights are perfected under
applicable law shall not be converted into or represent the right to receive any
shares, or any cash payment in lieu of any fractional shares of Best Common
Stock, but shall be converted into the right to receive such consideration as
may be determined to be due with respect to such dissenting Hiway Shares
pursuant to applicable law; provided, however, that if any holder of dissenting
Hiway Shares shall withdraw his or her demand for payment of the fair value of
his or her Hiway Shares or shall fail to perfect his or her dissenters' rights
in accordance with applicable law, then such holder's dissenting Hiway Shares
shall cease to be dissenting Hiway Shares and shall, subject to the terms of
this Agreement, be converted into and represent the right to receive a
certificate representing the number of whole shares of Best Common Stock and
cash in lieu of any fractional share of Best Common Stock into which such Hiway
Shares have been converted pursuant to this Agreement.
(g) Best Shares to which dissenters' rights are perfected under
applicable law shall be converted into the right to receive such consideration
as may be determined to be due with respect to such dissenting Best Share
pursuant to applicable law; provided, however, that if any holder of dissenting
Best Shares shall withdraw his or her demand for payment of the fair value of
his or her Best Shares or shall fail to perfect his or her dissenters' rights in
accordance with applicable law, then such holder's dissenting Best Shares shall
cease to be dissenting Best Shares.
1.5 Best Common Stock, Best Options and Best Warrants. At the Effective
Time: (i) each share of Best Common Stock issued and outstanding shall remain an
issued and outstanding share of Best Common Stock, and shall not be affected by
the Merger; (ii) each outstanding Best Option shall continue to represent a
right to acquire shares of Best Common Stock and shall remain an issued and
outstanding Best Option in the same amount and at the same exercise price
subject to the terms of the Best Benefit Plans (as defined in Section 3.11 of
this Agreement) under which it was issued and the agreement evidencing grant
thereunder, and shall not be affected by the Merger; and (iii) each outstanding
warrant to purchase Best Common Stock ("Best Warrant"), shall remain an issued
and outstanding Best Warrant in the same amount and at the same exercise price
subject to terms of the agreement under which it was issued, and shall not be
affected by the Merger.
1.6 Best Articles of Incorporation; Change of Name. Subject to the terms
and conditions of this Agreement, at the Effective Time, the Articles of
Incorporation of Best then in effect shall be, and shall continue in effect as,
the Articles of Incorporation of Best, as the surviving corporation in the
Merger, until thereafter amended in accordance with this Agreement and
applicable law; provided, however, that in connection with the Redomestication
Merger, Best shall change its name to Hiway Technologies, Inc.
1.7 Best Bylaws. Subject to the terms and conditions of this Agreement, at
the Effective Time, the Bylaws of Best then in effect shall be, and shall
continue in effect
4
<PAGE>
as, the Bylaws of Best, as the surviving corporation in the Merger, until
thereafter amended in accordance with this Agreement and applicable law.
1.8 Merger Tax Consequences and Accounting Treatment. It is intended that
(i) the Merger shall constitute a reorganization within the meaning of Section
368(a)(1)(A) of the Code, (ii) this Agreement shall constitute a "plan of
reorganization" for the purposes of Section 368 of the Code, and (iii) the
Merger shall qualify for "pooling of interests" accounting treatment under
Accounting Principles Board Opinion No. 16 and SEC Accounting Series Releases
130 and 135, as amended.
1.9 Best Management. At the Effective Time: (i) Arthur L. Cahoon shall be
the Chairman of Best as the surviving corporation in the Merger; (ii) David S.
Buzby shall be the Vice-Chairman of Best; (iii) Scott H. Adams shall be the
President and Chief Executive Officer of Best; (iv) Kenneth H. Copas shall be
the Chief Financial Officer of Best; (v) William Nesbitt shall be the Chief
Technical Officer of Best; and (vi) Thomas A. Skornia shall be the Secretary of
Best.
1.10 Board of Directors. At the Effective Time, the Board of Directors of
Best, as the surviving corporation in the Merger, shall consist of seven persons
including Thomas C. Barry, James Zarley, David S. Buzby, Arthur L. Cahoon, Scott
H. Adams, Steven Umberger and William Nesbitt.
1.11 Headquarters. At the Effective Time, the registered office of Best, as
the surviving corporation in the Merger, shall be located in Boca Raton,
Florida, provided, however, that Best shall conduct significant corporate
activities from regional executive offices located in Boca Raton, Florida and in
Mountain View, California.
ARTICLE II
EXCHANGE OF HIWAY SHARES
2.1 Exchange of Hiway Shares. As soon as practicable prior to the
Effective Time, and in no event later than 15 days prior to the Effective Time,
(i) Hiway shall prepare a list (which list shall be certified to Best by the
President of Hiway) identifying each shareholder of Hiway and setting forth the
number of whole shares, and cash in lieu of any fractional shares, of Best
Common Stock that each shareholder of Hiway is entitled to receive by virtue of
the consummation of the Merger, and (ii) Hiway shall deliver to Best such list,
as certified by the President of Hiway, and such other information as shall
enable Best to verify the information contained in such list.
2.2 Best to Make Shares Available. At the Effective Time, Best shall
deliver to Hiway, for the benefit of the shareholders of Hiway and for exchange
in accordance with this Article II, certificates representing the whole shares
of Best Common Stock and cash for payment of consideration in lieu of fractional
shares to be issued and paid in exchange for the Hiway Shares pursuant to this
Agreement.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BEST
Except as disclosed in the Best Disclosure Letter delivered to Hiway
simultaneously with this Agreement (the "Best Disclosure Schedule"), Best hereby
represents and warrants to Hiway as follows:
3.1 Corporate Organization.
(a) Best is a corporation duly organized, validly existing and in
good standing under the laws of the State of California. Best has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such license or qualification necessary,
except where the failure to be so licensed or qualified would not have a
Material Adverse Effect on Best. As used in this Agreement, the term "Material
Adverse Effect" means, with respect to Hiway or Best, as the case may be, a
material adverse effect on the business, assets, properties, operations,
condition (financial or otherwise), or (insofar as they can reasonably be
foreseen) prospects of such party and its Subsidiaries (as defined below) taken
as a whole, excluding for this purpose only, however, the payment and/or
incurrence of transactional expenses by Hiway or Best in connection with the
Merger, to the extent having such an effect. As used in this Agreement, the word
"Subsidiary" when used with respect to any party means any corporation,
association, partnership, limited liability company, or other organization,
whether incorporated or unincorporated, which is consolidated with such party
for financial reporting purposes. True and complete copies of the Articles of
Incorporation and Bylaws of Best, as in effect as of the date of this Agreement,
have previously been made available by Best to Hiway.
(b) Best has no Subsidiaries.
(c) A record of all corporate action taken by the shareholders and
Board of Directors (including committees thereof) of Best, and complete and
accurate copies of all of their proceedings and actions by written consent, and
all minutes of their meetings, are contained in the minute books of Best. The
minute books and stock ledgers of Best contain an accurate and complete record
of all issuances, transfers and cancellations of shares of capital stock of
Best. Hiway has been given access to and an opportunity to review all such
minutes, minute books and stock ledgers.
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3.2 Capitalization.
(a) The authorized capital stock of Best consists of 30,000,000
shares divided into two classes. One class consists of 10,000,000 shares of
preferred stock ("Best Preferred Stock"), of which 500,000 shares have been
designated Series A Preferred Stock ("Best Series A Stock") and 4,000,000 shares
have been designated Series B Preferred Stock ("Best Series B Stock"), and the
other class of said shares consists of 20,000,000 shares of Best Common Stock.
Prior to the Effective Time, Best will take all corporate action required to
increase the authorized capital stock of Best such that, at the Effective Time,
the authorized capital stock of Best will consist of 70,000,000, divided into
two classes, one of which will consist of 10,000,000 shares of Best Preferred
Stock, of which 500,000 shares will be designated Best Series A Stock and
4,000,000 shares will be designated Best Series B Stock, and the other class of
said shares will consist of 60,000,00 shares of Best Common Stock. As of the
date of this Agreement, there are no shares of Best Series A Stock, 3,462,000
shares of Best Series B Stock, 9,461,069 shares of Best Common Stock and no
other shares of Best Preferred Stock issued and outstanding, and no shares of
Best Common Stock or Best Preferred Stock are held in treasury. All of the
issued and outstanding shares of Best Common Stock and Best Preferred Stock have
been duly authorized and validly issued, are fully paid, nonassessable and free
of preemptive rights with no personal liability attaching to the ownership
thereof, and have been issued in compliance with state and federal securities
laws. Except as contemplated by this Agreement or as described in this Section
3.2(a), Best does not have and is not bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character calling for
the purchase or issuance of any shares of Best Common Stock or any other equity
securities of Best or any securities representing the right to purchase or
otherwise receive any shares of Best Common Stock or any other equity securities
of Best. As of the date of this Agreement, no shares of the capital stock of
Best are reserved for issuance, except for: (a) 4,000,000 shares of Best Common
Stock reserved for issuance upon the exercise of Best Options issued pursuant to
the Best Amended and Restated 1996 Stock Option Plan (the "Best Option Plan")
(of which Best Options representing 1,703,841 shares of Best Common Stock are
outstanding); (b) 300,000 shares of Best Common Stock reserved for issuance upon
the exercise of outstanding Best Warrants, exercisable at $0.50 per share until
January 15, 2001; and (c) 3,462,000 shares of Best Common Stock reserved for
issuance upon the conversion of outstanding Best Series B Stock. Since January
1, 1998, Best has not issued any shares of Best Common Stock or other equity
securities of Best, or any securities convertible into or exercisable for any
shares of Best Common Stock or other equity securities of Best, other than (x)
as contemplated by this Agreement, (y) shares of Best Common Stock issued upon
the exercise of Best Options under the Best Option Plan, which shares are
included in the outstanding capitalization of Best set forth above, or (z) Best
Options issued under the Best Option Plan, which Best Options are included in
the aggregate number of Best Options outstanding set forth above. The shares of
Best Common Stock to be issued pursuant to the Merger will be duly authorized
and validly issued and, at the Effective Time, all such shares will be fully
paid, nonassessable and free of preemptive rights with no personal liability
attaching to the ownership thereof. The information concerning Best Series B
Stock, Best Common Stock, Best Options and
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Best Warrants will be updated at the Closing to reflect Best Option or warrant
exercises and any conversion of Best Series B Stock into Best Common Stock
between the date of this Agreement and the Closing.
(b) The Best Disclosure Schedule sets forth a complete list of (i)
the shareholders of Best, (ii) the holders of all Best Options and the material
terms of such Best Options, (iii) the holders of all Best Warrants and (iv) the
officers and directors of Best. Best does not have any direct or indirect equity
or ownership interest in any other business or entity and does not have any
direct or indirect obligation or any commitment to invest any funds in any
corporation or other business or entity, other than for investment purposes in
the ordinary course of business in accordance with past practices that are
listed in the Best Disclosure Schedule.
3.3 Authority; No Violation.
(a) Best has full corporate power and authority to execute and
deliver this Agreement and, subject to receipt of shareholder approval, to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly and validly approved by the Board of Directors
of Best. The Board of Directors of Best has directed that this Agreement and the
transactions contemplated by this Agreement be submitted to the shareholders of
Best for approval at a meeting of such shareholders and, except for the adoption
of this Agreement by the affirmative vote of the holders of a majority of the
outstanding shares of Best Common Stock and two-thirds of the outstanding shares
of Best Preferred Stock, no other corporate proceedings on the part of Best are
necessary to approve this Agreement and to consummate the transactions
contemplated by this Agreement. This Agreement has been duly and validly
executed and delivered by Best and, (assuming due authorization, execution and
delivery by Hiway and the receipt of Best shareholder approval and all Requisite
Regulatory Approvals (as defined in Section 7.1(d) of this Agreement)),
constitutes a valid and binding obligation of Best, enforceable against Best in
accordance with its terms.
(b) Neither the execution and delivery of this Agreement by Best nor
the consummation by Best of the transactions contemplated by this Agreement, nor
compliance by Best with any of the terms or provisions of this Agreement, will
(i) violate any provision of the Articles of Incorporation or Bylaws of Best or
(ii) assuming that all Requisite Regulatory Approvals and all of the consents
and approvals referred to in Section 3.4 of this Agreement are duly obtained,
(x) to the best knowledge of Best, violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to Best or
any of its properties or assets or (y) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, charge, encumbrance or security
interest (collectively, "Lien"), upon any of the properties or assets of Best
under, any of the terms, conditions or provisions of any note, bond,
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mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Best is a party, or by which it or any of its
properties or assets may be bound or affected, except for such violations,
conflicts, breaches or defaults which, either individually or in the aggregate,
will not have or be reasonably likely to have a Material Adverse Effect on Best.
3.4 Consents and Approvals. Except for (i) the filing of applications by
Best for authorization to do business in the State of Florida, (ii) the filing
of any other required applications, notices and forms with, and the obtaining of
approvals from, each applicable Governmental Entity (as defined in this Section
3.4), (iii) the filing of the Certificate of Merger with the appropriate
authorities of (a) the State of California pursuant to the CCC and (b) of the
State of Florida pursuant to the FBCA, (iv) consents, authorizations, approvals,
filings or exemptions in connection with compliance with the applicable
provisions of federal and state securities laws and the rules and regulations
thereunder and of any applicable self-regulatory organization (each, an "SRO"),
(v) such filings and approvals as are required to be made or obtained under the
securities or "Blue Sky" laws of various states in connection with the issuance
of the shares of Best Common Stock pursuant to this Agreement, and (vi) the
approval of this Agreement by the requisite votes of the shareholders of Best
and the shareholders of Hiway, no consents or approvals of or filings or
registrations with any court, administrative agency or commission or other
governmental authority or instrumentality (a "Governmental Entity") or with any
third party are necessary in connection with the execution and delivery by Best
of this Agreement or the consummation by Best of the transactions contemplated
by this Agreement.
3.5 Reports. Best (i) has timely filed all reports, registrations and
statements, together with all amendments required to be made with respect
thereto, that it was required to file with each Governmental Entity having
jurisdiction, (ii) has timely filed all other reports and statements, together
with all amendments required to be made with respect thereto that it was
required to file under all applicable laws, rules or regulations (including any
report or statement required to be filed pursuant to the laws, rules or
regulations of the United States, any state, or any other Governmental Entity)
and (iii) has paid all fees and assessments due and payable in connection
therewith, except where the failure to file such reports, registrations or
statements, or to file any of such other reports, or to pay such fees and
assessments, either individually or in the aggregate, will not have a Material
Adverse Effect on Best. All such reports, registrations and statements, together
with all such amendments, were in substantial compliance with applicable law
when filed and, as of their respective dates, to the best knowledge of Best, did
not contain any false statements or material misstatements of fact or omit to
state any material facts necessary to make the statements set forth therein not
materially misleading in light of the circumstances in which such statements
were made. No material deficiencies have been asserted by any Governmental
Entity with respect to such reports, registrations and statements or any such
amendments thereto. No Governmental Entity has initiated any proceeding or, to
the best knowledge of Best, investigation into the business or operations of
Best, except where such proceedings or investigations are not likely, either
individually or in the aggregate, to have a Material Adverse Effect on Best.
There is no
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unresolved violation, criticism, or exception by any Governmental Entity with
respect to any report or statement relating to any examinations of Best which,
in the reasonable judgment of Best, is likely, either individually or in the
aggregate, to have a Material Adverse Effect on Best.
3.6 Financial Statements. Best has previously made available to Hiway
copies of the balance sheets of Best as of December 31 for the fiscal years
1997, 1996 and 1995, and the related statements of income, changes in
shareholders' equity and cash flows for the fiscal years 1997, 1996 and 1995, in
each case accompanied by the audit reports of Coopers & Lybrand LLP, independent
public accountants with respect to Best (collectively, the "Best Financial
Statements"). The balance sheets of Best as of December 31, 1997, 1996 and 1995
(including the related notes, where applicable) fairly present the financial
position of Best as of the dates thereof, and the other financial statements
referred to in this Section 3.6 (including the related notes, where applicable)
fairly present the results of the operations and changes in shareholders' equity
for the respective fiscal periods; each of the Best Financial Statements
(including the related notes, where applicable) complies in all material
respects with applicable accounting requirements; and each of the Best Financial
Statements (including the related notes, where applicable) has been prepared in
all material respects in accordance with generally accepted accounting
principles ("GAAP") consistently applied during the periods involved, except, in
each case, as indicated in such statements or in the notes thereto. The books
and records of Best have been, and are being, maintained in all material
respects in accordance with GAAP and all other applicable legal and accounting
requirements and reflect only actual transactions.
3.7 Broker's Fees. Neither Best nor any of its officers or directors has
employed any broker or finder or incurred any liability for any broker's fees,
commissions or finder's fees in connection with the transactions contemplated by
this Agreement.
3.8 Absence of Certain Changes or Events.
(a) Except as disclosed in the Best Financial Statements or the Best
Disclosure Schedule, since December 31, 1997 (i) Best has not incurred any
material indebtedness or other liability or obligation (whether absolute,
accrued, contingent or otherwise), other than in the ordinary course of their
business; (ii) Best has not declared or paid any dividend or other distribution
in respect of the capital stock of Best, or any direct or indirect redemption,
purchase or other acquisition by Best of any such stock; (iii) to the best
knowledge of Best, there has been no material adverse change in the business,
assets, properties, operations, or condition (financial or otherwise) of Best,
and (iv) no event has occurred which has had, or is likely to have, individually
or in the aggregate, a Material Adverse Effect on Best.
(b) Since December 31, 1997, Best has carried on its business in all
material respects in the ordinary and usual course theretofore conducted.
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(c) Since December 31, 1997, Best has not (i) except for such actions
as are in the ordinary course of business consistent with past practice or
except as required by applicable law, (A) increased the wages, salaries,
compensation, pension, or other fringe benefits or perquisites payable to any
executive officer, employee, or director from the amount thereof in effect as of
December 31, 1997, or (B) granted any severance or termination pay, entered into
any contract to make or grant any severance or termination pay, or paid any
bonuses in excess of its 1997 salary and employee benefits expenses, or (ii)
suffered any strike, work stoppage, slowdown, or other labor disturbance which,
in its reasonable judgment, is likely, either individually or in the aggregate,
to have a Material Adverse Effect on Best. The material terms of all employment
agreements and consulting agreements to which Best is a party are shown on
Schedule 3.8(c) of the Best Disclosure Schedule.
3.9 Legal Proceedings.
(a) Best is not a party to any, and there are no pending (or to the
best of their knowledge threatened) material legal, administrative, arbitral or
other proceedings, claims, actions or, to the best knowledge of Best,
governmental or regulatory investigations of any nature (including
noncontractual claims, bad faith claims and claims against any directors or
officers of Best) against Best, or challenging the validity or propriety of the
transactions contemplated by this Agreement, as to which there is a reasonable
likelihood of an adverse determination and which, if adversely determined would,
either individually or in the aggregate, have a Material Adverse Effect on Best.
(b) There is no injunction, order, judgment, decree, or, to the best
knowledge of Best, regulatory restriction (including noncontractual claims, bad
faith claims and claims against any directors or officers of Best) imposed upon
Best or the assets of Best which had, or might reasonably be expected to have, a
Material Adverse Effect on Best.
3.10 Taxes and Tax Returns.
(a) Best has duly filed all Tax Returns (as defined in Section
3.10(c) of this Agreement) required to be filed by it on or prior to the date of
this Agreement (all such Tax Returns being accurate and complete in all material
respects) and has duly paid or made provisions for the payment of all Taxes (as
defined in Section 3.10(c) of this Agreement) which have been incurred or are
due or claimed to be due from it by federal, state, county, foreign or local
taxing authorities on or prior to the date of this Agreement (including, if and
to the extent applicable, those due in respect of its properties, income,
business, capital stock, premiums, franchises, licenses, sales and payrolls)
other than (i) Taxes or other charges which are not yet delinquent or are being
contested in good faith and have not been finally determined for which adequate
reserves have been made on the Best Financial Statements, or (ii) Tax Returns or
Taxes the failure to file, pay or make provision for, either individually or in
the aggregate, are not likely, in the reasonable judgment of Best, to have a
Material Adverse Effect on Best. There are no material
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disputes pending, or claims asserted for, Taxes or assessments upon Best for
which Best does not have adequate reserves, nor has Best given any currently
effective waivers extending the statutory period of limitations applicable to
any Tax Return for any period. In addition, (A) proper and accurate amounts have
been withheld by Best from its employees' compensations for all prior periods in
compliance in all material respects with the income tax withholding provisions
of applicable federal, state and local laws, except where failure to do so would
not have a Material Adverse Effect on Best, (B) Tax Returns which are accurate
and complete in all material respects have been filed by Best for all periods
for which returns were due with respect to income tax withholding, Social
Security and unemployment taxes, except where failure to do so would not have a
Material Adverse Effect on Best, (C) the amounts shown on such Tax Returns to be
due and payable have been paid in full or adequate provision therefor has been
included by Best in its financial statements as of December 31, 1997, except
where failure to do so would not have a Material Adverse Effect on Best and (D)
there are no Tax Liens upon any property or assets of Best except Liens for
current Taxes not yet due or Liens that would not have a Material Adverse Effect
on Best. Best has not been required to include in income any adjustment pursuant
to Section 481 of the Code by reason of a voluntary change in accounting method
initiated by Best, and the Internal Revenue Service (the "IRS") has not
initiated or proposed any such adjustment or change in accounting method, in
either case which had or is reasonably likely to have a Material Adverse Effect
on Best. Except as set forth in the Best Financial Statements, Best has not
entered into a transaction which is being accounted for as an installment
obligation under Section 453 of the Code, which would be reasonably likely to
have a Material Adverse Effect on Best. Best is not a party to or bound by any
tax indemnity, tax sharing or tax allocation agreement. Best has never been a
member of an affiliated group of corporations within the meaning of Section 1504
of the Code. Best is not liable for the Taxes of any person under Section
1.1502-6 of the Treasury Regulations (or any similar provision of state, local
or foreign Tax law) or by contract, as a successor or otherwise. Best is not a
party to any joint venture, partnership or other arrangement or contract that
could be treated as a partnership for federal income tax purposes.
(b) Any amount that is reasonably likely to be received (whether in
cash or property or the vesting of property) as a result of any of the
transactions contemplated by this Agreement by any employee, officer, director
or trustee of Best or any of its affiliates who is a "Disqualified Individual"
(as such term is defined in proposed Treasury Regulation Section 1.280G-1) under
any employment, severance or termination agreement, other compensation
arrangement or Best Benefit Plan (as defined in Section 3.11(a) of this
Agreement) currently in effect will not be characterized as an "excess parachute
payment" (as such term is defined in Section 280G(b)(1) of the Code).
(c) As used in this Agreement, (i) the term "Tax" or "Taxes" means all
taxes, charges, fees, levies and other governmental assessments and impositions
of any kind payable to any governmental authority or agency (including all
federal, state, county, local, and foreign income, excise, gross receipts, gross
income, ad valorem, profits, gains, property, capital, sales, transfer, use,
payroll, employment, severance, withholding, duties, intangibles, franchise,
backup withholding, and other taxes, charges,
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levies or like assessments together with all penalties and additions to tax and
interest thereon); and (ii) the term "Tax Return" or "Tax Returns" means all
returns, reports, information returns and information statements with respect to
Taxes required to be filed with the IRS or any other Governmental Entity or tax
authority or agency, whether domestic or foreign (including consolidated,
combined and unitary tax returns).
(d) No disallowance of a deduction under Section 162(m) of the Code
for employee remuneration of any amount paid or payable by Best under any
contract, plan, program, arrangement or understanding will have a Material
Adverse Effect on Best.
(e) Best has not made an election under Section 341(f) of the Code.
(f) Best has not applied for any extensions of time on the filing of
any Tax Returns.
(g) Best's tax reserve (not including reserves created for timing)
are sufficient for all unpaid taxes.
3.11 Employee Benefit Plans; Labor Matters.
(a) The Best Disclosure Schedule sets forth a true and complete list of
each employee benefit plan, arrangement or agreement that is maintained as of
the date of this Agreement (the "Best Benefit Plans") by Best or by any
affiliated trade or business, whether or not incorporated (an "ERISA
Affiliate"), all of which together with Best would be deemed a "single employer"
within the meaning of Section 4001 of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA").
(b) Best has heretofore delivered or made available to Hiway true and
complete copies of each of the Best Benefit Plans and related documents,
including (i) the actuarial report for such Best Benefit Plan (if applicable)
for each of the last two years, and (ii) the most recent determination letter
from the IRS (if applicable) for such Best Benefit Plan.
(c) (i) Each of the Best Benefit Plans has been operated and administered
in all material respects in compliance with applicable laws including, but not
limited to, ERISA and the Code, (ii) each of the Best Benefit Plans intended to
be "qualified" within the meaning of Section 401(a) of the Code has received a
determination letter from the IRS that it is so qualified and no event has
occurred that will or is likely to give rise to disqualification of any such
plan or trust created thereunder, (iii) with respect to each Best Benefit Plan
which is subject to Title IV of ERISA, the present value of accrued benefits
under such Best Benefit Plan, based upon the actuarial assumptions used for
funding purposes in the most recent actuarial report prepared by the actuary for
such Best Benefit Plan with respect to such Best Benefit Plan, did not, as of
its latest valuation date, exceed the then current value of the assets of such
Best Benefit Plan allocable to such accrued benefits, (iv) no Best Benefit Plan
provides benefits,
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including death or medical benefits (whether or not insured), with respect to
current or former employees of Best or any ERISA Affiliate beyond their
retirement or other termination of service, other than (A) coverage mandated by
applicable law, (B) death benefits or retirement benefits under any "employee
pension plan" (as such term is defined in Section 3(2) of ERISA), (C) deferred
compensation benefits accrued as liabilities on the books of Best or the ERISA
Affiliates, (D) benefits the full cost of which is borne by the current or
former employee (or his or her beneficiary), or (E) disability or severance
plans identified on the Best Disclosure Schedule, (v) no material liability
under Title IV of ERISA has been incurred by Best or any ERISA Affiliate (other
than liability for premiums to the Pension Benefit Guaranty Corporation (the
"PBGC") arising in the ordinary course) that has not been satisfied in full, and
no condition exists that presents a material risk to Best or any ERISA Affiliate
of incurring a material liability thereunder, (vi) no Best Benefit Plan is a
"multiemployer pension plan" (as such term is defined in Section 3(37) of
ERISA), (vii) all required contributions or other amounts payable by Best as of
the Effective Time with respect to each Best Benefit Plan in respect of current
or prior plan years have been timely paid or accrued in accordance with GAAP and
Section 412 of the Code, (viii) to the best knowledge of Best, neither Best nor
any ERISA Affiliate has engaged in a transaction in connection with which Best
or any ERISA Affiliate reasonably could be subject to either a material civil
penalty assessed pursuant to Section 409 or 502(i) of ERISA or a material tax
imposed pursuant to Section 4975 or 4976 of the Code, and (ix) there are no
pending (or to the best knowledge of Best, threatened or anticipated) claims
(other than routine claims for benefits and administrative expenses payable in
the ordinary course) by, on behalf of or against any of the Best Benefit Plans
or any trusts related thereto which are, in the reasonable judgment of Best,
likely, either individually or in the aggregate, to have a Material Adverse
Effect on Best.
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated by this Agreement will (i) result
in any material payment (including severance, unemployment compensation, golden
parachute or otherwise) becoming due to any director or employee of Best or any
of its affiliates from Best or any of its affiliates under any Best Benefit Plan
or otherwise, (ii) materially increase any benefits otherwise payable under any
Best Benefit Plan or (iii) result in any acceleration of the time of payment or
vesting of any such benefits to any material extent.
(e) To the best knowledge of Best, Best is in compliance in all
material respects with all applicable laws and regulations respecting employment
and employment matters, discrimination in employment, terms and conditions of
employment, wages, hours and occupational safety and health and employment
practices (including federal and state wage and hour laws, workplace safety
laws, workers' compensation laws, equal employment opportunity laws, equal pay
laws, civil rights laws, the Americans With Disabilities Act and the Fair Labor
Standards Act of 1938, as amended), and is not engaged in any unfair labor
practice, except where the failure to be in compliance would not, individually
or in the aggregate, have a Material Adverse Effect on Best. Best has complied
with all applicable notice provisions of and have no material obligations under
COBRA with respect to any former employees or qualifying
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beneficiaries thereunder. There is no action, claim, cause of action, suit or
proceeding pending (or to the best knowledge of Best threatened) on the part of
any employee, independent contractor or applicant for employment, including any
such action, claim, cause of action, suit or proceeding based on allegations of
wrongful termination or discrimination on the basis of age, race, religion, sex,
sexual preference, or mental or physical handicap or disability that could (or
could reasonably be expected to) have a Material Adverse Effect on Best. Best is
not a party to any collective bargaining agreement or other labor union contract
nor does Best know of any activities or proceedings of any labor union to
organize any employees of Best. Best has provided all employees with all
relocation benefits, stock options, bonuses and incentives, and all other
compensation that such employee has earned up through the date of this Agreement
or that such employee was otherwise promised in his or her employment
agreement(s) with Best.
(f) Except as disclosed in the Best Financial Statements, all
material sums due for employee compensation have been paid, accrued or otherwise
provided for, and all employer contributions for employee benefits, including
deferred compensation obligations, and all benefits under each Best Benefit Plan
have been duly and adequately paid or provided for in accordance with plan
documents. To the best knowledge of Best, no person treated as an independent
contractor by Best is an employee as defined in Section 3401(c) of the Code, nor
has any employee been otherwise improperly classified as exempt, nonexempt or
otherwise, for purposes of federal or state income tax withholding or overtime
laws, rules, or regulations, except where such employee status or improper
classification would, either individually or in the aggregate, not have a
Material Adverse Effect on Best. To the best knowledge of Best, no executive or
key employee or group of employees of Best has any plans to terminate his, her
or their employment.
(g) Best has no commitment to (i) create any additional plan or
modify or change any existing Best Benefit Plan or (ii) enter into any contract
to provide compensation or benefits to any individual.
3.12 Compliance with Applicable Law. Best holds all licenses, franchises,
permits and authorizations necessary for the lawful conduct of its business
under and pursuant to, and has complied in all material respects with and is not
in default in any material respect under any, and has maintained and conducted
its business in all material respects in compliance with, all applicable laws,
statutes, orders, rules, regulations, policies and/or guidelines of each
Governmental Entity relating to Best, except where the failure to hold such
license, franchise, permit or authorization or such noncompliance or default
would not, either individually or in the aggregate, have a Material Adverse
Effect on Best.
3.13 Certain Contracts.
(a) Best is not a party to or bound by any contract, arrangement,
commitment or understanding (whether written or oral) (i) with respect to the
employment of any directors, officers or employees other than in the ordinary
course of
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business consistent with past practice, (ii) which, upon the consummation of the
transactions contemplated by this Agreement will (either alone or upon the
occurrence of any additional acts or events) result in any payment (whether of
severance pay or otherwise) becoming due from Best to any director, officer or
employee thereof, (iii) which materially restricts the conduct of any line of
business by Best, (iv) with or to a labor union or guild (including any
collective bargaining agreement) or (v) (including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan) any of
the benefits of which will be increased, or the vesting of the benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement, or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement. Best has previously made available to Hiway true and correct copies
of all employment and deferred compensation agreements which are in writing and
to which Best is a party. Each executory contract, arrangement, commitment or
understanding of the type described in this Section, whether or not set forth in
the Best Disclosure Schedule, is referred to in this Agreement as a "Best
Contract," and Best does not know of, or has not received notice of, any
violation of the above by any of the other parties thereto which, either
individually or in the aggregate, would have a Material Adverse Effect on Best.
(b) Each Best Contract is valid and binding on Best and in full force
and effect. Best has in all material respects performed all obligations required
to be performed by it to date under each Best Contract, except where such
noncompliance, either individually or in the aggregate, would not have a
Material Adverse Effect on Best. No event or condition exists which constitutes
or, after notice or lapse of time or both, would constitute, a material default
on the part of Best under any such Best Contract, except where such default,
either individually or in the aggregate, would not have a Material Adverse
Effect on Best.
3.14 Agreements with Regulatory Agencies. Best is not subject to any cease-
and-desist or other order issued by, or is a party to any written agreement,
consent agreement or memorandum of understanding with, or is a party to any
commitment letter or similar undertaking to, or is subject to any order or
directive by, or has adopted any board resolutions at the request of, any
Governmental Entity that currently restricts in any material respect the conduct
of its business or that in any material manner relates to its management or its
business (each, whether or not set forth in the Best Disclosure Schedule, a
"Best Regulatory Agreement"), nor has Best been advised by any Governmental
Entity that it is considering issuing or requesting a Best Regulatory Agreement.
3.15 Undisclosed Liabilities. Except for (i) those liabilities that are
fully reflected or reserved against on the Best Financial Statements at December
31, 1997 and (ii) those liabilities incurred in the ordinary course of business
consistent with past practice since December 31, 1997, Best has not incurred any
liability of any nature whatsoever (whether absolute, accrued, contingent or
otherwise and whether due or to become due) that, either alone or when combined
with all similar liabilities, had or could reasonably be expected to have a
Material Adverse Effect on Best.
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3.16 Intellectual Property.
(a) Best owns or has the right to use pursuant to license,
sublicense, agreement or permission all intellectual property necessary for the
operation of its business as presently conducted and as presently proposed to be
conducted. The term "intellectual property" means all trademarks, service marks,
logos, trade names and corporate names and registrations and applications for
registration thereof, copyrights and registrations and applications for
registration thereof, computer software, data and documentation, trade secrets
and confidential business information (including financial, marketing and
business data, pricing and cost information, business and marketing plans, and
customer and supplier lists and information), other proprietary rights, and
copies and tangible embodiments thereof (in whatever form or medium).
(b) To the best knowledge of Best, Best has not interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
intellectual property rights of third parties and neither Best, nor any of the
directors or officers (and employees with responsibility for intellectual
property matters) of Best has ever received any charge, complaint, claim or
notice alleging any such interference, infringement, misappropriation or
violation. To the best knowledge of Best, no third party has interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
intellectual property rights of Best.
(c) The Best Disclosure Schedule identifies each item of material
intellectual property owned by a third party that Best uses pursuant to license,
sublicense, agreement, or permission other than standard off-the-shelf end-user
software products. Best has made correct and complete copies of all such
licenses, sublicenses, agreements and permissions (as amended to date) available
to Hiway. With respect to each such item of such intellectual property: (i) the
license, sublicense, agreement or permission covering the item is legal, valid,
binding, enforceable and in full force and effect; (ii) the license, sublicense,
agreement or permission will continue to be legal, valid, binding and
enforceable and in full force and effect on identical terms on and after the
Closing Date; (iii) Best is not, and to the best knowledge of Best, the other
party to the license, sublicense, agreement or permission is not in breach or
default, and no event of default has occurred which with notice or lapse of
time, or both, would constitute a breach or default or permit termination,
modification or acceleration thereunder; (iv) no party to the license,
sublicense, agreement or permission has repudiated any provision thereof; (v)
with respect to such sublicense, the representations and warranties set forth in
(i) through (iv) above are, to the best knowledge of Best, true and correct with
respect to the underlying license; and (vi) Best has not granted any sublicense
or similar right with respect to the license, sublicense, agreement or
permission.
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3.17 Real Property; Environmental Liability.
(a) Best owns no right, title or interest in any real property except
as described on the Best Disclosure Schedule (collectively, the "Best Real
Property"). The Best Disclosure Schedule sets forth a complete and accurate list
and general description of all material leases for real property ("Best Real
Property Leases") to which Best is a party or by which it is bound. Best owns
all right, title and interest in, and has good and marketable title to, the Best
Real Property. Best has valid leasehold interests in each of the Best Real
Property Leases held by it, free and clear of all mortgages, options to
purchase, covenants, conditions, restrictions, easements, liens, security
interests, charges, claims, assessments and encumbrances, except for (i) rights
of lessors, co-lessees or sublessees that are reflected in each Best Real
Property Lease, (ii) current taxes not yet due and payable; (iii) Liens of
public record; and (iv) such nonmonetary imperfections of title and
encumbrances, if any, as do not materially detract from the value of or
materially interfere with the present use of such property. To the best
knowledge of Best, the activities of Best with respect to Best Real Property and
Best Real Property Leases owned or held by it for use in connection with its
operations are in all material respects permitted and authorized by applicable
zoning laws, ordinances and regulations and all laws, rules and regulations of
court, administrative agency or commission and other governmental authority or
instrumentality affecting such properties. Best enjoys peaceful and undisturbed
possession under all material Best Real Property Leases to which it is a party,
and all of such Best Real Property Leases are valid and in full force and
effect.
(b) There are no legal, administrative, arbitral or other
proceedings, claims, actions, causes of action, private environmental
investigations or remediation activities or, to the best knowledge of Best,
governmental investigations of any nature seeking to impose, or that could
reasonably be expected to result in the imposition of, on Best any liability or
obligation arising under common law or under any local, state or federal
environmental statute, regulation or ordinance (including the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA")), pending or (to the best knowledge of Best) threatened against Best,
which liability or obligation could reasonably be expected to have a Material
Adverse Effect on Best. To the best knowledge of Best, there is no reasonable
basis for any such proceeding, claim, action or governmental investigation that
would impose any material liability or obligation that could reasonably be
expected to have a Material Adverse Effect on Best. Best is not subject to any
agreement, order, judgment, decree, letter or memorandum by or with any court,
governmental authority, regulatory agency or third party imposing any material
liability or obligation that could reasonably be expected to have a Material
Adverse Effect on Best.
3.18 State Takeover Laws. The Board of Directors of Best has approved the
transactions contemplated by this Agreement and taken such action so that the
provisions of the CCC and all other provisions of each state or local "takeover"
law applicable to Best will not apply to this Agreement or any of the
transactions contemplated by this Agreement.
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3.19 Pooling of Interests. Best has no reason to believe that the Merger
will not qualify as a "pooling of interests" for accounting purposes.
3.20 Accuracy of Information Supplied. To the best knowledge of Best, none
of the information supplied or to be supplied by Best to Hiway pursuant to this
Agreement contains or will contain any untrue statement of a material fact or
omits or will omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they are made, not misleading.
3.21 Effective Time of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of Best set
forth in this Agreement, as updated by any written disclosure schedule delivered
pursuant to Section 6.10 of this Agreement, and except for representations which
speak as of a given date, shall be deemed to be made on and as of the date of
this Agreement, as of the Closing Date, and as of the Effective Time.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF HIWAY
Except as disclosed in the Hiway Disclosure Letter delivered to Best
simultaneously with this Agreement (the "Hiway Disclosure Schedule"), Hiway
hereby represents and warrants to Best as follows:
4.1 Corporate Organization.
(a) Hiway is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida. Hiway has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties and
assets owned or leased by it makes such license or qualification necessary,
except where the failure to be so licensed or qualified would not have a
Material Adverse Effect on Hiway. True and complete copies of the Articles of
Incorporation and Bylaws of Hiway, as in effect as of the date of this
Agreement, have previously been made available by Hiway to Best.
(b) The only Subsidiary of Hiway is RapidSite, Inc. (the "Hiway
Subsidiary"). The Hiway Subsidiary (i) is duly organized and validly existing as
a corporation under the laws of the State of Florida, (ii) is duly qualified to
do business and in good standing in all jurisdictions (whether federal, state,
local or foreign) where its ownership or leasing of property or the conduct of
its business requires it to be so qualified and in which the failure to be so
qualified would have a Material Adverse Effect on Hiway, and (iii) has all
requisite corporate power and authority to own or lease its properties and
assets and to carry on its business as now conducted. True and complete
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copies of the Articles of Incorporation and Bylaws of the Hiway Subsidiary, as
in effect on the date of this Agreement, have previously been made available by
Hiway to Best.
(c) A record of all corporate action taken by the shareholders and
the Board of Directors of Hiway (including committees thereof), and a record of
all corporate action taken by the shareholders and Board of Directors (including
committees thereof) of the Hiway Subsidiary, and complete and accurate copies of
all of their respective proceedings and actions by written consent, and all
minutes of their respective meetings, are contained in the respective minute
books of Hiway and the Hiway Subsidiary. The minute books and stock ledgers of
Hiway contain an accurate and complete record of all issuances, transfers and
cancellations of shares of capital stock of Hiway. The minute books and stock
ledgers of the Hiway Subsidiary taken together contain an accurate and complete
record of all issuances, transfers and cancellations of shares of capital stock
of the Hiway Subsidiary. Best has been given access to and an opportunity to
review all such minutes, minute books, membership records and stock ledgers.
4.2 Capitalization.
(a) The shareholders of Hiway have the full and complete power and
authority to approve and authorize this Agreement and the consummation of all of
the transactions contemplated by this Agreement. The shareholders of Hiway are
the only persons entitled to receive shares of Best Common Stock, and cash in
lieu of fractional shares of Best Common Stock, upon consummation of the Merger,
in exchange for Hiway Shares. The authorized capital stock of Hiway consists of
30,000,000 shares of Common Stock ("Hiway Common Stock"), with such shares
divided into two classes. One class consists of 15,000,000 shares of Class A
Common Stock, par value $0.01, of which 5,277,778 are outstanding as of the date
of this Agreement, and the other class consists of 15,000,000 shares of Class B
Common Stock, par value $0.01, none of which is outstanding as of the date of
this Agreement. All of the issued and outstanding shares of Hiway Common Stock
have been duly authorized and validly issued, are fully paid, nonassessable and
free of preemptive rights with no personal liability attaching to the ownership
thereof, and have been issued in compliance with state and federal securities
laws. Except as described in this Section 4.2(a), as of the date of this
Agreement, Hiway does not have and is not bound by any outstanding
subscriptions, options, warrants, calls, commitments or agreements of any
character ("Hiway Options") calling for the purchase or issuance of any shares
of capital stock or any other equity securities of Hiway or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity securities of Hiway. As of the date of this Agreement,
no shares of Hiway Common Stock were reserved for issuance except for: (a)
250,000 shares reserved for issuance upon the exercise of the Hiway Options
issued pursuant to the Hiway 1997 Stock Option Plan (the "Hiway Option Plan")
(of which options representing 50,000 shares of Hiway Common Stock are
outstanding); and (b) 680,409 shares of Hiway Common Stock reserved for issuance
upon the exercise of outstanding Hiway Warrants. Since January 1, 1998, Hiway
has not issued any shares of Hiway Common Stock or other equity securities of
Hiway, or any securities convertible into or exercisable for any shares of Hiway
Common Stock or other equity securities of Hiway,
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other than (x) Hiway Options issued under the Hiway Option Plan, which Hiway
Options are included in the aggregate number of outstanding Hiway Options set
forth above, (y) shares of Hiway Common Stock issued upon the exercise of Hiway
Options under the Hiway Option Plan, which shares are included in the
outstanding capitalization of Hiway set forth above, and (z) 400,000 warrants
issued to debentureholders and 280,409 warrants issued to Arthur L. Cahoon, the
material terms of which are set forth on the Hiway Disclosure Schedule. The
information concerning Hiway Common Stock, Hiway Options and Hiway Warrants will
be updated at the Closing to reflect Hiway Option or Hiway Warrant exercises and
Hiway Option grants between the date of this Agreement and the Closing.
(b) The authorized capital stock of the Hiway Subsidiary consists of
1,000 shares, $1.00 par value per share, of common stock ("Hiway Subsidiary
Stock"). As of the date of this Agreement, 100 shares of Hiway Subsidiary Stock
were issued and outstanding and no shares of Hiway Subsidiary Stock were held in
treasury. As of the date of this Agreement, no shares of Hiway Subsidiary Stock
were reserved for issuance. Other than the shares of Hiway Subsidiary Stock
described in the preceding sentence, the Hiway Subsidiary has not issued any
shares of Hiway Subsidiary Stock or other equity securities of the Hiway
Subsidiary, or any securities convertible into or exercisable for any shares of
Hiway Subsidiary Stock or other equity securities of the Hiway Subsidiary. Hiway
owns directly all of the issued and outstanding shares of Hiway Subsidiary
Stock, free and clear of all Liens, and all of such shares are duly authorized
and validly issued and are fully paid, nonassessable and free of preemptive
rights with no personal liability attaching to the ownership thereof. The Hiway
Subsidiary does not have and is not bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of any character calling for
the purchase or issuance of any shares of capital stock or any other equity
security of the Hiway Subsidiary or any securities representing the right to
purchase or otherwise receive any shares of capital stock or any other equity
security of the Hiway Subsidiary.
(c) The Hiway Disclosure Schedule sets forth a complete list of (i)
the shareholders of Hiway, (ii) the holders of Hiway Options and the material
terms of such Hiway Options, (iii) the officers and directors of Hiway, (iv) the
officers and directors of the Hiway Subsidiary, and (v) the percentage of the
outstanding voting stock of the Hiway Subsidiary owned or controlled, directly
or indirectly, by Hiway. Except for the following specified interests of Hiway
in WWWService GmbH (20%), RapidSite France (25%), RapidSite UK (60%) and
RapidSite Japan (KK) (35%) (collectively, the "Hiway Foreign Affiliates"), Hiway
does not have any direct or indirect equity or ownership interest in any other
business or entity. Hiway does not have any direct or indirect obligation or any
commitment to invest any funds in any corporation or other business or entity,
including any Hiway Foreign Affiliate. Each of the Hiway Foreign Affiliates is a
corporation or similar entity structured to limit Hiway's potential liability as
a partial owner in the Hiway Foreign Affiliate. Hiway has made available to Best
copies of all agreements between Hiway and each of the Hiway Foreign Affiliates,
and each of these agreements, to the best of Hiway's knowledge, (i) constitutes
a valid and binding
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obligation of Hiway and the Hiway Foreign Affiliate and (ii) complies with all
applicable law.
4.3 Authority; No Violation.
(a) Hiway has full corporate power and authority to execute and
deliver this Agreement and, subject to receipt of shareholder approval, to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement have been duly and validly approved by the Board of Directors
of Hiway. The Board of Directors of Hiway has directed that this Agreement and
the transactions contemplated by this Agreement be submitted to the shareholders
of Hiway for approval by written consent of such shareholders and, except for
the adoption of this Agreement by the requisite affirmative vote of the holders
of the outstanding Hiway Shares, no other corporate proceedings on the part of
Hiway are necessary to approve this Agreement and to consummate the transactions
contemplated by this Agreement. This Agreement has been duly and validly
executed and delivered by Hiway and (assuming due authorization, execution and
delivery by Best and the receipt of Hiway shareholder approval and all Requisite
Regulatory Approvals) constitutes a valid and binding obligation of Hiway,
enforceable against Hiway in accordance with its terms.
(b) Neither the execution and delivery of this Agreement by Hiway nor
the consummation by Hiway of the transactions contemplated by this Agreement,
nor compliance by Hiway with any of the terms or provisions of this Agreement,
will (i) violate any provision of the Hiway Articles of Incorporation or Bylaws,
or (ii) assuming that all Requisite Regulatory Approvals and all of the consents
and approvals referred to in Section 4.4 of this Agreement are duly obtained,
(x) to the best knowledge of Hiway, violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to Hiway or
any of its properties or assets, or (y) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any Lien upon any of the properties or assets of Hiway
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Hiway is a party, or by which it or any of its properties or
assets may be bound or affected, except for such violations, conflicts, breaches
or defaults which, either individually or in the aggregate, will not have or be
reasonably likely to have a Material Adverse Effect on Hiway.
4.4 Consents and Approvals. Except for (i) the filing of required
applications, notices and forms with, and the obtaining of approvals from each
applicable Governmental Entity, (ii) the filing of the Certificate of Merger
with the appropriate authorities of (a) the State of California pursuant to the
CCC and (b) the State of Florida pursuant to the FBCA, (iii) consents,
authorizations, approvals, filings or exemptions in connection with compliance
with the applicable provisions of federal and state securities
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laws and the rules and regulations thereunder and of any applicable SRO and (iv)
the approval of this Agreement by the requisite votes of the shareholders of
Best and the shareholders of Hiway, no consents or approvals of or filings or
registrations with any Governmental Entity or with any third party are necessary
in connection with the execution and delivery by Hiway of this Agreement or the
consummation by Hiway of the transactions contemplated by this Agreement.
4.5 Reports. Hiway and the Hiway Subsidiary (i) have timely filed all
reports, registrations and statements, together with all amendments required to
be made with respect thereto, that they were required to file with each
Governmental Entity having jurisdiction, (ii) have timely filed all other
reports and statements, together with all amendments required to be made with
respect thereto, that they were required to file under all applicable laws,
rules or regulations (including any report or statement required to be filed
pursuant to the laws, rules or regulations of the United States, any state, or
any other Governmental Entity) and (iii) have paid all fees and assessments due
and payable in connection therewith, except where the failure to file such
reports, registrations or statements, or to file any of such other reports, or
to pay such fees and assessments, either individually or in the aggregate, will
not have a Material Adverse Effect on Hiway. All such reports, registrations
and statements, together with all such amendments, were in substantial
compliance with applicable law when filed and, as of their respective dates, to
the best knowledge of Hiway, did not contain any false statements or material
misstatements of fact or omit to state any material facts necessary to make the
statements set forth therein not materially misleading in light of the
circumstances in which such statements were made. No material deficiencies have
been asserted by any Governmental Entity with respect to such reports,
registrations and statements or any such amendments thereto. No Governmental
Entity has initiated any proceeding or, to the best knowledge of Hiway,
investigation into the business or operations of Hiway or the Hiway Subsidiary
except where such proceedings or investigations are not likely, either
individually or in the aggregate, to have a Material Adverse Effect on Hiway.
There is no unresolved violation, criticism, or exception by any Governmental
Entity with respect to any report or statement relating to any examinations of
Hiway or the Hiway Subsidiary which, in the reasonable judgment of Hiway, is
likely, either individually or in the aggregate, to have a Material Adverse
Effect on Hiway.
4.6 Financial Statements. Hiway has previously made available to Best
copies of the consolidated balance sheets of Hiway and the Hiway Subsidiary as
of December 31 for the fiscal years 1997, 1996 and 1995, and the related
consolidated statements of income, changes in capital and surplus and cash flows
for the fiscal years 1997, 1996 and 1995 in each case accompanied by the audit
reports of Coopers & Lybrand LLP with respect to fiscal year 1997 and De Meo,
Young, McGrath & Company, P.A. with respect to fiscal years 1996 and 1995,
independent public accountants with respect to Hiway (collectively, the "Hiway
Financial Statements"). The consolidated balance sheets of Hiway as of December
31, 1997, 1996 and 1995 (including the related notes, where
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applicable) fairly present the consolidated financial position of Hiway and the
Hiway Subsidiary as of the dates thereof, and the other financial statements
referred to in this Section 4.6 (including the related notes, where applicable)
fairly present the results of the consolidated operations and changes in capital
and surplus and consolidated financial position of Hiway and the Hiway
Subsidiary for the respective fiscal periods or as of the respective dates
therein set forth; each of the Hiway Financial Statements (including the related
notes, where applicable) complies in all material respects with applicable
accounting requirements; and each of the Hiway Financial Statements (including
the related notes, where applicable) has been prepared in all material respects
in accordance with GAAP during the periods involved, except, in each case, as
indicated in such statements or in the notes thereto. The books and records of
Hiway and the Hiway Subsidiary have been, and are being, maintained in all
material respects in accordance with GAAP and all other applicable legal and
accounting requirements and reflect only actual transactions.
4.7 Broker's Fees. Neither Hiway nor the Hiway Subsidiary nor any of
their respective officers or directors has employed any broker or finder or
incurred any liability for any broker's fees, commissions or finder's fees in
connection with the transactions contemplated by this Agreement.
4.8 Absence of Certain Changes or Events.
(a) Except as disclosed in the Hiway Financial Statements or the
Hiway Disclosure Schedule, since December 31, 1997 (i) Hiway and the Hiway
Subsidiary taken as a whole have not incurred any material indebtedness or other
liability or obligation (whether absolute, accrued, contingent or otherwise),
other than in the ordinary course of their business, (ii) neither Hiway nor the
Hiway Subsidiary has declared or paid any dividend or other distribution in
respect of the Hiway Shares of Hiway or the capital stock of the Hiway
Subsidiary, or any direct or indirect redemption, purchase or other acquisition
by Hiway or the Hiway Subsidiary of any such Hiway Shares or stock; (iii) to the
best knowledge of Hiway, there has been no material adverse change in the
business, assets, properties, operations, or condition (financial or otherwise)
of Hiway or the Hiway Subsidiary, and (iv) no event has occurred which has had,
or is likely to have, individually or in the aggregate, a Material Adverse
Effect on Hiway.
(b) Since December 31, 1997, Hiway and the Hiway Subsidiary have
carried on their respective businesses in all material respects in the ordinary
and usual course theretofore conducted.
(c) Since December 31, 1997, neither Hiway nor the Hiway Subsidiary
has (i) except for such actions as are in the ordinary course of business
consistent with past practice or except as required by applicable law, (A)
increased the wages, salaries, compensation, pension, or other fringe benefits
or perquisites payable to any executive officer, employee, director, or trustee
from the amount thereof in effect as of December 31, 1997, or (B) granted any
severance or termination pay, entered into any contract to make or grant any
severance or termination pay, or paid any bonuses in excess of its 1997 salary
and employee benefits expenses, or (ii) suffered any strike, work stoppage,
slowdown, or other labor disturbance which, in its reasonable judgment, is
likely, either individually or in the aggregate, to have a Material Adverse
Effect on Hiway. The
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material terms of all employment agreements and consulting agreements to
which Hiway is a party are shown on Schedule 4.8(c) of the Hiway Disclosure
Schedule.
4.9 Legal Proceedings.
-----------------
(a) Neither Hiway nor the Hiway Subsidiary is a party to any, and there are
no pending (or to the best of their knowledge threatened) material legal,
administrative, arbitral or other proceedings, claims, actions or, to the best
knowledge of Hiway, governmental or regulatory investigations of any nature
(including noncontractual claims, bad faith claims and claims against any
directors or officers of Hiway or the Hiway Subsidiary) against Hiway or the
Hiway Subsidiary or challenging the validity or propriety of the transactions
contemplated by this Agreement, as to which there is a reasonable likelihood of
an adverse determination and which, if adversely determined, would, either
individually or in the aggregate, have a Material Adverse Effect on Hiway.
(b) There is no injunction, order, judgment, decree, or, to the best
knowledge of Hiway, regulatory restriction (including noncontractual claims, bad
faith claims and claims against any directors or officers of Hiway or the Hiway
Subsidiary) imposed upon Hiway or the Hiway Subsidiary or the assets of Hiway or
the Hiway Subsidiary which had, or might reasonably be expected to have, a
Material Adverse Effect on Hiway.
4.10 Taxes and Tax Returns.
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(a) Each of Hiway and the Hiway Subsidiary has duly filed all Tax Returns
required to be filed by them on or prior to the date of this Agreement (all such
returns being accurate and complete in all material respects) and has duly paid
or made provisions for the payment of all Taxes which have been incurred or are
due or claimed to be due from it by federal, state, county, foreign or local
taxing authorities on or prior to the date of this Agreement (including, if and
to the extent applicable, those due in respect of its properties, income,
business, capital stock, premiums, franchises, licenses, sales and payrolls)
other than (i) Taxes or other charges which are not yet delinquent or are being
contested in good faith and have not been finally determined for which adequate
reserves have been made on the Hiway Financial Statements, or (ii) Tax Returns
or Taxes the failure to file, pay or make provision for, either individually or
in the aggregate, are not likely, in the reasonable judgment of Hiway, to have a
Material Adverse Effect on Hiway. There are no material disputes pending, or
claims asserted for, Taxes or assessments upon Hiway or the Hiway Subsidiary for
which Hiway does not have adequate reserves, nor has Hiway or the Hiway
Subsidiary given any currently effective waivers extending the statutory period
of limitations applicable to any Tax Return for any period. In addition, (A)
proper and accurate amounts have been withheld by Hiway and the Hiway Subsidiary
from their employees' compensations for all prior periods in compliance in all
material respects with the income tax withholding provisions of applicable
federal, state and local laws, except where failure to do so would not have a
Material Adverse Effect on Hiway, (B) Tax Returns which are accurate and
complete in all material respects have been filed by Hiway and the Hiway
Subsidiary for all periods for which returns were due with
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respect to income tax withholding, Social Security and unemployment taxes,
except where failure to do so would not have a Material Adverse Effect on Hiway,
(C) the amounts shown on such Tax Returns to be due and payable have been paid
in full or adequate provision therefor has been included by Hiway in its
consolidated financial statements as of December 31, 1997, except where failure
to do so would not have a Material Adverse Effect on Hiway and (D) there are no
Tax Liens upon any property or assets of Hiway or the Hiway Subsidiary except
Liens for current Taxes not yet due or Liens that would not have a Material
Adverse Effect on Hiway. Neither Hiway nor the Hiway Subsidiary has been
required to include in income any adjustment pursuant to Section 481 of the Code
by reason of a voluntary change in accounting method initiated by Hiway or the
Hiway Subsidiary, and the IRS has not initiated or proposed any such adjustment
or change in accounting method, in either case which had or is reasonably likely
to have a Material Adverse Effect on Hiway. Except as set forth in the Hiway
Financial Statements, neither Hiway nor the Hiway Subsidiary has entered into a
transaction which is being accounted for as an installment obligation under
Section 453 of the Code, which would be reasonably likely to have a Material
Adverse Effect on Hiway. Neither Hiway nor the Hiway Subsidiary is a party to or
bound by any tax indemnity, tax sharing or tax allocation agreement. Neither
Hiway nor the Hiway Subsidiary has ever been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code other than as a
common parent corporation. Neither Hiway nor the Hiway Subsidiary is liable for
the Taxes of any person under Section 1.1502-6 of the Treasury Regulations (or
any similar provision of state, local or foreign Tax law) or by contract, as a
successor or otherwise. Neither Hiway nor the Hiway Subsidiary is a party to any
joint venture, partnership or other arrangement or contract that could be
treated as a partnership for federal income tax purposes. Hiway's basis and
excess loss account, if any, in the Hiway Subsidiary is set forth in the Hiway
Disclosure Schedule.
(b) Any amount that is reasonably likely to be received (whether in cash or
property or the vesting of property) as a result of any of the transactions
contemplated by this Agreement by any employee, officer, director or trustee of
Hiway or any of its affiliates who is a "Disqualified Individual" (as such term
is defined in proposed Treasury Regulation Section 1.280G-1) under any
employment, severance or termination agreement, other compensation arrangement
or Hiway Benefit Plan (as defined in Section 4.11(a) of this Agreement)
currently in effect will not be characterized as an "excess parachute payment"
(as such term is defined in Section 280G(b)(1) of the Code).
(c) No disallowance of a deduction under Section 162(m) of the Code for
employee remuneration of any amount paid or payable by Hiway or the Hiway
Subsidiary under any contract, plan, program, arrangement or understanding will
have a Material Adverse Effect on Hiway.
(d) Hiway has not made an election under Section 341(f) of the Code.
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(e) Hiway has not applied for any extensions of time on the filing of any
Tax Returns.
(f) Hiway's tax reserve (not including reserves created for timing) are
sufficient for all unpaid taxes.
4.11 Employee Benefit Plans; Labor Matters.
-------------------------------------
(a) The Hiway Disclosure Schedule sets forth a true and complete list of
each employee benefit plan, arrangement or agreement that is maintained as of
the date of this Agreement (the "Hiway Benefit Plans") by Hiway or its
Subsidiary or by any ERISA Affiliate, all of which together with Hiway would be
deemed a "single employer" within the meaning of Section 4001 of ERISA.
(b) Hiway has heretofore delivered or made available to Best true and
complete copies of each of the Hiway Benefit Plans and related documents,
including (i) the actuarial report for such Hiway Benefit Plan (if applicable)
for each of the last two years, and (ii) the most recent determination letter
from the IRS (if applicable) for such Hiway Benefit Plan.
(c) (i) Each of the Hiway Benefit Plans has been operated and administered
in all material respects in compliance with applicable laws including, but not
limited to, ERISA and the Code, (ii) each of the Hiway Benefit Plans intended to
be "qualified" within the meaning of Section 401(a) of the Code has received a
determination letter from the IRS that it is so qualified and no event has
occurred that will or is likely to give rise to disqualification of any such
plan or trust created thereunder, (iii) with respect to each Hiway Benefit Plan
which is subject to Title IV of ERISA, the present value of accrued benefits
under such Hiway Benefit Plan, based upon the actuarial assumptions used for
funding purposes in the most recent actuarial report prepared by the actuary for
such Hiway Benefit Plan with respect to such Hiway Benefit Plan, did not, as of
its latest valuation date, exceed the then current value of the assets of such
Hiway Benefit Plan allocable to such accrued benefits, (iv) no Hiway Benefit
Plan provides benefits, including death or medical benefits (whether or not
insured), with respect to current or former employees of Hiway, the Hiway
Subsidiary or any ERISA Affiliate beyond their retirement or other termination
of service, other than (A) coverage mandated by applicable law, (B) death
benefits or retirement benefits under any "employee pension plan" (as such term
is defined in Section 3(2) of ERISA), (C) deferred compensation benefits accrued
as liabilities on the books of Hiway, the Hiway Subsidiary or the ERISA
Affiliates, (D) benefits the full cost of which is borne by the current or
former employee (or his or her beneficiary), or (E) disability or severance
plans identified on the Hiway Disclosure Schedule, (v) no material liability
under Title IV of ERISA has been incurred by Hiway, the Hiway Subsidiary or any
ERISA Affiliate (other than liability for premiums to the PBGC arising in the
ordinary course) that has not been satisfied in full, and no condition exists
that presents a material risk to Hiway, the Hiway Subsidiary or any ERISA
Affiliate of incurring a material liability thereunder, (vi) no Hiway Benefit
Plan is a "multiemployer pension plan" (as such term is defined in Section
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3(37) of ERISA), (vii) all required contributions or other amounts payable by
Hiway or the Hiway Subsidiary as of the Effective Time with respect to each
Hiway Benefit Plan in respect of current or prior plan years have been timely
paid or accrued in accordance with GAAP and Section 412 of the Code, (viii) to
the best knowledge of Hiway, neither Hiway, the Hiway Subsidiary nor any ERISA
Affiliate has engaged in a transaction in connection with which Hiway, the Hiway
Subsidiary or any ERISA Affiliate reasonably could be subject to either a
material civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a
material tax imposed pursuant to Section 4975 or 4976 of the Code, and (ix)
there are no pending (or to the best knowledge of Hiway, threatened or
anticipated) claims (other than routine claims for benefits and administrative
expenses payable in the ordinary course) by, on behalf of or against any of the
Hiway Benefit Plans or any trusts related thereto which are, in the reasonable
judgment of Hiway, likely, either individually or in the aggregate, to have a
Material Adverse Effect on Hiway.
(d) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated by this Agreement will (i) result
in any material payment (including severance, unemployment compensation, golden
parachute or otherwise) becoming due to any director or employee of Hiway or any
of its affiliates from Hiway or any of its affiliates under any Hiway Benefit
Plan or otherwise, (ii) materially increase any benefits otherwise payable under
any Hiway Benefit Plan, or (iii) result in any acceleration of the time of
payment or vesting of any such benefits to any material extent.
(e) To the best knowledge of Hiway, Hiway and the Hiway Subsidiary are in
compliance in all material respects with all applicable laws and regulations
respecting employment and employment matters, discrimination in employment,
terms and conditions of employment, wages, hours and occupational safety and
health and employment practices (including federal and state wage and hour laws,
workplace safety laws, workers' compensation laws, equal employment opportunity
laws, equal pay laws, civil rights laws, the Americans With Disabilities Act and
the Fair Labor Standards Act of 1938, as amended), and are not engaged in any
unfair labor practice, except where the failure to be in compliance would not,
either individually or in the aggregate, have a Material Adverse Effect on
Hiway. Hiway and the Hiway Subsidiary have complied with all applicable notice
provisions of and have no material obligations under COBRA with respect to any
former employees or qualifying beneficiaries thereunder. There is no action,
claim, cause of action, suit or proceeding pending (or to the best knowledge of
Hiway threatened), on the part of any employee, independent contractor or
applicant for employment, including any such action, claim, cause of action,
suit or proceeding based on allegations of wrongful termination or
discrimination on the basis of age, race, religion, sex, sexual preference, or
mental or physical handicap or disability that could (or could reasonably be
expected to) have a Material Adverse Effect on Hiway. Neither Hiway nor the
Hiway Subsidiary is a party to any collective bargaining agreement or other
labor union contract nor does Hiway know of any activities or proceedings of any
labor union to organize any employees of Hiway or the Hiway Subsidiary. Hiway
and the Hiway Subsidiary have provided all employees with all relocation
benefits, stock options, bonuses and incentives, and all other compensation that
such employee has
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earned up through the date of this Agreement or that such employee was otherwise
promised in his or her employment agreement(s) with Hiway or the Hiway
Subsidiary, as the case may be.
(f) Except as disclosed in the Hiway Financial Statements, all material
sums due for employee compensation have been paid, accrued or otherwise provided
for, and all employer contributions for employee benefits, including deferred
compensation obligations, and all benefits under each Hiway Benefit Plan have
been duly and adequately paid or provided for in accordance with plan documents.
To the best knowledge of Hiway, no person treated as an independent contractor
by Hiway or the Hiway Subsidiary is an employee as defined in Section 3401(c) of
the Code, nor has any employee been otherwise improperly classified, as exempt,
nonexempt or otherwise, for purposes of federal or state income tax withholding
or overtime laws, rules, or regulations, except where such employee status or
improper classification would not, either individually or in the aggregate, have
a Material Adverse Effect on Hiway. To the best knowledge of Hiway, no
executive or key employee or group of employees of Hiway or the Hiway Subsidiary
has any plans to terminate his, her or their employment.
(g) Neither Hiway nor the Hiway Subsidiary has any commitment to (i) create
any additional plan or modify or change any existing Hiway Benefit Plan or (ii)
enter into any contract to provide compensation or benefits to any individual.
4.12 Compliance with Applicable Law. Hiway and the Hiway Subsidiary hold
all licenses, franchises, permits and authorizations necessary for the lawful
conduct of their respective businesses under and pursuant to, and have complied
in all material respects with and are not in default in any material respect
under any, and have maintained and conducted their respective businesses in all
material respects in compliance with, all applicable laws, statutes, orders,
rules, regulations, policies and/or guidelines of each Governmental Entity
relating to Hiway and the Hiway Subsidiary, except where the failure to hold
such license, franchise, permit or authorization or such noncompliance or
default would not, either individually or in the aggregate, have a Material
Adverse Effect on Hiway.
4.13 Certain Contracts.
-----------------
(a) Neither Hiway nor the Hiway Subsidiary is a party to or bound by any
contract, arrangement, commitment or understanding (whether written or oral) (i)
with respect to the employment of any directors, officers or employees other
than in the ordinary course of business consistent with past practice, (ii)
which, upon the consummation of the transactions contemplated by this Agreement
will (either alone or upon the occurrence of any additional acts or events)
result in any payment (whether of severance pay or otherwise) becoming due from
Hiway or its Subsidiary to any director, officer or employee thereof, (iii)
which materially restricts the conduct of any line of business by Hiway, (iv)
with or to a labor union or guild (including any collective bargaining
agreement) or (v) (including any stock option plan, stock appreciation right
plan, restricted stock plan or stock purchase plan) any of the benefits of which
will be
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increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement, or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement. Hiway has previously made
available to Best true and correct copies of all employment and deferred
compensation agreements which are in writing and to which Hiway or the Hiway
Subsidiary is a party. Each executory contract, arrangement, commitment or
understanding of the type described in this Section 4.13(a), whether or not set
forth in the Hiway Disclosure Schedule, is referred to in this Agreement as a
"Hiway Contract", and neither Hiway nor the Hiway Subsidiary knows of, or has
received notice of, any violation of the above by any of the other parties
thereto which, either individually or in the aggregate, would have a Material
Adverse Effect on Hiway.
(b) Each Hiway Contract is valid and binding on Hiway or the Hiway
Subsidiary, as applicable, and in full force and effect. Hiway and the Hiway
Subsidiary have in all material respects performed all obligations required to
be performed by them to date under each Hiway Contract, except where such
noncompliance, either individually or in the aggregate, would not have a
Material Adverse Effect on Hiway. No event or condition exists which
constitutes or, after notice or lapse of time or both, would constitute, a
material default on the part of Hiway or the Hiway Subsidiary under any such
Hiway Contract, except where such default, either individually or in the
aggregate, would not have a Material Adverse Effect on Hiway.
4.14 Agreements with Regulatory Agencies. Neither Hiway nor the Hiway
Subsidiary is subject to any cease-and-desist or other order issued by, or is a
party to any written agreement, consent agreement or memorandum of understanding
with, or is a party to any commitment letter or similar undertaking to, or is
subject to any order or directive by, or has adopted any board resolutions at
the request of, any Governmental Entity that currently restricts in any material
respect the conduct of its business or that in any material manner relates to
its management or its business (each, whether or not set forth in the Hiway
Disclosure Schedule, a "Hiway Regulatory Agreement"), nor has Hiway or the Hiway
Subsidiary been advised by any Governmental Entity that it is considering
issuing or requesting a Hiway Regulatory Agreement.
4.15 Undisclosed Liabilities. Except for (i) those liabilities that are
fully reflected or reserved against on the Hiway Financial Statements at
December 31, 1997 and (ii) those liabilities incurred in the ordinary course of
business consistent with past practice since December 31, 1997, neither Hiway
nor the Hiway Subsidiary has incurred any liability of any nature whatsoever
(whether absolute, accrued, contingent or otherwise and whether due or to become
due) that, either alone or when combined with all similar liabilities, had or
could reasonably be expected to have a Material Adverse Effect on Hiway.
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4.16 Intellectual Property.
(a) Hiway owns or has the right to use pursuant to license,
sublicense, agreement or permission all intellectual property necessary for the
operation of its business as presently conducted and as presently proposed to be
conducted.
(b) To the best knowledge of Hiway, Hiway has not interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
intellectual property rights of third parties and neither Hiway, nor any of the
directors or officers (and employees with responsibility for intellectual
property matters) of Hiway has ever received any charge, complaint, claim or
notice alleging any such interference, infringement, misappropriation or
violation. To the best knowledge of Hiway, no third party has interfered with,
infringed upon, misappropriated or otherwise come into conflict with any
intellectual property rights of Hiway.
(c) The Hiway Disclosure Schedule identifies each item of material
intellectual property owned by a third party that Hiway uses pursuant to
license, sublicense, agreement, or permission other than standard off-the-shelf
end-user software products. Hiway has made correct and complete copies of all
such licenses, sublicenses, agreements and permissions (as amended to date)
available to Best. With respect to each such item of such intellectual
property: (i) the license, sublicense, agreement or permission covering the
item is legal, valid, binding, enforceable and in full force and effect; (ii)
the license, sublicense, agreement or permission will continue to be legal,
valid, binding and enforceable and in full force and effect on identical terms
on and after the Closing Date; (iii) Hiway is not, and to the best knowledge of
Hiway, the other party to the license, sublicense, agreement or permission is
not in breach or default, and no event of default has occurred which with notice
or lapse of time, or both, would constitute a breach or default or permit
termination, modification or acceleration thereunder; (iv) no party to the
license, sublicense, agreement or permission has repudiated any provision
thereof; (v) with respect to such sublicense, the representations and warranties
set forth in (i) through (iv) above are, to the best knowledge of Hiway, true
and correct with respect to the underlying license; and (vi) Hiway has not
granted any sublicense or similar right with respect to the license, sublicense,
agreement or permission.
4.17 Real Property; Environmental Liability.
(a) Neither Hiway nor the Hiway Subsidiary owns any right, title or
interest in any real property. The Hiway Disclosure Schedule sets forth a
complete and accurate list and general description of all material leases for
real property ("Hiway Real Property Leases") to which Hiway or the Hiway
Subsidiary is a party or by which either of them is bound. Hiway and the Hiway
Subsidiary have valid leasehold interests in each of the Hiway Real Property
Leases held by any of them, free and clear of all mortgages, options to
purchase, covenants, conditions, restrictions, easements, liens, security
interests, charges, claims, assessments and encumbrances, except for (i) rights
of lessors, co-lessees or sublessees that are reflected in each Hiway Real
Property Lease, (ii) current taxes not yet due and payable; (iii) Liens of
public record; and (iv) such nonmonetary
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imperfections of title and encumbrances, if any, as do not materially detract
from the value of or materially interfere with the present use of such property.
To the best knowledge of Hiway, the activities of Hiway and the Hiway Subsidiary
with respect to all Hiway Real Property Leases held by each of them for use in
connection with their respective operations are in all material respects
permitted and authorized by applicable zoning laws, ordinances and regulations
and all laws, rules and regulations of each court, administrative agency or
commission and other governmental authority or instrumentality affecting such
properties. Hiway and the Hiway Subsidiary enjoy peaceful and undisturbed
possession under all material Hiway Real Property Leases to which they are
parties, and all of such Hiway Real Property Leases are valid and in full force
and effect.
(b) There are no legal, administrative, arbitral or other proceedings,
claims, actions, causes of action, private environmental investigations or
remediation activities or, to the best knowledge of Hiway, governmental
investigations of any nature seeking to impose, or that could reasonably be
expected to result in the imposition of, on Hiway or the Hiway Subsidiary any
liability or obligation arising under common law or under any local, state or
federal environmental statute, regulation or ordinance (including CERCLA),
pending or (to the best knowledge of Hiway) threatened against Hiway or the
Hiway Subsidiary, which liability or obligation could reasonably be expected to
have a Material Adverse Effect on Hiway. To the best knowledge of Hiway, there
is no reasonable basis for any such proceeding, claim, action or governmental
investigation that would impose any material liability or obligation that could
reasonably be expected to have a Material Adverse Effect on Hiway. Neither
Hiway nor the Hiway Subsidiary is subject to any agreement, order, judgment,
decree, letter or memorandum by or with any court, governmental authority,
regulatory agency or third party imposing any material liability or obligation
that could reasonably be expected to have a Material Adverse Effect on Hiway.
4.18 State Takeover Laws. The Board of Directors of Hiway has approved
the transactions contemplated by this Agreement and taken such action so that
the provisions of the FBCA and all other provisions of each state or local
"takeover" law applicable to Hiway will not apply to this Agreement or any of
the transactions contemplated by this Agreement.
4.19 Pooling of Interests. Hiway has no reason to believe that the Merger
will not qualify as a "pooling of interests" for accounting purposes.
4.20 Investment Intent. Each shareholder of Hiway is acquiring the Best
Common Stock for his or her own account, for investment only and not with a view
to the distribution or resale. Any sale, transfer or other disposition of the
Best Common Stock will be made in compliance with all applicable provisions of
the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
4.21 Accuracy of Information Supplied. To the best knowledge of Hiway,
none of the information supplied or to be supplied by Hiway or the Hiway
Subsidiary to Best
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pursuant to this Agreement contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they are made, not misleading.
4.22 Effective Time of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of Hiway set
forth in this Agreement, as updated by any written disclosure schedule delivered
pursuant to Section 6.10 of this Agreement, and except for representations which
speak as of a given date, shall be deemed to be made on and as of the date of
this Agreement, as of the Closing Date, and as of the Effective Time.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
-----------------------------------------
5.1 Conduct of Businesses Prior to the Effective Times. During the period
from the date of this Agreement to the Effective Time, except as expressly
contemplated or permitted by this Agreement (including the Best Disclosure
Schedule and the Hiway Disclosure Schedule), each of Best and Hiway shall, and
Hiway shall cause its Subsidiary to (a) conduct its business in the usual,
regular and ordinary course consistent with past practice, (b) use reasonable
best efforts to maintain and preserve intact its business organization,
employees and advantageous business relationships and retain the services of its
key officers and key employees and (c) take no action which would adversely
affect or delay the ability of any party to this Agreement to obtain any
Requisite Regulatory Approval for the transactions contemplated by this
Agreement or to perform its covenants and agreements under this Agreement.
5.2 Forbearances. During the period from the date of this Agreement to
the Effective Time, except as set forth in the Best Disclosure Schedule or the
Hiway Disclosure Schedule, as the case may be, and except as expressly
contemplated or permitted by this Agreement, neither Best nor Hiway shall, and
Hiway shall not permit its Subsidiary to, without the prior written consent of
the other:
(a) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money (other than short-term
indebtedness incurred to refinance short-term indebtedness), assume, guarantee,
endorse or otherwise as an accommodation become responsible for the obligations
of any other individual, corporation or other entity, or make any loan or
advance;
(b) (i) adjust, split, combine or reclassify any capital stock; (ii)
make, declare or pay any dividend or make any other distribution on, or directly
or indirectly redeem, purchase or otherwise acquire, any shares of its capital
stock or any securities or obligations convertible into or exchangeable for any
shares of its capital stock; (iii) grant any stock appreciation rights or grant
any individual, corporation or other entity any right to acquire any shares of
its capital stock (and no such rights or options shall be granted, except as
otherwise agreed in writing by Best and Hiway); or (iv) issue any additional
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shares of capital stock except pursuant to the exercise of stock options or
warrants or the conversion of convertible securities outstanding as of the date
of this Agreement or approved hereunder;
(c) sell, transfer, mortgage, encumber or otherwise dispose of any of
its properties or assets to any individual, corporation or other entity other
than a Subsidiary, or cancel, release or assign any indebtedness to any such
person or any claims held by any such person, except in the ordinary course of
business consistent with past practice or pursuant to contracts or agreements in
force at the date of this Agreement;
(d) except for transactions in the ordinary course of business
consistent with past practice or pursuant to contracts or agreements in force at
the date of this Agreement, make any material investment either by purchase of
stock or securities, contributions to capital, property transfers, or purchase
of any property or assets of any other individual, corporation or other entity
other than a Subsidiary;
(e) except for transactions in the ordinary course of business
consistent with past practice, enter into or terminate any material contract or
agreement, or make any change in any of its material leases or contracts, other
than renewals of contracts and leases without material adverse changes of terms;
(f) increase in any manner the compensation or fringe benefits of any
of its employees or pay any pension or retirement allowance not required by any
existing plan or agreement to any such employees, or become a party to, amend or
commit itself to any pension, retirement, profit-sharing or welfare benefit plan
or agreement or employment agreement with or for the benefit of any employee
other than in the ordinary course of business consistent with past practice or
accelerate the vesting of any stock options or other stock-based compensation;
(g) settle any claim, action or proceeding involving money damages,
except in the ordinary course of business consistent with past practice;
(h) take any action that would prevent or impede the Merger from
qualifying (i) for "pooling of interests" accounting treatment or (ii) as a
reorganization within the meaning of Section 368 of the Code;
(i) amend its Articles of Incorporation or its Bylaws, except as
contemplated by this Agreement;
(j) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect at any time prior to the
Effective Time, or in any of the conditions to the Merger set forth in Article
VII of this Agreement not being satisfied or in a violation of any provision of
this Agreement, except, in every case, as may be required by applicable law or
existing contractual obligations; or
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(k) agree to, or make any commitment to, take any of the actions
prohibited by this Section 5.2.
ARTICLE VI
ADDITIONAL AGREEMENTS
---------------------
6.1 Regulatory Matters.
(a) In connection with the solicitation of approval of the principal
terms of the Merger by the shareholders of Best and the shareholders of Hiway,
the parties will prepare a Joint Proxy Statement. Best shall mail or deliver the
Joint Proxy Statement to its shareholders and Hiway shall thereafter mail or
deliver the Joint Proxy Statement to its shareholders. The information provided
and to be provided by Best and Hiway for the Joint Proxy Statement will not, on
the date on which approval of the Merger by the shareholders of Best and the
shareholders of Hiway is obtained, contain any untrue statement of material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they were
made, not misleading. Each of Best and Hiway agree promptly to correct any
information provided by it which becomes false or misleading in any material
respect and to take all steps necessary to amend or supplement the Joint Proxy
Statement to correct the same and to cause the Joint Proxy Statement so
corrected to be distributed to the shareholders of Best and the shareholders of
Hiway to the extent required by applicable law.
(b) Best will prepare and file, and Hiway will cooperate with and
assist Best in preparing and filing, all statements, applications,
correspondence or forms required to be filed with appropriate state securities
law regulatory authorities to register or qualify the shares of Best Common
Stock to be issued upon consummation of the Merger or to establish an exemption
from such registration or qualification (the "Blue Sky Filings").
(c) Each of Best and Hiway shall duly make all other regulatory
filings required to be made by each in respect of this Agreement and the
transactions contemplated by this Agreement. Each party shall use all reasonable
efforts to obtain all permits, approvals and consents required to be obtained
prior to the consummation of the Merger or necessary to carry out the
transactions contemplated by this Agreement under applicable federal, state,
local and foreign laws, rules and regulations.
(d) Each party will furnish all information, including certificates,
consents and opinions of counsel concerning it and the Hiway Subsidiary
reasonably deemed necessary by the other party for the preparation of the Joint
Proxy Statement, the Blue Sky Filings and the applications for all Requisite
Regulatory Approvals. Each party covenants and agrees that all information
furnished by it for inclusion in the Joint Proxy Statement, Blue Sky Filings and
all other documents filed to obtain the Requisite Regulatory Approvals will
comply in all material respects with the provisions of
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applicable law, and will not contain any untrue statement of material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading.
(e) Each party shall provide to the other (i) promptly after filing
thereof, copies of all statements, applications, correspondence or forms filed
by such party prior to the Closing Date with state securities law regulatory
authorities and each other Governmental Entity in connection with the
transactions contemplated by this Agreement; and (ii) promptly after delivery
to, or receipt from, such regulatory authorities, all written communications,
letters, reports or other documents relating to the transactions contemplated by
this Agreement.
(f) The parties shall cooperate with each other and use their
reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings, to
obtain as promptly as practicable all permits, consents, approvals and
authorizations of all third parties and Governmental Entities which are
necessary or advisable to consummate the transactions contemplated by this
Agreement, and to comply with the terms and conditions of all such permits,
consents, approvals and authorizations of all such Governmental Entities. Best
and Hiway shall have the right to review in advance, and, to the extent
practicable, each will consult the other on, in each case subject to applicable
laws relating to the exchange of information, all the information relating to
Best or Hiway, as the case may be, and the Hiway Subsidiary, which appear in any
filing made with, or written materials submitted to, any third party or any
Governmental Entity in connection with the transactions contemplated by this
Agreement. In exercising the foregoing right, each of the parties hereto shall
act reasonably and as promptly as practicable. The parties agree to consult with
each other with respect to the obtaining of all permits, consents, approvals and
authorizations of all third parties and Governmental Entities necessary or
advisable to consummate the transactions contemplated by this Agreement and each
party will keep the other apprised of the status of matters relating to
completion of the transactions contemplated by this Agreement.
(g) Best and Hiway shall, upon request, furnish each other with all
information concerning themselves, the Hiway Subsidiary, directors, officers and
shareholders and such other matters as may be reasonably necessary or advisable
in connection with the Joint Proxy Statement, and each other statement, filing,
notice or application made by or on behalf of Best, Hiway or the Hiway
Subsidiary to any Governmental Entity in connection with the Merger and the
other transactions contemplated by this Agreement.
(h) Best and Hiway shall promptly advise each other upon receiving
each communication from any Governmental Entity whose consent or approval is
required for consummation of the transactions contemplated by this Agreement
which causes such party to believe that there is a reasonable likelihood that
any Requisite
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Regulatory Approval will not be obtained or that the receipt of any such
approval will be materially delayed.
6.2 Access to Information.
(a) Upon reasonable notice and subject to applicable laws relating to
the exchange of information, each of Best and Hiway shall, and Hiway shall cause
its Subsidiary to, afford to the officers, employees, accountants, counsel and
other representatives of the other party, access during normal business hours
during the period prior to the Effective Time, to all its properties, books,
contracts, commitments and records. During such period, each of Best and Hiway
shall, and Hiway shall cause its Subsidiary to, make available to the other
party (i) a copy of each report, schedule, and other document filed or received
by it during such period (other than reports or documents which Best or Hiway,
as the case may be, is not permitted to disclose under applicable law or by
agreement) and (ii) all other information concerning its business, properties
and personnel as such party may reasonably request. Neither Best nor Hiway nor
the Hiway Subsidiary shall be required to provide access to or to disclose
information where such access or disclosure would violate or prejudice the
rights of Best's or Hiway's, as the case may be, customers, jeopardize the
attorney-client and work product privileges of the entity in possession or
control of such information or contravene any law, rule, regulation, order,
judgment, decree, fiduciary duty or binding agreement entered into prior to the
date of this Agreement. The parties hereto will make appropriate substitute
disclosure arrangements under circumstances in which the restrictions of the
preceding sentence apply.
(b) Each of Best and Hiway agrees to keep confidential, and not
divulge to any other party or person (other than employees of, and attorneys,
accountants, financial advisors and other representatives for, Best and Hiway),
all non-public documents, information, records and financial statements received
from the other, and all reports, information and financial information obtained
through audits or other reviews conducted pursuant to this Agreement (unless
readily ascertainable from public or published information, or trade sources, or
already known or subsequently developed by a party independently of any
investigation or received from a third party not under an obligation to the
other party to keep such information confidential), and to use the same only in
connection with the transactions contemplated by this Agreement; and if the
transactions contemplated by this Agreement are not consummated for any reason,
each party agrees to return promptly to the other party all written materials
furnished by the other party, and all copies thereof, in connection with such
investigation, and to destroy all documents and records in its possession
containing extracts or summaries of any such non-public information.
(c) No investigation by either of the parties or their respective
representatives shall affect the representations, warranties, covenants or
conditions of the other set forth in this Agreement.
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6.3 Best Shareholder Approval. Best shall call a meeting of its
shareholders to be held as soon as reasonably practicable for the purpose of
obtaining the requisite shareholder approval required in connection with this
Agreement and the Merger. Best will, through its Board of Directors, subject to
its fiduciary obligations as determined by its Board of Directors, recommend to
its shareholders approval of this Agreement and the Merger.
6.4 Hiway Shareholder Approval. Hiway shall seek the written consent of
its shareholders as soon as reasonably practicable for the purpose of obtaining
the requisite shareholder approval required in connection with this Agreement
and the Merger, and shall use its reasonable best efforts to cause such written
consent to be effective on or before the date of the meeting of the shareholders
of Best called for the purpose of obtaining the requisite Best shareholder
approval required in connection with this Agreement and the Merger. Hiway will,
through its Board of Directors, subject to its fiduciary obligations as
determined by its Board of Directors, recommend to its shareholders approval of
this Agreement and the Merger.
6.5 Legal Conditions to Merger. Each of Best and Hiway shall, and Hiway
shall cause its Subsidiary to, use its reasonable best efforts (a) to take, or
cause to be taken, all actions necessary, proper or advisable to comply promptly
with all legal requirements which may be imposed on such party or the Hiway
Subsidiary with respect to the Merger and, subject to the conditions set forth
in Article VII of this Agreement, to consummate the transactions contemplated by
this Agreement and (b) to obtain (and to cooperate with the other party to
obtain) each consent, authorization, order and approval of, or exemption by,
each Governmental Entity and each other third party which is required to be
obtained by Best or Hiway or the Hiway Subsidiary in connection with the Merger
and the other transactions contemplated by this Agreement.
6.6 Affiliates.
----------
(a) For purposes of qualifying the Merger for "pooling of interests"
accounting treatment, Best and Hiway shall use their respective reasonable best
efforts to cause each director, executive officer and other person who is an
"Affiliate" (as defined below) of such party to deliver, as soon as practicable
after the date of this Agreement, and prior to the date of the meeting of
shareholders called by Best to approve this Agreement, a written agreement, in
the form of Exhibit A to this Agreement in the case of a Hiway Affiliate and
Exhibit B to this Agreement in the case of a Best Affiliate, providing that such
person will not sell, pledge, transfer or otherwise dispose of any shares of the
capital stock of Best held by such Affiliate and, in the case of the Affiliates
of Hiway, the shares of the capital stock of Hiway held by and shares of Best
Common Stock to be received by such Affiliate in the Merger except in compliance
with the applicable provisions of the Securities Act of 1933, as amended (the
"Securities Act"), and the rules and regulations thereunder; and (ii) except to
the extent and under the conditions permitted therein, during the period
commencing 30 days prior to the Merger and ending at the time of the publication
of financial results covering at least 30 days of combined operations of Best
and Hiway.
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(b) For purposes of this Agreement, the term "Affiliate" means any person,
entity or group controlling, controlled by, or under common control with, the
specified person or entity and "control" of a person or entity (including, with
correlative meaning, the terms "controlled by" and "under common control with")
means the possession, direct or indirect, of the power to direct or cause the
direction of the management and policies of an entity or individual, whether
through the ownership of voting securities, by contract or otherwise.
6.7 Employee Benefit Plans.
----------------------
(a) Prior to the Closing Date, Best and Hiway shall cooperate in
reviewing, evaluating and analyzing the Best Benefit Plans and Hiway Benefit
Plans with a view towards developing appropriate new benefit plans for the
employees covered thereby subsequent to the Merger in substantial conformance
with the Best Benefit Plans in effect as of the Effective Time, in replacement
and substitution for the Hiway Benefit Plans which shall be canceled, terminated
or frozen to the extent permitted by applicable law. It is the intention of Best
and Hiway to develop such new benefit plans, effective as soon as practicable
after the Effective Time, which, among other things, (i) treat similarly
situated employees on a substantially equivalent basis, taking into account all
relevant factors, including duties, geographic location, tenure, qualifications
and abilities, and (ii) do not discriminate between employees who were covered
by Best Benefit Plans, on the one hand, and those covered by Hiway Benefit
Plans, on the other, prior to the Effective Time, but (iii) with the overall
view that the Hiway Benefit Plans would be canceled, terminated or frozen, and
replaced by the Best Benefit Plans for times following the Effective Time to the
extent permitted by applicable law.
(b) Nothing in this Section shall be interpreted as preventing Best from
amending, modifying or terminating any Best Benefit Plans, Hiway Benefit Plans,
or other contracts, arrangements, commitments or understandings, in accordance
with their terms and applicable law.
6.8 Indemnification; Directors' and Officers' Insurance.
---------------------------------------------------
(a) In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative,
including any such claim, action, suit, proceeding or investigation in which any
individual who is now, or has been at any time prior to the date of this
Agreement, or who becomes prior to the Effective Time, a director or officer of
Best or of Hiway or the Hiway Subsidiary, including any entity specified in the
Best Disclosure Schedule or the Hiway Disclosure Schedule (the "Indemnified
Parties"), is or is threatened to be, made a party based in whole or in part on,
or arising in whole or in part out of, or pertaining to (i) the fact that he is
or was a director, officer or employee of Best, Hiway, the Hiway Subsidiary or
any entity specified in the Best Disclosure Schedule or the Hiway Disclosure
Schedule, or any of their respective predecessors, or (ii) this Agreement or any
of the transactions contemplated by this Agreement or thereby, whether in any
case asserted or arising
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before or after the Effective Time, the parties agree to cooperate and use their
reasonable best efforts to defend against and respond thereto. It is understood
and agreed that after the Effective Time, Best shall indemnify and hold
harmless, as and to the fullest extent permitted by law (and, as relates to acts
or times prior to the Effective Time, to the fullest extent permitted under
applicable law at such time, including the provisions of Hiway's Articles of
Incorporation), each such Indemnified Party against all losses, claims, damages,
liabilities, costs, expenses (including reasonable attorneys' fees and expenses
in advance of the final disposition of any claim, suit, proceeding or
investigation to each Indemnified Party to the fullest extent permitted by law
upon receipt of any undertaking required by applicable law), judgments, fines
and amounts paid in settlement in connection with any such threatened or actual
claim, action, suit, proceeding or investigation, and in the event of any such
threatened or actual claim, action, suit, proceeding or investigation (whether
asserted or arising before or after the Effective Time), the Indemnified Parties
may retain counsel reasonably satisfactory to them after consultation with Best;
provided, however, that (A) Best shall have the right to assume the defense
thereof and upon such assumption Best shall not be liable to any Indemnified
Party for any legal expenses of other counsel or any other expenses subsequently
incurred by any Indemnified Party in connection with the defense thereof, except
that if Best elects not to assume such defense, the Indemnified Party may retain
counsel reasonably satisfactory to him after consultation with Best, and Best
shall pay the reasonable fees and expenses of such counsel for the Indemnified
Party, (B) Best shall be obligated pursuant to this paragraph to pay for only
one firm of counsel for all Indemnified Parties except to the extent
representation by a single firm or attorney is, in the absence of an informed
consent by the Indemnified Party, prohibited by ethical rules relating to
lawyers' conflicts of interest, (C) Best shall not be liable for any settlement
effected without its prior written consent (which consent shall not be
unreasonably withheld), (D) Best shall have no obligation hereunder to any
Indemnified Party when and if a court of competent jurisdiction shall ultimately
determine, and such determination shall have become final and nonappealable,
that indemnification of such Indemnified Party in the manner contemplated by
this Agreement is prohibited by applicable law, and (E) Best shall have no
obligation hereunder to any Indemnified Party for which and to the extent
payment is actually and unqualifiedly made to such Indemnified Party under any
insurance policy, any other agreement for indemnification or otherwise. Any
Indemnified Party intending to claim indemnification under this Section, upon
learning of any such claim, action, suit, proceeding or investigation, shall
notify Best thereof, provided that the failure to so notify shall not affect the
obligations of Best under this Section except to the extent such failure to
notify materially prejudices Best. Best's obligations under this Section
continue in full force and effect for a period of six years after the Effective
Time (or the period of the applicable statute of limitations, if longer);
provided, however, that all rights to indemnification in respect of any claim (a
"Claim") asserted or made within such period shall continue until the final
disposition of such Claim.
(b) Best shall use its reasonable best efforts to cause the individuals
serving as officers and directors of (i) Best, (ii) each entity specified in the
Best Disclosure Schedule, (iii) Hiway, (iv) the Hiway Subsidiary or (v) each
entity specified in
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the Hiway Disclosure Schedule immediately prior to the Effective Time to be
covered for a period of six years after the Effective Time (or the period of the
applicable statute of limitations, if longer) by the directors' and officers'
liability insurance policy maintained by Best with respect to acts or omissions
occurring prior to the Effective Time which were committed by such officers and
directors in their capacity as such; provided, however, that in no event shall
Best be required to expend more than 200% of the current amount expended by
Hiway (the "Insurance Premium Amount") to maintain or procure insurance coverage
pursuant hereto; and provided, further, that if Best is unable to maintain or
obtain the insurance called for by this Section, Best shall use its reasonable
best efforts to obtain as much comparable insurance as available for the
Insurance Premium Amount.
(c) If Best or any of its successors or assigns (i) consolidates with or
merges into any other person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger or (ii) transfers or
conveys all or substantially all of its properties and assets to any person,
then, and in each such case, to the extent necessary, proper provision shall be
made so that the successors and assigns of Best assume the obligations set forth
in this Section.
(d) The provisions of this Section are intended to be for the benefit of,
and shall be enforceable by, each Indemnified Party and his or her heirs and
representatives.
6.9 Additional Agreements.
---------------------
(a) In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement or to vest
Best with full title to all properties, assets, rights, approvals, immunities
and franchises of any of the parties to this Agreement, the proper officers and
directors of each party to this Agreement and the Hiway Subsidiary shall take
all such necessary action as may be reasonably requested by, and at the sole
expense of, Best.
(b) Prior to the Effective Time, neither Hiway nor the Hiway Subsidiary
nor any Hiway shareholder shall acquire, directly or indirectly, beneficial or
record ownership of any shares of Best Common Stock or other equity securities
of Best, or any securities convertible into or exercisable for any shares of
Best Common Stock or other equity securities of Best.
(c) In connection with this Agreement and the issuance of shares of Best
Common Stock to shareholders of Hiway hereunder, Hiway will use its reasonable
best efforts to cause its shareholders to become parties to that certain
Shareholder Buy-Sell Agreement with Best in the form attached hereto as Exhibit
E immediately prior to the Effective Time.
6.10 Advice of Changes. Best and Hiway shall give prompt notice to the
other party as soon as practicable after it has actual knowledge of (i) the
occurrence, or failure
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to occur, of any event which would or would be likely to cause any party's
representations or warranties contained in this Agreement to be untrue or
incorrect in any material respect at any time after the date of this Agreement
to the Effective Time, or (ii) any failure on its part or on the part of any of
the Hiway Subsidiary's officers, directors, employees, representatives or agents
to comply with or satisfy in any material respect any covenant, condition or
agreement to be complied with or satisfied by such party under this Agreement.
Each party shall have the right to deliver to the other party a written
disclosure schedule as to any matter of which it becomes aware following
execution of this Agreement which would constitute a breach of any
representation, warranty or covenant of this Agreement by such party,
identifying on such disclosure schedule the representation, warranty or covenant
which would be so breached, provided that each such disclosure schedule shall be
delivered as soon as practicable after such party becomes aware of the matter
disclosed therein. The nondisclosing party shall have five business days after
receipt of such disclosure schedule to notify the disclosing party that (x) it
will close notwithstanding the new disclosure, (y) it will not close based on
such new disclosure, or (z) further investigation or negotiation is required for
it to reach a determination whether or not to close based on such new
disclosure. If the parties thereafter are unable to reach agreement on a
mutually satisfactory means of resolving the matter so disclosed, the
nondisclosing party shall have the right in its discretion, to terminate this
Agreement pursuant to Section 8 of this Agreement. Best shall update the Best
Disclosure Schedule (the "Closing Date Best Disclosure Schedule") to a date that
is no earlier than ten business days prior to the Closing Date and no later than
seven business days prior to the Closing Date and shall deliver the Closing Date
Best Disclosure Schedule to Hiway no earlier than six business days prior to the
Closing Date. Hiway shall update the Hiway Disclosure Schedule (the "Closing
Date Hiway Disclosure Schedule") to a date that is no earlier than ten business
days prior to the Closing Date and no later than seven business days prior to
the Closing Date and shall deliver the Closing Date Hiway Disclosure Schedule to
Best no earlier than six business days prior to the Closing Date.
ARTICLE VII
CONDITIONS PRECEDENT
--------------------
7.1 Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of the following conditions:
(a) This Agreement and the transactions contemplated by this Agreement
shall have been approved and adopted by the requisite affirmative vote of the
holders of Best Common Stock and Best Preferred Stock entitled to vote thereon.
(b) This Agreement and the transactions contemplated by this Agreement
shall have been approved and adopted by the requisite affirmative vote of the
shareholders of Hiway entitled to vote thereon.
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(c) The Certificate of Merger shall have been filed with the
appropriate Governmental Entities immediately prior to the Closing (as defined
in Section 9.1).
(d) All approvals of Governmental Entities required to consummate the
transactions contemplated by this Agreement shall have been obtained and shall
remain in full force and effect, without the imposition of any condition which
in the reasonable judgment of Best and Hiway is materially burdensome upon Best
or Hiway and the Hiway Subsidiary (all such approvals being referred to in this
Agreement as the "Requisite Regulatory Approvals"). Without limiting the
generality of the foregoing, all required Blue Sky Filings shall have been made,
and the issuance of Best Common Stock in the Merger shall have been qualified or
registered with the appropriate state securities law regulatory authorities of
all states in which qualification or registration is required under applicable
state securities laws, and such qualifications or registrations shall not have
been suspended or revoked, or shall be exempt from such qualification or
registration.
(e) No order, injunction or decree issued by any Governmental Entity
of competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger or any of the other transactions contemplated by this
Agreement shall be in effect. No statute, rule, regulation, order, injunction or
decree shall have been enacted, entered, promulgated or enforced by any
Governmental Entity which prohibits, materially restricts or makes illegal
consummation of the Merger.
(f) The percentage interests of those Hiway Shareholders perfecting
their dissenters' rights under applicable law, when aggregated, shall not exceed
1% of the percentage interests of all Hiway shareholders as a whole.
7.2 Conditions to Obligation of Best. The obligation of Best to effect
the Merger is also subject to the satisfaction or waiver by Best at or prior to
the Effective Time of the following conditions:
(a) The representations and warranties of Hiway set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and (except (i) to the extent such representations and warranties
speak as of an earlier date and (ii) for any changes to the Hiway Disclosure
Schedule that are disclosed by Hiway to Best in the Closing Date Hiway
Disclosure Schedule) as of the Closing Date as though made on and as of the
Closing Date. Best shall have received a certificate signed on behalf of Hiway
by the Chief Executive Officer and the Chief Financial Officer of Hiway to the
foregoing effect, and to which any Closing Date Hiway Disclosure Schedule shall
be appended.
(b) Hiway shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date, and Best shall have received a certificate signed on behalf of
Hiway by the Chief Executive Officer and the Chief Financial Officer of Hiway to
such effect.
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(c) Hiway and the Hiway Subsidiary, taken as a whole, shall not have
suffered a material adverse change in their businesses, assets, properties,
operations or condition (financial or otherwise); and no event or circumstance
shall have occurred which has, or is likely to have, a Materially Adverse Effect
on Hiway or upon the right of Hiway or the Hiway Subsidiary to conduct their
respective businesses as presently conducted.
(d) Hiway shall have delivered to Best an opinion, dated the Closing
Date, of counsel for Hiway, satisfactory to Best and its counsel, to the effect
set forth on Exhibit C to this Agreement. Such opinion shall also cover such
other matters incident to the transactions herein contemplated as Best and its
counsel may reasonably request. In rendering its opinion, counsel to Hiway may
rely on certificates of officers of Hiway, opinions of other counsel, the
authenticity of all signatures on documents believed to be genuine and such
other evidence as they may deem necessary or desirable.
(e) Hiway shall have delivered to Best such other certificates and
instruments as Best and its counsel may reasonably request. The form and
substance of all certificates, instruments, opinions and other documentation
delivered to Best under this Agreement shall be reasonably satisfactory to Best
and its counsel.
(f) The shareholders of Hiway shall have entered into that certain
Shareholder Buy-Sell Agreement with Best in the form attached hereto as Exhibit
E.
7.3 Conditions to Obligation of Hiway. The obligation of Hiway to effect
the Merger is also subject to the satisfaction or waiver by Hiway at or prior to
the Effective Time of the following conditions:
(a) The representations and warranties of Best set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and (except (i) to the extent such representations and warranties
speak as of an earlier date and (ii) for any changes to the Best Disclosure
Schedule that are disclosed by Best to Hiway in the Closing Date Best Disclosure
Schedule) as of the Closing Date as though made on and as of the Closing Date.
Hiway shall have received a certificate signed on behalf of Best by the Chief
Executive Officer and the Chief Financial Officer of Best to the foregoing
effect, and to which any Closing Date Best Disclosure Schedule shall be
appended.
(b) Best shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the Closing
Date, and Hiway shall have received a certificate signed on behalf of Best by
the Chief Executive Officer and the Chief Financial Officer of Best to such
effect.
(c) Best shall not have suffered a material adverse change in its
financial condition, operations, assets or business prospects; and no event or
circumstance
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shall have occurred which has, or is likely to have, a Materially
Adverse Effect on Best or upon the right of Best to conduct its business as
presently conducted.
(d) Best shall have delivered to Hiway an opinion, dated the Closing
Date, of counsel for Best, satisfactory to Hiway and its counsel, to the effect
set forth on Exhibit D to this Agreement. Such opinion shall also cover such
other matters incident to the transactions herein contemplated as Hiway and its
counsel may reasonably request. In rendering their opinion, counsel to Best may
rely on certificates of officers of Best, opinions of other counsel, the
authenticity of all signatures on documents believed to be genuine and such
other evidence as they may deem necessary or desirable.
(e) Best shall have delivered to Hiway such other certificates and
instruments as Hiway and its counsel may reasonably request. The form and
substance of all certificates, instruments and other documentation delivered to
Hiway under this Agreement shall be reasonably satisfactory to Hiway and its
counsel.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination. This Agreement may be terminated at any time prior to
the Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the shareholders of Best and the shareholders of
Hiway:
(a) by mutual consent of Best and Hiway in a written instrument, if
the Board of Directors of Best and the Board of Directors of Hiway so determine
to terminate this Agreement by an affirmative vote of a majority of the members
of its entire Board;
(b) by either Best or Hiway if (i) any Governmental Entity which must
grant a Requisite Regulatory Approval has denied approval of the Merger and such
denial has become final and nonappealable or any Governmental Entity of
competent jurisdiction has issued a final nonappealable order permanently
enjoining or otherwise prohibiting the consummation of the transactions
contemplated by this Agreement, and (ii) the Board of Directors of Best or the
Board of Directors of Hiway, as the case may be, determines to terminate this
Agreement by an affirmative vote of a majority of the members of its entire
Board;
(c) by either Best or Hiway if (i) the Merger shall not have been
consummated on or before June 1, 1998, unless the failure of the Merger to be
consummated by such date shall be due to the failure of the party seeking to
terminate this Agreement to perform or observe the covenants and agreements of
such party set forth in this Agreement, and (ii) the Board of Directors of Best
or the Board of Directors of Hiway, as the case may be, determines to terminate
this Agreement by an affirmative vote of a majority of the members of its entire
Board;
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(d) by either Best or Hiway (provided that the terminating party is
not then in material breach of any representation, warranty, covenant or other
agreement contained in this Agreement) if (i) there shall have been a material
breach of any of the covenants or agreements or any of the representations or
warranties set forth in this Agreement on the part of the other party, which
breach is not cured within 45 days following written notice to the party
committing such breach, or which breach, by its nature or timing, cannot be
cured prior to the Closing Date, and (ii) the Board of Directors of Best or the
Board of Directors of Hiway, as the case may be, determines to terminate this
Agreement by an affirmative vote of a majority of the members of its entire
Board;
(e) by Best upon written notice to Hiway if the Board of Directors of
Hiway does not, or shall indicate to Best that it is unwilling or unable to,
publicly recommend in the Joint Proxy Statement that its shareholders approve
and adopt this Agreement, or if after recommending in the Joint Proxy Statement
that its shareholders approve and adopt this Agreement, the Board of Directors
of Hiway shall have withdrawn, modified or amended such recommendation in any
respect materially adverse to Best, provided that any such notice of termination
must be given not later than 45 days after the later of the date Best shall have
been advised by Hiway in writing that it is unable or unwilling to so recommend
in the Joint Proxy Statement or that it has withdrawn, modified or amended such
recommendation, or such later date as may be agreed upon by Best and Hiway;
(f) by Hiway upon written notice to Best if the Board of Directors of
Best does not, or shall indicate to Hiway that it is unwilling or unable to,
publicly recommend in the Joint Proxy Statement that its shareholders approve
and adopt this Agreement, or if after recommending in the Joint Proxy Statement
that its shareholders approve and adopt this Agreement, the Board of Directors
of Best shall have withdrawn, modified or amended such recommendation in any
respect materially adverse to Hiway, provided that any such notice of
termination must be given not later than 45 days after the later of the date
Hiway shall have been advised by Best in writing that it is unable or unwilling
to so recommend in the Joint Proxy Statement or that it has withdrawn, modified
or amended such recommendation, or such later date as may be agreed upon by Best
and Hiway;
(g) by either Best or Hiway if any approval of the shareholders of
Best or any approval of the shareholders of Hiway required for the consummation
of the Merger has not been obtained by reason of the failure to obtain (i) the
required vote at a duly held meeting of shareholders of Best or at any
adjournment or postponement thereof, or (ii) the required written consent of the
shareholders of Hiway;
(h) by either Best or Hiway if any of the conditions specified by
Article VII of this Agreement to the obligation of the terminating party have
not been satisfied on the Closing Date; or
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(i) by Best if the Closing Date Hiway Disclosure Schedule discloses
any change from the Hiway Disclosure Schedule which has, or is likely to have, a
Material Adverse Effect on Hiway; or by Hiway if the Closing Date Best
Disclosure Schedule discloses any change from the Best Disclosure Schedule which
has, or is likely to have, a Material Adverse Effect on Best.
8.2 Effect of Termination. In the event of termination of this Agreement
by either Best or Hiway as provided in Section 8.1 of this Agreement, (i) this
Agreement shall forthwith become void and have no effect, except that Sections
6.2(b), 8.2, 9.2, 9.3, 9.5, 9.13, 9.16 and 9.17 of this Agreement shall survive
any termination of this Agreement, and (ii) none of Best, Hiway, the Hiway
Subsidiary or any of the officers or directors of any of them shall have any
liability of any nature whatsoever under this Agreement, or in connection with
the transactions contemplated by this Agreement, provided, however, that neither
Best nor Hiway shall be relieved or released from any liabilities or damages
arising out of its willful breach of any provision of this Agreement.
8.3 Amendment. Subject to compliance with applicable law, this Agreement
may be amended by the parties hereto, by action taken or authorized by the Board
of Directors of Best and the Board of Directors of Hiway, at any time before or
after approval of the matters presented in connection with the Merger by the
shareholders of Best or the shareholders of Hiway; provided, however, that after
any approval of the transactions contemplated by this Agreement by the
shareholders of Best or the shareholders of Hiway, there may not be, without
further approval of the shareholders of Best and Hiway, any amendment of this
Agreement which changes the amount or the form of the consideration to be
delivered to the shareholders of Hiway under this Agreement other than as
contemplated by this Agreement. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, the
parties to this Agreement may, to the extent legally allowed, (a) extend the
time for the performance of any of the obligations or other acts of the other
parties to this Agreement, (b) waive any inaccuracies in the representations and
warranties contained in this Agreement or in any document delivered pursuant
hereto and (c) waive compliance with any of the agreements or conditions
contained in this Agreement; provided, however, that after any approval of the
transactions contemplated by this Agreement by the shareholders of Best or the
shareholders of Hiway, there may not be, without further approval of the
shareholders of Best or Hiway, as applicable, any extension or waiver of this
Agreement or any portion thereof which reduces the amount or changes the form of
the consideration to be delivered to the shareholders of Hiway under this
Agreement other than as contemplated by this Agreement. Any agreement on the
part of a party to this Agreement to any such extension or waiver shall be valid
only if set forth in a written instrument signed on behalf of such party, but
such extension or waiver or failure to insist on strict compliance with an
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure.
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ARTICLE IX
GENERAL PROVISIONS
------------------
9.1 Closing. Subject to the terms and conditions of this Agreement, the
closing of the Merger (the "Closing") will take place at 10:00 a.m. on June 1,
1998, unless extended by mutual agreement of the parties (the "Closing Date").
9.2 Nonsurvival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and agreements in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except as otherwise provided in Section 8.2 of this Agreement
and except for those covenants and agreements contained in this Agreement and in
any such instrument which by their terms apply in whole or in part after the
Effective Time.
9.3 Expenses. Except as otherwise expressly provided in this Agreement,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement shall be paid by the party incurring
such expense; provided, however, that the costs and expenses of printing and
mailing the Joint Proxy Statement shall be borne by Best.
9.4 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation), mailed by registered or certified mail (return receipt requested)
or delivered by an express courier (with confirmation) to the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Best, to:
Best Internet Communications, Inc.
345 East Middlefield Road
Mountain View, CA 94043
Attention: David Buzby, CFO
Fax: 650-940-6471
Telephone: 650-944-8218
with copies to:
Fenwick & West LLP
Two Palo Alto Square, 4th Floor
Palo Alto, CA 94306
Attention: Jacqueline Daunt, Esq.
Fax: 650-494-1417
Telephone: 650-494-0600
and
48
<PAGE>
The Skornia Law Firm
160 West Santa Clara Street, Suite 1500
San Jose, CA 95113
Fax: 408-280-2801
Telephone: 408-280-2806
(b) if to Hiway, to:
Hiway Technologies, Inc.
6401 Congress Avenue, Suite 110
Boca Raton, FL 33487
Attention: Scott H. Adams, President
Fax: 561-989-8784
Telephone: 561-989-8091 x 2402
with copies to:
Steel Hector & Davis LLP
1900 Phillips Point West
777 South Flagler Drive
West Palm Beach, Florida 33401
Attention: Thomas G. O'Brien III, Esq.
Fax: 561-655-1509
Telephone: 561-650-7287
9.5 Jurisdiction; Service of Process. Any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this Agreement
may be brought against any of the parties in the courts of the jurisdiction in
which the defendant's principal place of business is located (i.e., the State of
California, County of Santa Clara or the United States District Court for the
Northern District of California for Best, and the State of Florida, County of
Palm Beach or the United States District Court for the Southern District of
Florida for Hiway), and each of the parties consents to the jurisdiction of such
courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any
action or proceeding referred to in the preceding sentence may be served on any
party anywhere in the world.
9.6 Further Assurances. At the request of any party to this Agreement,
the other parties shall execute, acknowledge and deliver such other documents
and/or instruments as may be reasonably required by the requesting party to
carry out the purposes of this Agreement. If any party to this Agreement is
involved in litigation, threatened litigation or government inquiries with
respect to a matter covered by this Agreement, the other party to this Agreement
shall also make available to such party, at reasonable times and subject to the
reasonable requirements of its own businesses, such of its personnel as may have
information relevant to such matters, provided that such party shall reimburse
the providing party for its reasonable costs for employee time
49
<PAGE>
incurred in connection therewith if more than one business day is required.
Following the Closing, the parties will cooperate with each other in connection
with tax audits and in the defense of any legal proceedings.
9.7 Remedies Cumulative. Unless expressly made the exclusive remedy by
the terms of this Agreement, all remedies provided for in this Agreement are
cumulative and shall be in addition to any and all other rights and remedies
provided by law and by any other agreements between the parties.
9.8 Presumptions. It is expressly acknowledged and agreed that all
parties have been represented by counsel and have participated in the
negotiation and drafting of this Agreement, and that there shall be no
presumption against any party on the ground that such party was responsible for
preparing this Agreement or any part of it.
9.9 Exhibits and Schedules. Each of the exhibits and schedules referred
to in, or attached to, this Agreement is an integral part of this Agreement and
is incorporated in this Agreement by this reference.
9.10 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation." No provision of this
Agreement shall be construed to require Best, Hiway or any of their respective
Subsidiaries or Affiliates to take any action which would violate any applicable
law, rule or regulation.
9.11 Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
9.12 Entire Agreement. This Agreement (including the documents and the
instruments referred to in this Agreement) constitutes the entire agreement and
supersedes all prior agreements and understandings, both written and oral, among
the parties with respect to the subject matter of this Agreement.
9.13 Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Florida, without regard to its
conflicts of law principles.
9.14 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or
50
<PAGE>
enforceability of any of the terms or provisions of this Agreement in any other
jurisdiction. If any provision of this Agreement is so broad as to be
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
9.15 Publicity. Except as otherwise required by applicable law, neither
Best nor Hiway shall, and Hiway shall not permit its Subsidiary to, issue or
cause the publication of any press release or other public announcement with
respect to, or otherwise make any public statement concerning, the transactions
contemplated by this Agreement without the consent of the other party, which
consent shall not be unreasonably withheld.
9.16 Assignment; Third Party Beneficiaries. Neither this Agreement nor
any of the rights, interests or obligations shall be assigned by any of the
parties to this Agreement (whether by operation of law or otherwise) without the
prior written consent of the other parties to this Agreement. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by the parties and their respective successors and assigns.
Except as otherwise specifically provided in Section 6.8, this Agreement
(including the documents and instruments referred to in this Agreement) is not
intended to confer upon any person other than the parties to this Agreement any
rights or remedies under this Agreement.
9.17 Attorneys' Fees. If litigation is brought concerning this Agreement,
the prevailing party shall be entitled to receive from the non-prevailing party,
and the non-prevailing party shall upon final judgment and expiration of all
appeals immediately pay upon demand all reasonable attorneys' fees and expenses
of the prevailing party.
51
<PAGE>
IN WITNESS WHEREOF, Best and Hiway have caused this Agreement to be
executed by their duly authorized officers as of the date first above written.
BEST INTERNET COMMUNICATIONS,
INC.
By: /s/ James Zarley
---------------------------------------
James Zarley, President and Chief
Executive Officer
HIWAY TECHNOLOGIES, INC.
By: /s/ Scott H. Adams
---------------------------------------
Scott H. Adams, President
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]
52
<PAGE>
SCHEDULE OF EXHIBITS
--------------------
<TABLE>
<CAPTION>
<S> <C>
Exhibit A - Hiway Affiliate Letter Agreement
Exhibit B - Best Affiliate Letter Agreement
Exhibit C - Opinion of Hiway Counsel
Exhibit D - Opinion of Best Counsel
Exhibit E - Shareholder Buy-Sell Agreement
</TABLE>
53
<PAGE>
EXHIBIT 3.02
AMENDED AND RESTATED
--------------------
ARTICLES OF INCORPORATION
-------------------------
OF
--
BEST INTERNET COMMUNICATIONS, INC.
----------------------------------
Alan D. Mutter and Thomas A. Skornia certify that:
1. They are the President and Secretary, respectively, of Best Internet
Communications, Inc., a California corporation.
2. The articles of incorporation of the corporation are amended and restated to
read as follows:
ARTICLE I
The name of the corporation is Best Internet Communications, Inc.
ARTICLE II
The purpose of the corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
A. The corporation is authorized to issue two classes of shares to be
designated respectively Serial Preferred Stock ("Preferred Stock") and Common
Stock ("Common Stock"). The total number of shares of capital stock that the
corporation is authorized to issue is thirty million (30,000,000). The total
<PAGE>
number of shares of Serial Preferred Stock the corporation shall have authority
to issue is ten million (10,000,000). The total number of shares of Common
Stock the corporation shall have authority to issue is twenty million
(20,000,000).
B. Five Hundred Thousand (500,000) shares of the Preferred Stock are
designated "Series A Preferred Stock." The "Initial Sales Price" of a series of
Preferred Stock shall mean the sales price of the initial shares sold of such
series of Preferred Stock. The "Initial Sales Price" of the Series A Preferred
Stock is the lesser of $2.00 or the price of the corporation's Common Stock at
an initial public offering; provided, however, at all times prior to the initial
public offering, such price shall be $2.00. Any series of Preferred Stock (i)
whose rights, preferences, privileges, restrictions, number and designation are
fixed in a resolution adopted by the corporation's Board of Directors as set
forth in certificates of determination(s) filed subsequent to the filing of the
Certificate of Determination of Preferences of Series A Preferred Shares, dated
as of January 17, 1996, and (ii) which are initially sold by the corporation at
a per share price (the "Initial Sales Price" of such series) of at least $2.00
per share (as adjusted for any combinations, consolidations, stock distributions
or stock dividends subsequent to the filing of the Certificate of Determination
of Preferences of Series A Preferred Shares, dated as of January 17, 1996) are
hereby defined as "Parity Preferred Stock."
Four million (4,000,000) shares of the Preferred Stock are designated
"Series B Preferred Stock." The Initial Sales Price of the Series B Preferred
Stock is $1.25.
The remaining shares of Preferred Stock may be issued from time to time in
one or more series. The Board of Directors of the corporation (the "Board of
Directors") is expressly authorized to provide for the issue of all or any of
the remaining shares of the Preferred Stock in one or more series, and to fix
the number of shares and to determine or alter for each such series, such voting
powers, full or limited, or no voting powers, and such designations,
preferences, and relative, participating, optional, or other rights and such
qualifications, limitations, or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issue of such shares (a "Preferred Stock Designation") and as
may be permitted by the General Corporation Law of California. The Board of
Directors is also expressly authorized to increase or decrease (but not below
the number of shares of such series then outstanding) the number of shares of
any series subsequent to the issue of shares of that series. In case the number
of shares of any such series shall be so decreased, the shares constituting such
decrease shall resume the status that they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
-2-
<PAGE>
C. The powers, preferences, rights, restrictions, and other matters
relating to the Series A Preferred Stock, Parity Preferred Stock and Series B
Preferred Stock are as follows:
1. Dividends.
---------
(a) The holders of the Series A Preferred Stock shall be entitled to
receive dividends at the rate of five percent (5%) of the Initial Sales Price
per share and the holders of the Parity Preferred Stock are entitled to receive
dividends at the dividend rate applicable to the Parity Preferred Stock,
respectively, payable out of any assets legally available therefor. The amount
of dividend shall be prorated for a share of Series A Preferred Stock or Parity
Preferred Stock which is not issued and outstanding for an entire fiscal year.
Such dividends shall be payable only when, as, and if declared by the Board of
Directors out of any assets legally available therefor and shall be
noncumulative.
(b) No dividends shall be paid on or declared or set apart for the Series
B Preferred Stock of the corporation during any fiscal year of the corporation
until dividends on the Series A Preferred Stock and Parity Preferred Stock shall
have been paid or declared and set apart during that fiscal year in the amount
set forth above. After the dividends to which the holders of Series A Preferred
Stock and Parity Preferred Stock are entitled have been paid or declared and set
apart in any one fiscal year of the corporation, the holders of the Series B
Preferred Stock shall be entitled to receive dividends at the rate of $.0625 per
share (as adjusted for any stock dividends, combinations or splits with respect
to such shares) per annum, payable out of any assets legally available therefor.
The amount of dividend shall be prorated for a share of Series B Preferred Stock
which is not issued and outstanding for an entire fiscal year. Such dividends
shall be payable only when, as, and if declared by the Board of Directors out of
any assets legally available therefor and shall be noncumulative.
(c) No dividends (other than those payable solely in the Common Stock of
the corporation) shall be paid on or declared or set apart for any Common Stock
of the corporation during any fiscal year of the corporation until dividends on
the Series A Preferred Stock, Parity Preferred Stock and Series B Preferred
Stock, shall have been paid or declared and set apart during that fiscal year in
the amounts set forth above. After the dividends to which the holders of Series
A Preferred Stock, Parity Preferred Stock and Series B Preferred Stock are
entitled have been paid or declared and set apart in any one fiscal year of the
corporation, if the Board of Directors shall elect to declare additional
dividends out of funds legally available therefor in that fiscal year, such
additional dividends shall be allocated among the holders of Common Stock in
proportion to the numbers of shares held by them. No rights shall accrue to the
holders of the Series A Preferred Stock, Parity Preferred Stock
-3-
<PAGE>
or Series B Preferred Stock in the event the corporation shall fail to declare
or pay dividends on the Series A Preferred Stock or the Series B Preferred Stock
in the amount of five percent (5%) of the Initial Sales Price per share per
fiscal year, or on the Parity Preferred Stock at the dividend rate applicable to
the Parity Preferred Stock, respectively, or in any amount in any prior fiscal
year of the corporation, whether or not the earnings of the corporation in that
previous fiscal year were sufficient to pay such dividends in whole or in part.
In the event the Board of Directors of the corporation declares dividends in a
fiscal year in an amount less than the aggregate of all the dividend preferences
of the Series A Preferred Stock, Parity Preferred Stock and Series B Preferred
Stock, then the entire amount of dividends declared by the Board of Directors
shall be distributed ratably among the holders of the Series A Preferred Stock
and the Parity Preferred Stock (if any) until they have been paid the full
amount of dividends to which they are entitled or the entire amount of dividends
has been exhausted and, thereafter, ratably among the holders of the Series B
Preferred Stock. The corporation shall cause a notice of payment of dividend to
be mailed to the holders of the corporation's outstanding shares at their
addresses shown on the records of the corporation not less than 30 days prior to
the dividend record date. The notice of payment of dividend shall set forth the
dividend record date, the dividend payment date, and the amount of dividend to
be paid, if any, for each share of Series A Preferred Stock, Parity Preferred
Stock, Series B Preferred Stock and Common Stock, respectively, outstanding on
the dividend record date.
(d) No dividends in the form of Common Stock or Preferred Stock or other
equity of the corporation shall be paid on or declared or set apart for the
Series A Preferred Stock, Parity Preferred Stock or the Series B Preferred Stock
unless all such series of Preferred Stock receive such dividends pro rata based
upon the number of shares of Common Stock into which such shares of Preferred
Stock are convertible, as adjusted from time to time under Section 4 hereof.
(e) In the event of a conversion of the Series A Preferred Stock, Parity
Preferred Stock or Series B Preferred Stock pursuant to Section 4, any accrued
and unpaid dividends shall be paid at the election of the holder in cash or
Common Stock at its then fair market value, as determined by the Board of
Directors.
2. Liquidation Preference.
----------------------
(a) In the event of any voluntary or involuntary liquidation, dissolution,
or winding up of the corporation, no distribution shall be made on the shares of
Series B Preferred Stock or the Common Stock without first making distributions
on the shares of Series A Preferred Stock equal to the amount of the Initial
Sales Price per share for each share of Series A Preferred Stock, plus all
declared but unpaid preferred dividends thereon, and on the shares of Parity
Preferred Stock equal to the liquidation preference for the Parity Preferred
Stock. After such payment to the holders of the Series A Preferred Stock and
Parity Preferred Stock, distributions shall be made on the shares of the Series
B Preferred Stock equal to $1.25 per share plus all accrued, but unpaid
preferred dividends. After such payment to the holders of the Series A
-4-
<PAGE>
Preferred Stock, Parity Preferred Stock and Series B Preferred Stock, the
remaining proceeds, if any, shall be allocated among the holders of the Common
Stock in proportion to the numbers of shares held by them. If upon occurrence
of such event the assets and property thus distributed among the holders of the
Series A Preferred Stock, Parity Preferred Stock and Series B Preferred Stock
shall be insufficient to permit the payment to such holders of the full
preferential amount, then the entire assets and property of the corporation
legally available for distribution shall be distributed ratably among the
holders of the Series A Preferred Stock and the Parity Preferred Stock (if any)
such that the same percentage of the following amounts is paid on each share of
Series A Preferred Stock and Parity Preferred Stock: (i) for the Series A
Preferred Stock, the sum of its Initial Sales Price and declared but unpaid
dividends, and (ii) for the Parity Preferred Stock, its liquidation preference.
If after payment in full of such amounts to the holders of Series A Preferred
Stock and Parity Preferred Stock assets and property of the corporation legally
available for distribution remain, such assets and property shall be distributed
ratably among the holders of Series B Preferred Stock until such holders have
received their entire preferential amount. A consolidation or merger of the
corporation with or into any other corporation or corporations, or a sale of all
or substantially all of the assets of the corporation, shall not be deemed to be
a liquidation, dissolution, or winding up within the meaning of this
subparagraph.
Each holder of an outstanding share of Series A Preferred Stock or Series B
Preferred Stock shall be deemed to have consented, for purposes of Sections 502,
503, and 506 of the California Corporations Code, to distributions made by the
corporation in connection with the repurchase of shares of Common Stock issued
to or held by employees, consultants, independent contractors, vendors, or
customers upon termination of their services or failure to fulfill certain
conditions pursuant to agreements providing for the right of said repurchase
between the corporation and such persons at the same price per share such
persons paid therefor.
(b) The provisions of this Section 2 are in addition to the protective
provisions of Section 5 hereof.
3. Redemption. The shares of Series A Preferred Stock and Series B
----------
Preferred Stock shall be redeemable in cash at any time at the option of the
Board of Directors of the corporation in
-5-
<PAGE>
whole or in part at a redemption price per share equal to an amount equal to the
Initial Sales Price of such series, plus an amount equal to all declared but
unpaid dividends on the outstanding shares of such series up to and including
the date fixed for redemption (the "redemption date"), such sum price
hereinafter sometimes referred to as the "redemption price." The corporation
shall not be required to redeem all or part of any series of preferred stock
because it is redeeming all or part of any other series of preferred stock. In
the event the Board of Directors elects to partially redeem the Series A
Preferred Stock or the Series B Preferred Stock, the method of selecting the
shares to be redeemed shall be at the discretion of the Board of Directors.
The corporation shall give notice of the redemption of any or all shares of
Series A Preferred Stock or Series B Preferred Stock by causing a notice of
redemption to be mailed not earlier than 120 nor later than 60 days prior to the
redemption date to the holders of record of the shares of Series A Preferred
Stock or Series B Preferred Stock being called for redemption at their addresses
shown on the records of the corporation. The notice of redemption shall set
forth the class and series of shares and part thereof to be redeemed, the
redemption date, the redemption price and the place at which the share
certificates should be surrendered to obtain payment of the redemption price.
On or prior to the redemption date, the corporation shall deposit the
redemption price of all shares of Series A Preferred Stock or Series B Preferred
Stock designated for redemption in said notice and not yet redeemed with a bank
or trust company having aggregate capital and surplus in excess of $25,000,000
as a trust fund for the benefit of the holders of the shares designated for
redemption and not yet redeemed.
On or before the redemption date, each holder of shares called for
redemption shall surrender the certificate for such shares to the corporation at
the place so designated in the notice of redemption and shall thereupon be
entitled to receive payment of the redemption price on the redemption date,
unless the holder has exercised the conversion privilege as hereinafter
provided. If less than all of the shares represented by such certificates are
redeemed, a new certificate shall forthwith be issued for the unredeemed shares.
If on the redemption date the corporation has deposited as a trust fund with a
bank or trust company sufficient funds to pay the redemption price in full to
the holder of all shares called for redemption, then the shares so called shall
be deemed to be redeemed as of the redemption date and, notwithstanding that the
certificate(s) evidencing any shares of Series A Preferred Stock or Series B
Preferred Stock so called for redemption shall not have been surrendered, all
rights with respect to the shares so called for redemption shall forthwith after
such date cease, except only the right of the holder to receive the redemption
price thereof without interest upon surrender of the certificate(s) therefor.
-6-
<PAGE>
Any monies deposited by the corporation pursuant hereto for the redemption
of shares thereafter converted into shares of Common Stock pursuant to Section 4
hereof no later than the fifth (5th) day preceding the date of redemption shall
be returned to the corporation forthwith upon such conversion. The balance of
any monies deposited by the corporation pursuant hereto remaining unclaimed at
the expiration of one (1) year following the date of redemption shall thereafter
be returned to the corporation upon its request expressed in a resolution of its
Board of Directors; provided, however, such amounts shall remain a debt of the
corporation.
4. Conversion. The holders of Series A Preferred Stock and Series B
----------
Preferred Stock shall have conversion rights as follows (the "Conversion
Rights"):
(a) Right to Convert. Subject to subsection (b), each share of Series A
----------------
Preferred Stock or Series B Preferred Stock shall be convertible, at the option
of the holder thereof, at any time after the date of issuance of such share,
into such number of fully paid and nonassessable shares of Common Stock as is
determined at the rate (adjusted as appropriate pursuant to Section 4(b) below)
of one (1) share of Common Stock for each one (1) share of Series A Preferred
Stock or Series B Preferred Stock to be converted, by surrendering the
certificate(s) for such share of Series A Preferred Stock or Series B Preferred
Stock at the principal executive office of the corporation, duly endorsed to the
corporation, together with written notice of intention to convert; provided,
however, that in the event a date is fixed for redemption of said shares of
Series A Preferred Stock or Series B Preferred Stock, this conversion privilege
must be exercised at least five (5) days prior to said redemption date.
Shares of Series A Preferred Stock or Series B Preferred Stock converted as
herein provided may not be reissued. The corporation shall at all times reserve
and keep available, out of its authorized but unissued shares of Common Stock,
solely for the purpose of conversion of its shares of Series A Preferred Stock
and Series B Preferred Stock, such number of shares of Common Stock as shall be
sufficient to effect the conversion of all shares of Series A Preferred Stock
and Series B Preferred Stock from time to time outstanding, and the corporation
shall obtain and keep in force such permits as may be required in order to
enable the corporation lawfully to issue and deliver such number of shares of
Common Stock.
(b) Adjustments to Conversion Rate.
------------------------------
(i) Adjustments for Subdivisions, Splits Combinations,
--------------------------------------------------
Consolidations, Reorganizations or Reclassifications of Common Stock. In the
- --------------------------------------------------------------------
event that after the date of the first issuance of the Series A Preferred Stock
or the Series B Preferred Stock the outstanding shares of Common Stock shall be
-7-
<PAGE>
(1) subdivided or split into a greater number of shares of Common Stock; (2)
combined or consolidated, by reclassification or otherwise, into a lesser number
of shares of Common Stock or (3) changed into a different number of shares of
any other class or classes of stock, whether by capital reorganization,
reclassification or otherwise, subject to further adjustment as hereinafter
provided, each holder of the shares of Series A Preferred Stock or Series B
Preferred Stock shall receive upon conversion, the stock and/or securities to
which the holder would have been entitled had the holder converted, immediately
prior to such split, subdivision, combination, consolidation, reorganization or
reclassification, such Holder's shares of Series A Preferred Stock or Series B
Preferred Stock.
(ii) Adjustments for Other Dividends and Distributions. In the event
-------------------------------------------------
the corporation at any time after the date of the first issuance of the Series A
Preferred Stock or the Series B Preferred Stock makes, or fixes a record date
for, the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in the securities of the corporation,
then the holders of the shares of Series A Preferred Stock or Series B Preferred
Stock shall receive upon conversion, in addition to the number of shares of
Common Stock receivable thereupon, the stock or securities to which the holder
would have been entitled had the holder held, at the time of said dividend or
other distribution, the same number of shares of Common Stock as the number of
Series A Preferred Stock or Series B Preferred Stock converted, and had they
thereafter during the period from the date of such event to and including the
date of conversion, retained such stock or securities receivable by them as
aforesaid during such period, subject to all other adjustments called for during
such period under this Section 4 with respect to the rights of the holders of
the Series A Preferred Stock or Series B Preferred Stock.
(c) Automatic Conversion. Each share of Series B Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock (i) upon the date
specified by vote or written consent or agreement of holders of two-thirds (2/3)
of the outstanding shares of Series B Preferred Stock, or (ii) immediately prior
to the closing of the sale of the corporation's Common Stock in a firm
commitment, underwritten public offering registered under the Securities Act of
1933, as amended (the "Securities Act"), other than a registration relating
solely to a transaction under Rule 145 under such Act or to an employee benefit
plan of the corporation, at a public offering price (before underwriters'
discounts and expenses) of $5.00 per share or where the aggregate proceeds to
the corporation and/or any selling shareholders (before deduction for
underwriters' discounts and expenses) exceed five million dollars ($5,000,000);
or (iii) upon the conversion of at least two-thirds (2/3) of the shares of the
Series B Preferred Stock originally issued by the corporation.
-8-
<PAGE>
(d) Mechanics of Conversion.
-----------------------
(i) Before any holder of Series A Preferred Stock or Series B Preferred
Stock shall be entitled voluntarily to convert the same into shares of Common
Stock, he shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the corporation or of any transfer agent for such
stock, and shall give written notice to the corporation at such office that he
elects to convert the same and shall state therein the number of shares to be
converted and the name or names in which he wishes the certificate or
certificates for shares of Common Stock to be issued. The corporation shall, as
soon as practicable thereafter, issue and deliver at such office to such holder
of Series A Preferred Stock or Series B Preferred Stock, a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled. Such conversion shall be deemed to have been made immediately prior to
the close of business on the date of surrender of the shares of Series A
Preferred Stock or Series B Preferred Stock to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on such date.
(ii) If the conversion is in connection with an underwritten offering of
securities pursuant to the Securities Act, the conversion may, at the option of
any holder tendering shares of Series A Preferred Stock or Series B Preferred
Stock for conversion, be conditioned upon the closing with the underwriters of
the sale of securities pursuant to such offering, in which event the person(s)
entitled to receive the Common Stock upon conversion of the Series A Preferred
Stock or Series B Preferred Stock shall not be deemed to have converted such
Series A Preferred Stock or Series B Preferred Stock until immediately prior to
the closing of such sale of securities.
(e) Fractional Shares. No fractional share shall be issued upon the
-----------------
conversion of any share or shares of Series A Preferred Stock or Series B
Preferred Stock. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one share of Series A Preferred Stock or
Series B Preferred Stock by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion
would result in the issuance of a fraction of a share of Common Stock, the
corporation shall, in lieu of issuing any fractional share, pay the holder
otherwise entitled to such fraction a sum in cash equal to the fair market value
of such fraction on the date of conversion (as determined in good faith by the
Board of Directors).
5. Voting Rights. Except as otherwise required by law, the holders of
-------------
Series A Preferred Stock, the holders of Series B Preferred Stock and the
holders of Common Stock shall be
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<PAGE>
entitled to notice of any shareholders meeting in accordance with the Bylaws of
the corporation and to vote together as a single class (except with respect to
those matters required by law to be submitted to a separate class or series
vote) upon the election of directors and upon any other matter submitted to
shareholders for a vote, on the following basis:
(a) Common Stock Vote. Each holder of Common Stock issued and
-----------------
outstanding shall be entitled to one (1) vote for each share of Common Stock
held.
(b) Series A Preferred Stock Vote. Each holder of Series A Preferred
-----------------------------
Stock issued and outstanding shall be entitled to the number of votes equal to
the number of shares of Common Stock into which such shares of Series A
Preferred Stock is convertible, as adjusted from time to time under Section 4
hereof. Fractional votes shall not, however, be permitted and any fractional
voting rights resulting from the above formula (after aggregating all shares
into which shares of Series A Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
(c) Series B Preferred Stock Vote. Each holder of Series B Preferred
-----------------------------
Stock issued and outstanding shall be entitled to the number of votes equal to
the number of shares of Common Stock into which such shares of Series B
Preferred Stock is convertible, as adjusted from time to time under Section 4
hereof. Fractional votes shall not, however, be permitted and any fractional
voting rights resulting from the above formula (after aggregating all shares
into which shares of Series B Preferred Stock held by each holder could be
converted) shall be rounded to the nearest whole number (with one-half being
rounded upward).
(d) Cumulative Voting. Notwithstanding the above, for the election of
-----------------
directors each holder of Common, Series A Preferred Shares or Series B Preferred
Shares shall after giving the notice required by Section 708 of the California
Corporations Code, as amended from time to time, be entitled to the number of
votes as determined pursuant to paragraphs (a) and (b) above multiplied by the
number of directors to be elected with each shareholder being entitled to
cumulate such votes for one candidate or to distribute such votes among the
candidates as the shareholder sees fit.
6. Restrictions and Limitations.
----------------------------
(a) In addition to any other rights provided by law, so long as fifty
percent (50%) of the total issued Series A Preferred Stock shall be outstanding,
the corporation shall not, without the vote or written consent by the holders of
a majority of the then outstanding shares of the Series A Preferred Stock:
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<PAGE>
(i) amend or repeal any provision of, or add any provision to, this
corporation's Articles of Incorporation or Bylaws if such action would
materially and adversely alter or change the preferences, rights,
privileges or powers of, or the restrictions provided for the benefit of,
the Series A Preferred Stock authorized hereby;
(ii) reclassify any shares of Common Stock into shares having any
preference or priority as to dividends or assets superior to any such
preference or priority of the Series A Preferred Stock; or
(iii) create a series of Parity Preferred Stock having a dividend
rate greater than five percent (5%) of its Initial Sales Price, and/or a
liquidation preference greater than its Initial Sales Price plus declared
but unpaid dividends thereon.
Notwithstanding the foregoing, the authorization of Parity Preferred Stock shall
not require a class vote of the Series A Preferred Stock except as required by
Section 903 or other provisions of the California Corporations Code.
(b) In addition to any other rights provided by law, so long as twenty-
five percent (25%) of the total issued Series B Preferred Stock shall be
outstanding, the corporation shall not, without the vote or written consent by
the holders of a majority of the then outstanding shares of the Series B
Preferred Stock:
(i) amend or repeal any provision of, or add any provision to, this
corporation's Articles of Incorporation or Bylaws if such action would
materially and adversely alter or change the preferences, rights,
privileges or powers of, or the restrictions provided for the benefit of,
the Series B Preferred Stock authorized hereby;
(ii) reclassify any shares of Common Stock into shares having any
preference or priority as to dividends or assets superior to any such
preference or priority of the Series B Preferred Stock; or
(iii) create a series of Parity Preferred Stock having a dividend
rate greater than five percent (5%) of its Initial Sales Price, and/or a
liquidation preference greater than its Initial Sales Price plus declared
but unpaid dividends thereon.
Notwithstanding the foregoing, the authorization of Parity Preferred Stock shall
not require a class vote of the Series B Preferred Stock except as required by
Section 903 or other provisions of the California Corporations Code.
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<PAGE>
ARTICLE IV
A. The liability of directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
B. The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the California Corporations Code) through bylaw
provisions, agreements with agents, vote of shareholders or disinterested
directors, or otherwise, to the fullest extent permissible under California law.
C. Any amendment, repeal or modification of any provision of the Article V
shall not adversely affect any right or protection of an agent of this
corporation existing at the time of such amendment, repeal or modification.
3. The foregoing amendment and restatement of Articles of Incorporation has
been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of Articles of Incorporation has
been duly approved by the required vote of shareholders in accordance with
Section 902 of the California Corporations Code. The total number of
outstanding shares of the corporation is 7,462,500 shares of Common Stock and no
shares of Preferred Stock. The number of shares voting in favor of the
amendment equaled or exceeded the vote required. The percentage vote required
was more than fifty percent (50%) of the outstanding shares of Common Stock.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Dated: June 11, 1996.
/s/ Alan D. Mutter
---------------------------------
Alan D. Mutter, President
/s/ Thomas A. Skornia
---------------------------------
Thomas A. Skornia, Secretary
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<PAGE>
Exhibit 10.02
BEST INTERNET COMMUNICATIONS, INC.
---------------------------------
INVESTORS' RIGHTS AGREEMENT
---------------------------
THIS INVESTORS' RIGHTS AGREEMENT (this "Agreement"), made and entered into
as of the 12th day of June, 1996, by and among BEST INTERNET COMMUNICATIONS,
-----------------------------
INC., a California corporation (the "Company"), and the persons identified on
- ----
Exhibit A attached hereto (the "Holders"),
W I T N E S S E T H:
WHEREAS, certain persons have the right to acquire shares of the Company's
Series A Preferred Stock and/or shares of Common Stock issued upon conversion
thereof (the "Series A Preferred Stock") and possess registration rights
pursuant to those certain Note and Warrant Purchase Agreements dated as of
January 18, 1996 between the Company and such persons (the "Series A
Agreements"); and
WHEREAS, the Holders are parties to the Series B Preferred Stock Purchase
Agreement dated as of June 12,1996, between the Company and the Holders (the
"Series B Agreement"), certain of the Company's and such Holders' obligations
under which are conditioned upon the execution and delivery of this Agreement by
such Holders and the Company;
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the Holders hereby agree as follows:
SECTION 1
---------
Restrictions on Transferability of
----------------------------------
Securities; Registration Rights
-------------------------------
1.1 Certain Definitions. As used in this Agreement, the
-------------------
following terms shall have the meanings set forth below:
(a) "Closing" shall mean the date of the initial sale of
shares of the Company's Series B Preferred Stock.
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<PAGE>
(b) "Commission" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the Securities
Act.
(c) "Common Stock" shall mean the Common Stock, no par value, of the
Company.
(d) "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(e) "Holder" shall mean any Investor who holds Registrable Securities and
any holder of Registrable Securities to whom the registration rights conferred
by this Agreement have been transferred in compliance with Section 1.11 hereof.
(f) "Investors" shall mean persons who purchased Shares pursuant to the
Series B Agreement.
(g) "Other Shareholders" shall mean persons other than Holders who, by
virtue of agreements with the Company, are entitled to include their securities
in certain registrations by the Company.
(h) "Registrable Securities" shall mean (i) shares of Common Stock issued
or issuable pursuant to the conversion of the Shares and (ii) any Common Stock
issued as a dividend or other distribution with respect to or in exchange for or
in replacement of the shares referenced in (i) above, provided, however, that
Registrable Securities shall not include any shares of Common Stock which have
previously been registered or which have been sold to the public.
(i) The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
(j) "Registration Expenses" shall mean all expenses incurred in effecting
any registration pursuant to this Agreement, including, without limitation, all
registration,
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<PAGE>
qualification, and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, blue sky fees and expenses, and
expenses of any regular or special audits incident to or required by any such
registration, but shall not include Selling Expenses and fees and disbursements
of counsel for the Holders (but excluding the compensation of regular employees
of the Company, which shall be paid in any event by the Company).
(k) "Rule 144", shall mean Rule 144 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(l) "Rule 145" shall mean Rule 145 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(m) "Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar successor federal statute and the rules and regulations thereunder,
all as the same shall be in effect from time to time.
(n) "Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and fees and
disbursements of counsel for any Holder (other than the fees and disbursements
of counsel included in Registration Expenses).
(o) "Shares" shall mean shares of the Company's Series B Preferred Stock.
1.2 Company Registration.
--------------------
(a) If the Company shall determine to register any of its securities either
for its own account or the account of a security holder or holders, other than
the Company's initial public offering, a registration relating solely to
employee benefit plans, a registration relating solely to a Rule 145
transaction, or a registration on any registration form that does not permit
secondary sales, the Company will:
-3-
<PAGE>
(i) promptly give to each Holder written notice thereof; and
(ii) use its best efforts to include in such registration (and any
related registration or qualification under blue sky laws or other
compliance), except as set forth in Section 1.2(b) below, and in any
underwriting involved therein, all the Registrable Securities specified in
a written request or requests, made by any Holder and received by the
Company within twenty (20) days after the written notice from the Company
described in clause (i) above. Such written request may specify all or a
part of a Holder's Registrable Securities.
(b) Underwriting. If the registration of which the Company gives notice is
------------
for a registered public offering involving an underwriting, the Company shall so
advise the Holders as a part of the written notice given pursuant to Section
1.2(a)(i). In such event, the right of any Holder to registration pursuant to
this Section 1.2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such Holder's Registrable Securities in the
underwriting to the extent provided herein. All Holders proposing to distribute
their securities through such underwriting shall (together with the Company and
the other holders of securities of the Company with registration rights to
participate therein distributing their securities through such underwriting)
enter into an underwriting agreement in customary form with the representative
of the underwriter or underwriters selected by the Company.
Notwithstanding any other provision of this Section 1.2, if the
representative of the underwriters advises the Company in writing that marketing
factors require a limitation on the number of shares to be underwritten, the
representative may (subject to the limitations set forth below) exclude all
Registrable Securities from, or limit the number of Registrable Securities to be
included in, the registration and underwriting. If such registration is the
second or any subsequent Company initiated registered offering of the Company's
securities to the general public, the Company may limit, to the extent so
advised by the underwriters, the amount of securities to be included in the
registration by the Company's shareholders (including the Holders); provided,
however, that the aggregate value of
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<PAGE>
securities (including Registrable Securities) to be included in such
registration by the Company's shareholders (including the Holders) may not be so
reduced to less than ten percent (10%) of the total value of all securities
included in such registration. The Company shall so advise all holders of
securities requesting registration, and the number of shares of securities that
are entitled to be included in the registration and underwriting shall be
allocated first to the Company for securities being sold for its own account and
thereafter as set forth in Section 1.10. If any person does not agree to the
terms of any such underwriting, he shall be excluded therefrom by written notice
from the Company or the underwriter. Any Registrable Securities or other
securities excluded or withdrawn from such underwriting shall be withdrawn from
such registration. The Holders acknowledge that the holders of Series A
Preferred Stock have certain rights to be included in a registration prior to
the Holders.
If shares are so withdrawn from the registration or if the number of shares
of Registrable Securities to be included in such registration was previously
reduced as a result of marketing factors, the Company shall then offer to all
persons who have retained the right to include securities in the registration
the right to include additional securities in the registration in an aggregate
amount equal to the number of shares so withdrawn, with such shares to be
allocated among the persons requesting additional inclusion in accordance with
Section 1.10 hereof.
1.3 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Section 1.2 hereof and reasonable fees of one counsel for all the selling
shareholders whether pursuant to this Agreement or otherwise (not to exceed
$10,000) shall be borne by the Company.
1.4 Registration Procedures. In the case of each registration effected by
-----------------------
the Company pursuant to Section 1, the Company will keep each Holder advised in
writing as to the initiation of each registration and as to the completion
thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one hundred eighty
(180) days or until the Holder or Holders have completed the distribution
described in the registration
-5-
<PAGE>
statement relating thereto, whichever first occurs; provided, however, that (i)
such one hundred eighty (180) day period shall be extended for a period of time
equal to the period the Holder refrains from selling any securities included in
such registration at the request of an underwriter of Common Stock (or other
securities) of the Company; and (ii) in the case of any registration of
Registrable Securities on Form S-3 which are intended to be offered on a
continuous or delayed basis, such one hundred eighty (180) day period shall be
extended, if necessary, to keep the registration statement effective until all
such Registrable Securities are sold, provided that Rule 415, or any successor
rule under the Securities Act, permits an offering on a continuous or delayed
basis, and provided further that applicable rules under the Securities Act
governing the obligation to file a post-effective amendment permit, in lieu of
filing a post-effective amendment that (A) includes any prospectus required by
Section 10(a)(3) of the Securities Act or (B) reflects facts or events
representing a material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of information
required to be included in (A) and (B) above to be contained in periodic reports
filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration
statement;
(b) Prepare and file with the Commission such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a Holder
from time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
requited to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or
-6-
<PAGE>
incomplete in the light of the circumstances then existing, and at the request
of any such seller, prepare and furnish to such seller a reasonable number of
copies of a supplement to or an amendment of such prospectus as may be necessary
so that, as thereafter delivered to the purchasers of such shares, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant hereunder to
be listed on each securities exchange on which similar securities issued by the
Company are then listed; and
(f) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant to such registration statement and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration.
1.5 Identification.
--------------
(a) The Company will indemnify each Holder, each of its officers, directors
and partners, legal counsel, and accountants and each person controlling such
Holder within the meaning of section 15 of the Securities Act, with respect to
which registration, qualification, or compliance has been effected pursuant to
this Section 1, and each underwriter, if any, and each person who controls
within the meaning of section 15 of the Securities Act any underwriter, against
all expenses, claims, losses, damages, and liabilities (or actions, proceedings,
or settlements in respect thereof) arising out of or based on any untrue
statement (or alleged untrue statement) of a material fact contained in any
prospectus, offering circular, or other document (including any related
registration statement, notification, or the like) incident to any such
registration, qualification, or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation
-7-
<PAGE>
thereunder applicable to the Company and relating to action or inaction required
of the Company in connection with any such registration, qualification, or
compliance, and will pay when incurred or promptly reimburse each such Holder,
each of its officers, directors, partners, legal counsel, and accountants and
each person controlling such Holder, each such underwriter, and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending or settling any such
claim, loss, damage, liability, or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability, or expense arises out of or is based on any untrue statement or
omission based upon writ.-ten information furnished to the Company by such
Holder or underwriter and stated to be specifically for use therein. it is
agreed that the indemnity agreement contained in this Section 1.5(a) shall not
apply to amounts paid in settlement of any such loss, claim, damage, liability,
or action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld).
(b) Each Holder will, if Registrable Securities held by him are included in
the securities as to which such registration, qualification, or compliance is
being effected, indemnify the Company, each of its directors, officers,
partners, legal counsel, and accountants and each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of section 15 of the
Securities Act, each other such Holder and Other Shareholder, and each of their
officers, directors, and partners, and each person controlling such Holder or
Other Shareholder, against all claims, losses, damages and liabilities (or
actions in respect thereof) arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular, or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
the Company and such Holders, Other Shareholders, directors, officers, partners,
legal counsel, and accountants, persons, underwriters, or control persons for
any legal and any other expenses reasonably incurred in connection with
investigating or defending any such claim, loss,
-8-
<PAGE>
damage, liability, or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus, offering
circular, or other document in reliance upon and in conformity with written
information furnished to the Company by such Holder and stated to be
specifically for use therein provided, however, that the obligations of such
Holder hereunder shall not apply to amounts paid in settlement of any such
claims, losses, damages, or liabilities (or actions in respect thereof) if such
settlement is effected without the consent of such Holder (which consent shall
not be unreasonably withheld).
(c) Each party entitled to indemnification under this Section 1.5 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 1, to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.5 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability,
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<PAGE>
claim, damage, or expense referred to therein, then the Indemnifying Party, in
lieu of indemnifying such Indemnified Party hereunder, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such loss,
liability, claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and of the
Indemnified Party on the other in connection with the statements or omissions
that resulted in such loss, liability, claim, damage, or expense as well as any
other relevant equitable considerations. The relative fault of the Indemnifying
Party and of the Indemnified Party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties, relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into in connection with the underwritten public offering are in conflict with
the foregoing provisions, the provisions in the underwriting agreement shall
control.
1.6 Information by Holder. Each Holder of Registrable Securities shall
---------------------
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any registration,
qualification, or compliance referred to in this Section 1.
1.7 Rule 144 Reporting. with a view to making available the benefits of
------------------
certain rules and regulations of the Commission that may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) Make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the Securities Act, at
all times from and after ninety(90) days following the effective date of the
first registration under the Securities Act filed by the Company for an offering
of its
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<PAGE>
securities to the general public;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements; and
(c) So long as a Holder owns any Restricted Securities, furnish to the
Holder forthwith upon written request a written statement by the Company as to
its compliance with the reporting requirements of Rule 144 (at any time from and
after ninety (90) days following the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration.
1.8 Transfer or Assignment of Registration Rights. The rights to cause
---------------------------------------------
the Company to register securities granted to a Holder by the Company under this
Section 1 may be transferred or assigned by a Holder only to a transferee or
assignee of not less than 500,000 shares of Registrable Securities (as presently
constituted and subject to subsequent adjustments for stock splits, stock
dividends, reverse stock splits, and the like), provided that the Company is
given written notice at the time of or within a reasonable time after such
transfer or assignment, stating the name and address of the transferee or
assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned, and, provided further, that the
transferee or assignee of such rights assumes the obligations of such Holder
under this Section 1.
1.9 "Market Stand-Off" Agreement. If requested by the Company and an
----------------------------
underwriter of Common Stock (or other securities) of the Company, a Holder shall
not sell or otherwise transfer or dispose of any Common Stock (or other
securities) of the Company held by such Holder (other than those included in the
registration) during the one hundred twenty (120) day period (ninety (90) days
with respect to any registration after the Company's initial public offering)
following the effective date of a registration
-11-
<PAGE>
statement of the Company filed under the Securities Act, provided that all
Holders, officers and directors of the Company enter into similar agreements.
The obligations described in this Section 1.9 shall not apply to a
registration relating solely to employee benefit plans on Form S-1 or Form S-8
or similar forms that may be promulgated in the future, or a registration
relating solely to a Commission Rule 145 transaction on Form S-4 or similar
forms that may be promulgated in the future. The Company may impose stop-
transfer instructions with respect to the shares (or securities) subject to the
foregoing restriction until the end of such one hundred twenty (120) day or
ninety (90) day period, as applicable.
1.10 Allocation of Registration Opportunities. In any circumstance in
----------------------------------------
which all of the Registrable Securities and other shares of Common Stock of the
Company (including shares of Common Stock issued or issuable upon conversion of
shares of any currently unissued series of Preferred Stock of the Company) with
registration rights (the "Other Shares") requested to be included in a
registration on behalf of the Holders or other Shareholders cannot be so
included as a result of limitations of the aggregate number of shares of
Registrable Securities and Other Shares that may be so included, the number of
shares of Registrable Securities and Other Shares that may be so included shall
be allocated among the Holders and Other Shareholders requesting inclusion of
shares pro rata on the basis of the number of shares of Registrable Securities
and Other Shares that would be held by such Holders and Other Shareholders,
assuming conversion; provided, however, so that such allocation shall not
operate to reduce the aggregate number of Registrable Securities and Other
Shares to be included in such registration, if any Holder or Other Shareholder
does not request inclusion of the maximum number of shares of Registrable
Securities and Other Shares allocated to him pursuant to the above-described
procedure, the remaining portion of his allocation shall be reallocated among
those requesting Holders and Other Shareholders whose allocations did not
satisfy their requests pro rata on the basis of the number of shares of
Registrable Securities and Other Shares which would be held by such Holders and
Other Shareholders, assuming conversion, and this procedure shall be repeated
until all of the shares of Registrable Securities and Other Shares which may be
included in the registration on behalf of the Holders and Other
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<PAGE>
Shareholders have been so allocated. The Company shall not limit the number of
Registrable Securities to be included in a registration pursuant to this
Agreement in order to include shares held by shareholders with no registration
rights or to include founder's stock or any other shares of stock issued to
employees, officers, directors, or consultants pursuant to Company's 1996
Amended and Restated Stock Option Plan. Notwithstanding the foregoing, the
Company shall not be required to provide to Holders pro rata rights to the
extent the holders of Series A Preferred Stock have rights which are not subject
to cutbacks.
1.11 Delay of Registration. No Holder shall have any right to take any
---------------------
action to restrain, enjoin, or otherwise delay any registration as the result of
any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.12 Termination of Registration Rights. The right of any Holder to
----------------------------------
request inclusion in any registration pursuant to Section 1.2 shall terminate on
the closing of the first Companyinitiated registered public offering of Common
Stock of the Company, provided that all shares of Registrable Securities held or
entitled to be held upon conversion by such Holder may immediately be sold under
Rule 144 during any ninety (90) day period, or on such date after the closing of
the first Company-initiated registered public offering of Common Stock of the
Company as all shares of Registrable Securities held or entitled to be held upon
conversion by such Holder may immediately be sold under Rule 144 during any
ninety (90) day period; provided, however, that the provisions of this Section
1.12 shall not apply to any Holder who owns more than two percent (2%) of the
Company's outstanding stock until the earlier of (x) such time as such Holder
owns less than two percent (2%) of the outstanding stock of the Company, or (y)
the expiration of three years after the closing of the first registered public
offering of Common Stock of the Company.
SECTION 2
Miscellaneous
-------------
2.1 Governing Law. This Agreement shall be governed in all
-------------
-13-
<PAGE>
respects by the laws of the State of California, as if entered into by and
between California residents exclusively for performance entirely within
California.
2.2 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
2.3 Entire Agreement; Amendment; Waiver. This Agreement constitutes the
-----------------------------------
full and entire understanding and agreement between the parties with regard to
the subjects hereof. Neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated, except by a written instrument signed by the
Company and the holders of at least a majority of the Registrable Shares and any
such amendment, waiver, discharge or termination shall be binding on all the
Holders, but in no event shall the obligation of any Holder hereunder be
materially increased, except upon the written consent of such Holder.
2.4 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by United States
first-class mail, postage prepaid, or delivered personally by hand or nationally
recognized courier addressed (a) if to a Holder, as indicated on the list of
Holders attached hereto as Exhibit A, or at such other address as such holder or
permitted assignee shall have furnished to the Company in writing, or (b) if to
the Company, at 345 East Middlefield Road, Mountain View, CA 94043, Attn: Mr.
David Buzby, fax: (415) 940-6471, or at such other address as the Company shall
have furnished to each holder in writing. All such notices and other written
communications shall be effective (i) if mailed, five (5) days after mailing and
(ii) if delivered, upon delivery.
2.5 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any Holder, upon any breach or default of the
Company under this Agreement shall impair any such right, power or remedy of
such Holder nor shall it be construed to be a waiver of any such breach or
default, or an acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default therefore or thereafter
occurring. Any waiver, permit,
-14-
<PAGE>
consent or approval of any kind or character on the part of any Holder of any
breach or default under this Agreement or any waiver on the part of any Holder
of any provisions or conditions of this Agreement must be made in writing and
shall be effective only to the extent specifically set forth in such writing.
All remedies, either under this Agreement or by law or otherwise afforded to any
Holder, shall be cumulative and not alternative.
2.6 Arbitration. To the fullest extent not prohibited by law, any
-----------
controversy or claim arising out of or relating to this Agreement or the
transactions contemplated hereby, or the breach thereof I shall be settled by
final and binding arbitration in accordance with the commercial rules then in
effect of the American Arbitration Association ("AAA"), as modified or
supplemented under this section. The decision of the arbitrators shall be final
and binding and judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction. If any series of claims arising out
of the same or related transactions shall involve claims which are arbitrable
under the preceding clause and claims which are not, the arbitrable claims shall
first be finally determined before suit may be instituted upon the others. The
arbitration panel shall consist of three arbitrators, one arbitrator appointed
by the Company, one by a majority of the Holders and a third neutral arbitrator
appointed by the AAA. The venue for all arbitration proceedings shall be San
Francisco, California. The successful party to such action or proceeding shall
pay to the prevailing party all costs and expenses, including reasonable
attorneys' fees, incurred by such prevailing party in such action or proceeding
and in any appeal in connection therewith.
2.7 Rights; Separability. Unless otherwise expressly provided herein, a
--------------------
Holder's rights hereunder are several rights, not rights jointly held with any
of the other Holders. In case any provision of this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
2.8 Information Confidential. Each Holder acknowledges that any
------------------------
confidential information received by them pursuant hereto, including, but not
limited to, the pendency of any proposed public offering, is for such Holder's
use only, and it
-15-
<PAGE>
will not use such confidential information in violation of the Exchange Act or
reproduce, disclose or disseminate such information to any other person (other
than its employees or agents having a need to know the contents of such
information, and its attorneys), except in connection with the exercise of
rights under this Agreement, unless the Company has made such information
available to the public generally or such Holder is required to disclose such
information by a governmental body.
2.9 Titles and Subtitles. The titles of the paragraphs and subparagraphs
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
2.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
2.11 Subsequent Closings. In the event that the Company shall conduct
-------------------
subsequent sales of Series B Preferred Stock pursuant to and in accordance with
the terms of the Series B Agreement, any holder of such shares of Series B
Preferred Stock shall be deemed an Investor with all of the rights of an
Investor under this Agreement; provided that as a condition thereto such
Investor and the Company shall sign a counterpart signature page to this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Investors Rights
Agreement effective as of the day and year first above written.
BEST INTERNET COMMUNICATIONS,
INC.
By: /s/ David S. Buzby
--------------------------------------
Title: C.F.O.
-----------------------------------
HOLDERS:
-16-
<PAGE>
/s/ David S. Buzby
-----------------------------------------
David S. Buzby
/s/ Robert Leppo
-----------------------------------------
Robert Leppo
/s/ James R. Zarley
-----------------------------------------
Jim Zarley
-17-
<PAGE>
EXHIBIT A
---------
LIST OF HOLDERS
---------------
Mr. Robert D. Leppo
2340 Vallejo #100
San Francisco, CA 94123
Mr. James Acquistapace
3465 Diablo Avenue
Hayward, CA 94545
MSTC Custodian, FBO Michael S. Erickson IRA
MSTC Acct. No. 14-50958
Attn: Retirement Plans Department
One Pierrepont Plaza, 10th Floor
Brooklyn, NY 11201
Tax ID # 11-317-9897
TPOC Fund, L.P.
One Baja Court
Corte Madera, CA 94925-1801
David S. Buzby
345 East Middlefield Road
Mountain View, CA 94043
Jim Zarley
345 East Middlefield Road
Mountain View, CA 94043
BI Partners, LLC
c/o Saratoga Associates
108 East Read St.
Baltimore, MD 21202
Michael Erickson
Trustee EFL Trust (10/3/95)
One Birn Street
Corte Madre, CA 94925
Edward & Sue Moltzen IRA
Account = 5991 - 7533
Robert W. Baird & Co.
727 East Wisconsin Ave.
Milwaukee, WI 53201
Peter & Polly Pitshev
Revokable Living Trust (4/11/85)
Boulder City, NV
Edward & Sue Moltzen
Bremmer & Moltzen
33 North Deerborn St.
Chicago, IL 60602
-18-
<PAGE>
EXHIBIT 10.05
BEST INTERNET COMMUNICATIONS, INC.
AMENDED & RESTATED
1996 STOCK OPTION PLAN
(EFFECTIVE AS OF MAY 29, 1996)
SECTION 1. PURPOSE.
- --------------------
The purpose of the Plan is to offer selected employees, directors and
consultants an opportunity to acquire a proprietary interest in the success of
Best Internet Communications, Inc. (the "Company"), or to increase such
interest, to encourage such selected persons to remain in the employ of the
Company and to attract new employees with outstanding qualifications by
purchasing Shares of the Company's Common Stock. The Plan provides for the
grant of Options to purchase Shares. Options granted under the Plan may include
Nonstatutory Options as well as incentive stock options intended to qualify
under section 422 of the Internal Revenue Code.
SECTION 2. DEFINITIONS.
- ------------------------
(a) "Board of Directors" shall mean the Board of Directors of the Company,
------------------
as constituted from time to time.
(b) "Change of Control" shall mean the occurrence of any of the following
-----------------
events:
(i) the consummation of the acquisition of fifty-one percent (51%) or
more of the outstanding stock of the Company by one person or by two or
more persons acting as a partnership, limited partnership, syndicate or
other group pursuant to a tender offer validly made under any federal or
state law (other than a tender offer by the Company);
(ii) the consummation of a merger, consolidation or other
reorganization of the Company (other than a reincorporation of the
Company), if after giving effect to such merger, consolidation or other
reorganization of the Company, the
-1-
<PAGE>
stockholders of the Company immediately prior to such merger, consolidation
or other reorganization do not represent a majority in interest of the
holders of voting securities (on a fully diluted basis) with the ordinary
voting power to elect directors of the surviving or resulting entity after
such merger, consolidation or other reorganization;
(iii) the sale of all or substantially all of the assets of the
Company to a third party who is not an affiliate (including a Parent or
Subsidiary) of the Company;
(iv) the dissolution of the Company pursuant to action validly taken
by the stockholders of the Company in accordance with applicable state law.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" shall mean a committee of the Board of Directors which is
---------
authorized to administer the Plan under Section 3. After the initial public
offering of the Company's common stock, the Committee shall have membership
composition which enables the Plan to qualify under Rule 16b-3 with regard to
the grant of Options to persons who are subject to Section 16 of the Securities
Exchange Act of 1934.
(e) "Company" shall mean Best Internet Communications, Inc., a California
-------
corporation.
(f) "Disability" shall means that an Optionee is unable to engage in any
----------
substantial gainful activity by reason of any medically determinable physical or
mental impairment.
(g) "Employee" shall mean (i) any individual who is a common-law employee
--------
of the Company or of a Subsidiary, (ii) a member of the Board of Directors, or
(iii) a consultant who performs services for the Company or a Subsidiary.
Service as a member of the Board of Directors or as a consultant shall be
considered employment for all purposes of the Plan except the second sentence of
Section 4(a).
-2-
<PAGE>
(h) "Exercise Price" shall mean the amount for which one Share may be
--------------
purchased upon exercise of an Option, as specified by the Committee in the
applicable Stock Option Agreement.
(i) "Fair Market Value" shall mean the fair market value of a Share, as
-----------------
determined by the Committee in good faith. Such determination shall be
conclusive and binding on all persons.
(j) "ISO" shall mean an employee incentive stock option described in
---
Code section 422(b).
(k) "Nonstatutory Option" shall mean an employee stock option that is not
-------------------
an ISO.
(l) "Option" shall mean an ISO or Nonstatutory Option granted under the
------
Plan and entitling the holder to purchase Shares.
(m) "Optionee" shall mean an individual who holds an Option.
--------
(n) "Plan" shall mean this Best Internet Communications, Inc.
----
Amended & Restated 1996 Stock Option Plan.
(o) "Service" shall mean service as an Employee.
-------
(p) "Share" shall mean one share of Stock, as adjusted in accordance with
-----
Section 8 (if applicable).
(q) "Stock" shall mean the common stock of the Company.
-----
(r) "Stock Option Agreement" shall mean the agreement between the Company
----------------------
and an Optionee which contains the terms, conditions and restrictions pertaining
to his or her Option.
(s) "Subsidiary" shall mean any corporation, of which the Company and/or
----------
one or more other Subsidiaries own not less than 50 percent of the total
combined voting power of all classes of outstanding stock of such corporation. A
corporation that attains the status of a Subsidiary on a date after the adoption
of the Plan shall be considered a Subsidiary commencing as of such date.
-3-
<PAGE>
SECTION 3. ADMINISTRATION.
- --------------------------
(a) Committee Membership. The Plan shall be administered by the Committee,
--------------------
which shall consist of members of the Board of Directors. The members of the
Committee shall be appointed by the Board of Directors. If no Committee has been
appointed, the entire Board of Directors shall constitute the Committee.
(b) Committee Procedures. The Board of Directors shall designate one of
--------------------
the members of the Committee as chairperson. The Committee may hold meetings at
such times and places as it shall determine. The acts of a majority of the
Committee members present at meetings at which a quorum exists, or acts reduced
to or approved in writing by all Committee members, shall be valid acts of the
Committee.
(c) Committee Responsibilities. Subject to the provisions of the Plan, the
--------------------------
Committee shall have full authority and discretion to take the following
actions:
(i) To interpret the Plan and to apply its provisions;
(ii) To adopt, amend or rescind rules, procedures and forms relating
to the Plan;
(iii) To authorize any person to execute, on behalf of the Company,
any instrument required to carry out the purposes of the Plan;
(iv) To determine when Options are to be granted under the Plan;
(v) To select the Optionees;
(vi) To determine the number of Shares to be made subject to each
Option;
(vii) To prescribe the terms and conditions of each Option, including
(without limitation) the Exercise Price, the vesting schedule, to determine
whether such Option is to be classified as an ISO or as a Nonstatutory
Option, and to specify the provisions of the Stock Option Agreement
relating to such Option;
(viii) To amend or terminate any outstanding Stock Option Agreement;
-4-
<PAGE>
(ix) To determine the disposition of an Option in the event of an
Optionee's divorce or dissolution of marriage;
(x) To correct any defect, supply any omission, or reconcile any
inconsistency in the Plan and any Option;
(xi) To prescribe the consideration for the grant of each Option
under the Plan and to determine the sufficiency of such consideration; and
(xii) To take any other actions deemed necessary or advisable for the
administration of the Plan.
All decisions, interpretations and other actions of the Committee shall be
final and binding on all Optionees, and all persons deriving their rights from
an Optionee. No member of the Committee shall be liable for any action that he
or she has taken or has failed to take in good faith with respect to the Plan or
any Option.
(d) Financial Reports. To the extent required by applicable law, and not
-----------------
less often than annually, the Company shall furnish to Optionees Company
financial statements including a balance sheet regarding the Company's financial
condition and results of operations, unless such Optionees have duties with the
Company that assure them access to equivalent information. Such financial
statements need not be audited.
SECTION 4. ELIGIBILITY.
- -----------------------
(a) General Rule. Only Employees, as defined in Section 2(f), shall be
------------
eligible for designation as Optionees by the Committee. In addition, only
individuals who are employed as common-law employees by the Company or a
Subsidiary shall be eligible for the grant of ISOs.
(b) Ten-Percent Shareholders. An Employee who owns more than 10 percent
------------------------
of the total combined voting power of all classes of outstanding stock of the
Company or any of its
-5-
<PAGE>
Subsidiaries shall not be eligible for designation as an Optionee unless (i) the
Exercise Price for an ISO (and a NSO to the extent required by applicable law)
is at least 110 percent of the Fair Market Value of a Share on the date of
grant, and (ii) in the case of an ISO, such ISO by its terms is not exercisable
after the expiration of five years from the date of grant.
(c) Attribution Rules. For purposes of Subsection (b) above, in
-----------------
determining stock ownership, an Employee shall be deemed to own the stock owned,
directly or indirectly, by or for his brothers, sisters, spouse, ancestors and
lineal descendants. Stock owned, directly or indirectly, by or for a
corporation, partnership, estate or trust shall be deemed to be owned
proportionately by or for its shareholders, partners or beneficiaries. Stock
with respect to which such Employee holds an option shall not be counted.
(d) Outstanding Stock. For purposes of Subsection (b) above, "outstanding
-----------------
stock" shall include all stock actually issued and outstanding immediately after
the grant. "Outstanding stock" shall not include shares authorized for issuance
under outstanding options held by the Employee or by any other person.
SECTION 5. STOCK SUBJECT TO PLAN.
- ---------------------------------
(a) Basic Limitation. Shares offered under the Plan shall be authorized
----------------
but unissued Shares. The aggregate number of Shares which may be issued under
the Plan (upon exercise of Options) shall not exceed four million (4,000,000)
Shares, subject to adjustment pursuant to Section 8. The number of Shares which
are subject to Options outstanding at any time under the Plan shall not exceed
the number of Shares which then remain available for issuance under the Plan.
The Company, during the term of the Plan, shall at all times reserve and keep
available sufficient Shares to satisfy the requirements of the Plan.
-6-
<PAGE>
(b) Additional Shares. In the event that any outstanding Option for any
-----------------
reason expires or is canceled or otherwise terminated, the Shares allocable to
the unexercised portion of such Option shall again be available for the purposes
of the Plan.
SECTION 6. TERMS AND CONDITIONS OF OPTIONS.
- -------------------------------------------
(a) Stock Option Agreement. Each grant of an Option under the Plan shall
----------------------
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms and conditions of the Plan
and may be subject to any other terms and conditions which are not inconsistent
with the Plan and which the Committee deems appropriate for inclusion in a Stock
Option Agreement. The provisions of the various Stock Option Agreements entered
into under the Plan need not be identical.
(b) Number of Shares. Each Stock Option Agreement shall specify the
----------------
number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 8. The Stock Option
Agreement shall also specify whether the Option is an ISO or a Nonstatutory
Option.
(c) Exercise Price. Each Stock Option Agreement shall specify the
--------------
Exercise Price. The Exercise Price of an ISO shall not be less than one hundred
percent (100%) of the Fair Market Value of a Share on the date of grant. To the
extent required by applicable law, the Exercise Price of a Nonstatutory Option
shall not be less than eighty-five percent (85%) of the Fair Market Value of a
Share on the date of grant. Subject to the preceding two sentences, the Exercise
Price under any Option shall be determined by the Committee in its sole
discretion. The Exercise Price shall be payable in a form described in Section
7.
(d) Withholding Taxes. As a condition to the exercise of an Option, the
-----------------
Optionee shall make such arrangements as the Committee may require for the
satisfaction of any federal, state, local or foreign withholding tax obligations
that may arise in connection with such exercise. The Optionee shall also make
such arrangements as the Committee may require for the satisfaction of any
federal, state,
-7-
<PAGE>
local or foreign withholding tax obligations that may arise in connection with
the disposition of Shares acquired by exercising an Option.
(e) Exercisability. Each Stock Option Agreement shall specify the date
--------------
when all or any installment of the Option is to become exercisable. To the
extent required by applicable law, an Option shall become exercisable no less
rapidly than the rate of 20% per year for each of the first five years from the
date of grant. Subject to the preceding sentence, the exercisability of any
Option shall be determined by the Committee in its sole discretion.
(f) Term. The Stock Option Agreement shall specify the term of
----
the Option. The term shall not exceed ten (10) years from the date of grant,
except as otherwise provided in Section 4(b). Subject to the preceding sentence,
the Committee at its sole discretion shall determine when an Option is to
expire.
(g) Nontransferability. No Option shall be transferable by the Optionee
------------------
other than by will or by the laws of descent and distribution. An Option may be
exercised during the lifetime of the Optionee only by him or by his guardian or
legal representative. No Option or interest therein may be transferred,
assigned, pledged or hypothecated by the Optionee during his lifetime, whether
by operation of law or otherwise, or be made subject to execution, attachment or
similar process.
(h) Exercise of Options on Termination of Service. Each Option shall set
---------------------------------------------
forth the extent to which the Optionee shall have the right to exercise the
Option following termination of the Optionee's service with the Company and its
Subsidiaries. Such provisions shall be determined in the sole discretion of the
Committee, need not be uniform among all Options issued pursuant to the Plan,
and may reflect distinctions based on the reasons for termination of
-8-
<PAGE>
employment. Notwithstanding the foregoing, and to the extent required by
applicable law, each Option shall provide that the Optionee shall have the right
to exercise the vested portion of any Option held at termination for at least 30
days following termination of service with the Company for any reason, and that
the Optionee shall have the right to exercise the Option for at least six months
if the Optionee's service terminates due to death or Disability.
(i) No Rights as a Shareholder. An Optionee, or a transferee of an
--------------------------
Optionee, shall have no rights as a shareholder with respect to any Shares
covered by an Option until the date of the issuance of a stock certificate for
such Shares.
(j) Modification, Extension and Assumption of Options. Within the
-------------------------------------------------
limitations of the Plan, the Committee may modify, extend or assume outstanding
Options or may accept the cancellation of outstanding Options (whether granted
by the Company or another issuer) in return for the grant of new Options for the
same or a different number of Shares and at the same or a different Exercise
Price or for other consideration.
(k) Restrictions on Transfer of Shares. Any Shares issued upon exercise
----------------------------------
of an Option shall be subject to such rights of repurchase, rights of first
refusal and other transfer restrictions as the Committee may determine. Such
restrictions shall be set forth in the applicable Stock Option Agreement and
shall apply in addition to any restrictions that may apply to holders of Shares
generally.
SECTION 7. PAYMENT FOR SHARES.
- ------------------------------
(a) General Rule. The entire Exercise Price of Shares issued under the
------------
Plan shall be payable in lawful money of the United States of America at the
time when such Shares are purchased, except as provided in Subsections (b), (c)
and (d) below.
-9-
<PAGE>
(b) Surrender of Stock. To the extent that a Stock Option Agreement so
------------------
provides, payment may be made all or in part with Shares which have already been
owned by the Optionee or the Optionee's representative for any time period
specified by the Committee and which are surrendered to the Company in good form
for transfer. Such Shares shall be valued at their Fair Market Value on the date
when the new Shares are purchased under the Plan.
(c) Promissory Notes. To the extent that a Stock Option Agreement so
----------------
provides, payment may be made all or in part with a full recourse promissory
note executed by the Optionee. The interest rate and other terms and conditions
of such note shall be determined by the Committee. The Committee may require
that the Optionee pledge his or her Shares to the Company for the purpose of
securing the payment of such note. In no event shall the stock certificate(s)
representing such Shares be released to the Optionee until such note is paid in
full.
(d) Cashless Exercise. To the extent that a Stock Option Agreement so
-----------------
provides and a public market for the Shares exists, payment may be made all or
in part by delivery (on a form prescribed by the Committee) of an irrevocable
direction to a securities broker to sell Shares and to deliver all or part of
the sale proceeds to the Company in payment of the aggregate Exercise Price.
SECTION 8. ADJUSTMENT OF SHARES.
- --------------------------------
(a) General. In the event of a subdivision of the outstanding Stock, a
-------
declaration of a dividend payable in Shares, a declaration of a dividend payable
in a form other than Shares in an amount that has a material effect on the value
of Shares, a combination or consolidation of the outstanding Stock into a lesser
number of Shares, a recapitalization, a reclassification or a similar
occurrence, the Committee shall make appropriate adjustments in one or more of
(i) the
-10-
<PAGE>
number of Shares available for future grants under Section 5, (ii) the
number of Shares covered by each outstanding Option or (iii) the Exercise Price
under each outstanding Option.
(b) Reorganizations. In the event of: (1) a dissolution or liquidation
---------------
of the Company; (2) a merger or consolidation in which the Company is not the
surviving corporation; (3) a reverse merger in which the Company is the
surviving corporation but the shares of the Company's common stock outstanding
immediately preceding the merger are converted by virtue of the merger into
other property, whether in the form of securities, cash or otherwise, or (4) any
other capital reorganization in which more than fifty percent (50%) of the
shares of the Company entitled to vote are exchanged, then at the sole
discretion of the Board and to the extent permitted by applicable law: (i) any
surviving corporation shall assume any options outstanding under the Plan or
shall substitute similar options for those outstanding under the Plan, or (ii)
such options shall continue in full force and effect. In the event any surviving
corporation refuses to assume or continue such options, or to substitute similar
options for those outstanding under the Plan, then, with respect to options held
by persons then performing services as employees, consultants or directors for
the Company, the time during which such options may be exercised shall be
accelerated and the options terminated if not exercised within three (3) months
of such event. Notwithstanding the foregoing, at the discretion of the
Committee, individual Stock Option Agreements may permit acceleration of vesting
under specified circumstances.
(c) Reservation of Rights. Except as provided in this Section 8, an
---------------------
Optionee shall have no rights by reason of (i) any subdivision or consolidation
of shares of stock of any class, (ii) the payment of any dividend or (iii) any
other increase or decrease in the number of shares of stock of any class. Any
issue by the Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall not affect, and no adjustment by reason
-11-
<PAGE>
thereof shall be made with respect to, the number or Exercise Price of Shares
subject to an Option. The grant of an Option pursuant to the Plan shall not
affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure, to merge or consolidate or to dissolve, liquidate, sell or transfer
all or any part of its business or assets.
SECTION 9. LEGAL REQUIREMENTS.
- -------------------------------
Shares shall not be issued under the Plan unless the issuance and delivery
of such Shares complies with (or is exempt from) all applicable requirements of
law, including (without limitation) the Securities Act of 1933, as amended, the
rules and regulations promulgated thereunder, state securities laws and
regulations, and the regulations of any stock exchange on which the Company's
securities may then be listed.
SECTION 10. NO EMPLOYMENT RIGHTS.
- ----------------------------------
No provision of the Plan, nor any Option granted under the Plan, shall be
construed to give any person any right to become, to be treated as, or to remain
an Employee. The Company and its Subsidiaries reserve the right to terminate
any person's Service at any time and for any reason.
SECTION 11. DURATION AND AMENDMENTS.
- ------------------------------------
(a) Term of the Plan. The Plan, as set forth herein, shall become
----------------
effective on the date of its adoption by the Board of Directors, subject to the
approval of the Company's shareholders. In the event that the shareholders fail
to approve the Plan within twelve (12) months after its adoption by the Board of
Directors, any Option grants already made shall
-12-
<PAGE>
be null and void, and no additional Option grants shall be made after such date.
The Plan shall terminate automatically September 13, 2005 and may be terminated
on any earlier date pursuant to Subsection (b) below.
(b) Right to Amend or Terminate the Plan. The Board of Directors may
------------------------------------
amend the Plan at any time and from time to time Rights and obligations under
any Option granted before amendment of the Plan shall not be materially altered,
or impaired adversely, by such amendment, except with consent of the person to
whom the Option was granted. An amendment of the Plan shall be subject to the
approval of the Company's stockholders only to the extent required by applicable
laws, regulations or rules.
(c) Effect of Amendment or Termination. No Shares shall be issued or sold
----------------------------------
under the Plan after the termination thereof, except upon exercise of an Option
granted prior to such termination. The termination of the Plan, or any amendment
thereof, shall not affect any Option previously granted under the Plan.
SECTION 12. EXECUTION.
- ----------------------
To record the adoption of the Plan by the Board of Directors, the Company
has caused its authorized officer to execute the same as of May 29, 1996.
BEST INTERNET COMMUNICATIONS, INC.
By____________________________________________________
Its___________________________________________________
-13-
<PAGE>
EXHIBIT 10.10
AMENDED AND RESTATED
KEY EMPLOYEE AGREEMENT
----------------------
This AMENDED AND RESTATED KEY EMPLOYEE AGREEMENT (hereinafter referred to
as the "Agreement") is made and entered into as of the 10th day of February,
1997 by and between Best Internet Communications, Inc. a California corporation
(hereinafter referred to as the "Company"), and David S. Buzby (hereinafter
referred to as the "Executive") and replaces the earlier Agreement between them
dated February 10, 1996, which had replaced an earlier Agreement between them
dated July 31, 1995.
WHEREAS, the Company is in the business of providing access services to an
international global computer network, and related products and services to the
public.
WHEREAS, the Executive possesses unique operational and financial skills
which are valuable to the business and financial prospects of the Company.
WHEREAS, in light of the foregoing, the Company desires to employ the
Executive as Chief Financial Officer and Senior Vice President of Business
Development and the Executive desires to accept such employment.
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the Company and Executive agree as follows:
1. Employment and Duties. The Company hereby employs Executive to serve
---------------------
as Chief Financial Officer and Senior Vice President of Business Development.
In that capacity, Executive shall perform all services, acts or things necessary
or advisable to fulfill the duties of a Chief Financial Officer and Senior Vice
President of Business Development. However, Executive at all times is subject
to the direction of the Chief Executive Officer and to the policies established
by the Board of Directors of the Company (hereinafter the "Board").
2. Term of Employment. The Company hereby agrees to employ Executive, and
------------------
Executive accepts employment, upon the terms and conditions set forth herein,
commencing on February 10, 1997. Executive's employment shall continue until
sooner terminated by the Company or by Executive pursuant to Section 8 hereof.
3. Salary. Executive shall be entitled to receive from Company a starting
------
base salary of Twelve Thousand Five Hundred
<PAGE>
dollars ($12,500.00) per month, calculated from the date of the Executive's
commencement of employment, pursuant to Paragraph 2 above. The base salary shall
be paid to Executive in installments every other week and shall be reviewed
annually by the CEO and any reduction in salary from year to year may be
considered by Executive to constitute a termination pursuant to Paragraph 11
below. Executive's salary shall be reviewed at the end of each year during the
term hereof.
4. Stock Options In addition to Executive's salary described in
-------------
Paragraph 3, the Executive had previously received an incentive stock option
grant sufficient to purchase and maintain one per cent (1%) of the total Company
shares outstanding and as fully diluted (ie: by option grants, warrants, and or
convertible debt or equity securities). Eighty thousand (80,000) shares of such
options vested 6 months from August 10, 1995 and have a striking price of $.25.
The remaining options under the 1% option grant are to vest pro rata each month
over a 48 month period, which commenced on August 10, 1995 and will continue
until August 9, 1999, so long as the Executive continues to be a service
provider to the Company. The striking price for such remaining options under
the 1% grant is $.50. Such options granted to Executive shall become fully
vested upon sale of all or substantially all of the Company's assets, sale of
the Company, merger or change in control of greater than 50% of the Company's
outstanding voting stock or upon an initial public offering of Company
securities. All options shall, to the maximum extent allowed by law, be
incentive stock options.
The Executive and Company have now agreed to cap the 1% grant mentioned above at
145,010 shares (equivalent to 1% of the Company's fully diluted shares at the
date of this Agreement) with the rest of the terms the same as described above.
The Company has also agreed to grant the Executive additional Incentive Options
on a further Two Hundred Thousand (200,000) shares of Common Stock at an
exercise price of Seventy-Five Cents ($0.75) per share, these options to vest in
forty-eight (48) equal monthly installments per the Company's Stock Option Plan
and vest start date to be August 10, 1995 and will continue until August 9,
1999, so long as the Executive continues to be a service provider to the
Company. Such option shall become fully vested upon sale of all or substantially
all of the Company's assets, sale of the Company, merger or change in control of
greater than 50% of the Company's outstanding voting stock or upon an initial
public offering of Company securities. All options shall, to the maximum extent
allowed by law, be incentive stock options.
<PAGE>
5. Cash Bonus. To be paid in amount, if any, and at such time, solely
----------
at the discretion of the CEO.
6. Extent of Services. Executive shall devote his entire time, attention
------------------
and energies to the business of the Company and shall not during the term of
this Agreement be engaged (whether or not during normal business hours) in any
other business or professional activity, whether or not such activity is pursued
for gain, profit or other pecuniary advantage; but this shall not be construed
as preventing the Executive from (a) investing his personal assets in businesses
which do not directly compete with the Company in such form or manner as will
not require any services on his part and in which his participation is solely
that of an investor or Board Member, (b) purchasing securities in any
corporation whose securities are regularly traded, provided that such purchase
shall not result in his collectively owning beneficially at any time five
percent or more of the equity securities of any corporation engaged in a
business competitive to that of the Company, (c) participating in conferences,
preparing or publishing papers or books or teaching so long as the CEO approves
of such activities prior to the Executive's engaging in them, and d) taking up
to a total of two (2) full time workdays, or the equivalent each fiscal quarter
to sit on the Board of Resource Holdings, LLC. Prior to commencing any activity
described in clause (c) above, the Executive shall inform the CEO of the Company
in writing of any such activity.
7. Vacations and Leave. Executive shall be entitled to vacation and other
-------------------
leave in accordance with normal Company policy. Vacations shall be taken at
such time or times as Executive and the CEO shall mutually agree.
8. Expense Reimbursements. Upon presentation of supporting documentation,
----------------------
and consistent with Company policy, the Company will reimburse Executive for all
reasonable business expenses incurred by the Executive in connection with the
business of the Company. The parties acknowledge that Executive may incur
certain non-reimbursable business expenses which are nonetheless for the benefit
of the Company.
9. Other Benefits. In addition to the benefits specifically described
--------------
herein, during the term of this Employment Agreement Executive and his family
shall be entitled to receive all other benefits of employment generally made
available to other members of the Company's management, including, without
limitation, benefits as a result of any present or future medical insurance
plans, retirement, or pension plans. Executive shall also, during the term
hereof, have the use of a cellular telephone for business use provided by
Company.
<PAGE>
10. Termination of Employment. This Agreement may be terminated by either
-------------------------
party, for any reason or for no reason, immediately upon written notice given to
the other party. Accordingly, Executive and Company acknowledge and agree that
this agreement is an AT WILL EMPLOYMENT AGREEMENT. In the event Company elects
to terminate Executive's employment with the Company, Executive shall receive
three (3) months salary as a severance payment and shall have accelerated one
month's worth of options for every four weeks he was employed at the Company.
Termination pursuant to this Section shall not prejudice any other remedy to
which the terminating or terminated party may be entitled either at law, in
equity or under this agreement.
11. Successors to the Company. Except as otherwise provided herein, this
-------------------------
Agreement shall be binding upon and inure to the benefit of the Company and any
successor of the Company, or any corporation which acquires directly or
indirectly all of the assets of the Company whether by merger, consolidation,
sale or otherwise, but shall not otherwise be assignable by the Company. This
agreement is not assignable by Executive.
12. Notices. Any notice to be given under the terms of this Agreement
-------
shall be given as follows: Notice to Company shall be addressed to its
corporate secretary at the Company's principal offices; Notice to Executive
shall be addressed to Executive's home address as last shown on the records of
the Company. Notice of a change of address under this section shall have been
duly given when personally delivered, or three (3) days after being enclosed in
a properly sealed envelope addressed as aforesaid, and deposited (postage paid)
at a post office or United States Government branch post office.
13. Waiver. Neither party's failure to enforce any provision of this
------
Agreement shall be deemed or in any way construed as a waiver of any such
provision, nor prevent that party from thereafter enforcing each and every
provision of this Agreement. The rights granted both parties herein are
cumulative and shall not constitute a waiver of either party's right to assert
all other legal remedies available to it under the circumstances.
14. Severability. If one or more of the provisions or paragraphs of this
------------
Agreement shall be held to be illegal or otherwise void or invalid, the
remainder of this Employment Agreement shall not be affected and shall remain in
full force and effect.
<PAGE>
15. Applicable Law/Forum. This Agreement shall be interpreted under the
--------------------
laws of the State of California, without regard to or application of choice of
law rules or principles. The exclusive jurisdiction for any legal proceeding
regarding this Agreement shall be in the courts of the State of California,
Santa Clara County, and the parties hereto expressly submit to the jurisdiction
of said courts.
16. Entire Agreement. This Agreement and the Employee Proprietary
----------------
Information Agreement, together with any written personnel policies or rules
issued by Company (which are subject to modification by Company at any time upon
written notice), contains the entire agreement of the parties and supersedes and
replaces any other agreement or understanding between them with respect to the
subject matter of this Agreement. Except as provided herein, this Agreement may
be modified only by an agreement in writing signed by the party against whom
enforcement of any waiver, change, modification, extension or discharge is
sought.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first above written.
COMPANY:
BEST INTERNET COMMUNICATIONS, INC.
By: /s/ Jim Zarley
-----------------------------------
Jim Zarley, CEO
EXECUTIVE:
/s/ David Buzby
---------------------------------
David S. Buzby
<PAGE>
Exhibit 10.11
KEY EMPLOYEE AGREEMENT
This KEY EMPLOYEE AGREEMENT (hereinafter referred to as the ("Agreement")
is made and entered into as of this 1st day of January, 1997, by and between
Best Internet Communications, Inc., a California corporation (hereinafter
referred to as the "Company") and Jim Zarley (hereinafter referred to as
"Executive").
WHEREAS, Company is in the business of providing communications services to
an international computer network and related products and services to the
public;
WHEREAS, Executive possesses unique technical and operational skills which
are valuable to the business and financial prospects of Company;
WHEREAS, in light of the foregoing, Company desires to employ Executive as
Chairman, President and Chief Executive Officer and Executive desires to accept
such employment;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
Company and Executive agree as follows:
1. Duties. Company hereby employs Executive to serve in the dual capacity of
------
Chairman and of President and CEO, reporting to the Board of Directors with such
duties as are specified in Company's Bylaws and as may be defined from time to
time by the Board.
2. Term of Employment. Company hereby agrees to employ Executive and Executive
------------------
agrees to accept employment upon the terms and conditions set forth herein,
commencing on January 1, 1997, and shall continue unless and until either or
both capacities are terminated by Company or by the Executive pursuant to
Paragraph 12 below.
3. Salary. Executive shall be entitled to receive from Company a starting base
------
salary of $10,000 per month, which if annualized is $120,000, $7,500 per month
to the President and CEO capacity and $2,500 per month to the Chairman capacity.
Salary is calculated from the date of Executive's commencement of employment,
pursuant to Paragraph 2 above. The base salary shall be paid Executive in
installments every other week and shall be reviewed and may be increased or
decreased by the Board annually or at such earlier time as one of the capacities
may be terminated.
4. Stock Options. In addition to Executive's salary described in
-------------
-1-
<PAGE>
Paragraph 3, above, Executive shall receive Incentive Stock Options at a
striking price of 75 cents per share as to 780,000 shares and $1.25 as to 20,000
shares, all 800,000 of which shall vest over a twenty-four(24) month period,
commencing on January 1, 1997, 600,000 to the President and CEO capacity and
200,000 to the Chairman capacity. The aforementioned stock options shall
otherwise be subject to the terms and conditions of the Stock Option Agreement
and Company's Stock Option Plan. Such plans state, in part, that an employee
must be employed by Company for at least six (6) months before vesting of the
first six months worth of options; thereafter, options shall vest pro rata each
month. In the event of the closing of an Initial Public Offering or the transfer
of ownership of 51% or more of the Company, for other than passive funding
purposes, all of such options as have been granted to the Executive as of the
date of the transaction shall be fully vested.
5. Extent of Services. So long as he serves both as Chairman and as President
------------------
and CEO, Executive shall devote his full time, attention and energies to the
business of Company and shall not during such time be engaged (whether or not
during normal business hours) in any other business or professional activity,
whether or not such activity is pursued for gain, profit or other pecuniary
advantage, but this shall not be construed as preventing the Executive from (a)
investing personal assets in businesses which do not compete with Company in
such form or manner as will not require any substantial services on the part of
the Executive and in which the Executive's participation is principally that of
an investor; (b) purchasing securities in any corporation whose securities are
regularly traded, provided that such purchase shall not result in the
Executive's collectively owning beneficially at any time five percent (5%) or
more of the equity securities of a corporation engaged in a business competitive
to that of Company; and (c) participating in conferences, preparing or
publishing papers or books or teaching, so long as the Board approves of such
activities prior to the Executive engaging in them. It is agreed that the
President and CEO capacity is deemed to be three quarters (3/4) of full time and
the Chairman capacity one quarter (1/4).
6. Vacations and Leave. Executive shall be entitled to vacation and other
-------------------
leave in accordance with normal Company policy applicable to management
employees. Vacations shall be taken at such time or times as Executive and the
Board shall mutually agree.
7. Expense Reimbursement. Upon presentation of supporting documentation and
---------------------
consistent with Company policy, Company will reimburse Executive for any
reasonable and necessary business expenses incurred by Executive in connection
with the business of Company. The parties acknowledge that Executive may incur
certain
-2-
<PAGE>
business-related expenses which Company will not reimburse but which nonetheless
further the business interests of Company and Executive's professional interest.
8. Other Benefits. In addition to the benefits specifically described herein,
--------------
during the term of this Agreement, Executive and his spouse, children and/or
other dependents shall be entitled to receive, on an equivalent basis, all
other benefits of employment generally made available to other members of
Company's management and their families, including, without limitation, benefits
as a result of any present or future medical insurance, disability insurance,
life insurance, retirement or pension plans. It is understood that any 401(k)
plan implemented by Company will be made available to Executive at the time and
upon the equivalent terms as made available to Company's other management
employees.
9. Taxes. Company may withhold from any amounts payable under this Agreement
-----
such federal, state, or local taxes as shall be required to be withheld pursuant
to any applicable law or regulation.
10. Termination of Employment. This Agreement and Executive's employment in
-------------------------
either the capacity of Chairman or of President and CEO or both may be
terminated by either party, for any reason or no reason, immediately upon ten
(10) days written notice given to the other party. Accordingly, Executive and
Company acknowledge and agree that this Agreement and any employments hereunder
are to be considered AT-WILL EMPLOYMENT. Termination pursuant to this Section
shall not prejudice any other remedy to which the terminating party may be
entitled at law, in equity, or under this Agreement. This is the only Agreement
concerning termination between Company and Executive, and the parties
acknowledge that this Agreement supersedes and replaces any other written or
oral agreement, representation or understanding between the parties concerning
termination and that this Agreement can only be modified in a writing signed by
the Board's delegate.
11. Successors to the Company. Except as otherwise provided herein, this
-------------------------
Agreement shall be binding upon and inure to the benefit of Company and any
successors of Company, or any corporation which acquires directly or indirectly
all of the assets of Company, whether by merger, consolidation, sale or
otherwise, and shall not be otherwise assignable by Company. This Agreement is
not assignable by Executive.
12. Notice. Any notice to be given under the terms of this Agreement shall be
------
given as follows: Notice to Company shall be addressed to its CFO at Company's
principal offices; Notices to
-3-
<PAGE>
Executive shall be addressed to Executive's home as last shown on the records of
Company or given by personal delivery. Notice of a change of address under this
section shall have been duly given when personally delivered or three (3) days
after being enclosed in a properly sealed envelope addressed as aforesaid, and
deposited (postage paid) with the United States Postal Service.
13. Waiver. Neither party's failure to enforce any provision of this Agreement
------
shall be deemed or in any way construed as a waiver of any such provision, nor
prevent that party from thereafter enforcing each and every provision of this
Agreement. The rights granted both parties herein are cumulative and shall not
constitute a waiver of either party's right to assert all other legal remedies
available under the circumstances.
14. Severability. If one or more of the provisions or paragraphs of this
------------
Agreement shall be held to be illegal or otherwise void or invalid, the
remainder of this Agreement shall not be affected and shall remain in full force
and effect.
15. Governing law. This Agreement shall be interpreted under the laws of the
-------------
State of California, without regard to or application of choice of law rules or
principles.
16. Arbitration. In the event any claim or controversy arises under or
-----------
concerning any provision of this Agreement, including the termination provision
(Paragraph 11), Company and Executive hereby agree that such claim or
controversy shall be settled by final, binding arbitration in accordance with
the Employment Dispute Resolution Rules of the American Arbitration Association,
provided, however, that the impartial arbitration shall be chosen as follows: if
Company and Executive are unable to agree upon an impartial arbitrator within
five (5) days of a request for arbitration, the parties shall request a panel of
five (5) labor and employment arbitrators from the American Arbitration
Association and shall alternatively strike names until a single arbitrator
remains. Arbitration shall occur, if practicable, in Santa Clara County, CA.
Judgment upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. Depositions may be taken and other discovery may
be obtained during such arbitration proceedings to the same extent as authorized
in civil judicial proceedings, subject to any limitations placed on discovery by
the arbitrator. The parties shall share equally in the costs of conducting the
arbitration and shall each pay their expenses, but the prevailing party shall be
entitled to recover its reasonable attorneys' fees. Notwithstanding the
foregoing, nothing herein shall preclude or limit Company from seeking
injunctive relief from a court of competent jurisdiction. Executive
acknowledges and
-4-
<PAGE>
agrees that, by agreeing to this provision, he is agreeing to arbitrate any
claim relating to his employment, whether or not it arises under the terms of
this Agreement, that may arise under federal and state laws including, but not
limited to, claims arising under Title VII, the Age Discrimination in Employment
Act, the Americans with Disabilities Act and the Fair Employment and Housing
Act. EXECUTIVE FURTHER UNDERSTANDS THAT BY AGREEING TO ARBITRATE EMPLOYMENT
CLAIMS HE IS WAIVING HIS RIGHT TO BRING AN ACTION AGAINST Company IN A COURT OF
LAW, EITHER STATE OR FEDERAL, AND IS WAIVING HIS RIGHT TO HAVE HIS CLAIMS AND
DAMAGES, IF ANY, DETERMINED BY A JURY.
17. Entire Agreement. This Agreement, any stock option agreements and the
----------------
Employee Proprietary Information Agreement signed by the Executive contain the
entire agreement of the parties and supersede and replace any other Agreement.
Except as provided herein, this Agreement may be modified only by an agreement
in writing signed by the party against whom enforcement of any waiver, change,
modification, extension or discharge is sought. Only Company's Board has the
authority to make such modifications of this Agreement on behalf of Company.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
COMPANY:
Best Internet Communications, Inc.
By: /s/ David S. Buzby
----------------------------------
Chief Financial Officer
EXECUTIVE:
/s/ James R. Zarley
-------------------------------------
Jim Zarley
-5-
<PAGE>
EXHIBIT 16.01
June 9, 1998
Securities and Exchange Commission
450 5th Street, N.W.
Washington, D.C. 20549
Re: Hiway Technologies, Inc.
Registration Statement on Form S-1
Gentlemen:
This letter is provided to you pursuant to Item 304 of Regulation S-K in
connection with the above-referenced Registration Statement. The undersigned
confirms that it has received a copy of the disclosures made by the registrant
in response to Item 304 of Regulation S-K (which disclosures are set forth in
the "Experts" and "Change in Independent Accountants" sections of such
Registration Statement.) The undersigned further confirms that it agrees with
the statements made by the registrant in response to Item 304.
Very truly yours,
/s/ De Meo, Young, McGrath & Company, P.A.
De Meo, Young, McGrath & Company, P.A.
<PAGE>
HIWAY TECHNOLOGY, INC
=====================
LIST OF SUBSIDIARIES
--------------------
RapidSite, Inc., a corporation incorporated in Florida
RapidSite Ltd., a private limited company incorporated under the laws of
England
<PAGE>
EXHIBIT 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 (File
No. ) of our reports dated May 27, 1998 on our audits of the supplemental
consolidated financial statements and financial statement schedule of Hiway
Technologies, Inc. which reports present our opinion on the supplemental
consolidated financial statements in conformity with generally accepted
accounting principles applicable after financial statements are issued for a
period which includes the date of consummation of the Merger. We also consent
to the references to us under the headings "Experts" and "Selected Consolidated
Financial Data" in such Prospectus.
COOPERS & LYBRAND, L.L.P.
San Jose, California
June 10, 1998
<PAGE>
EXHIBIT 23.03
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement on Form S-1 of our
report dated September 17, 1997 on our audits of the financial statements of
Hiway Technologies, Inc. as of December 31, 1996 and for the period from April
6, 1995 (date of inception) to December 31, 1995 and the year ended December
31, 1996. We also consent to the references to us under the headings "Experts"
and "Selected Consolidated Financial Data" in such Prospectus.
DE MEO, YOUNG, McGRATH & COMPANY, P.A.
June 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1996 JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1996 DEC-31-1997 DEC-31-1998
<CASH> 1,588 5,672 6,531
<SECURITIES> 0 0 0
<RECEIVABLES> 1,753 3,622 4,537
<ALLOWANCES> (373) (1,073) (1,198)
<INVENTORY> 29 71 35
<CURRENT-ASSETS> 3,276 9,056 10,623
<PP&E> 5,449 10,763 12,296
<DEPRECIATION> 686 2,057 2,371
<TOTAL-ASSETS> 9,539 19,467 22,360
<CURRENT-LIABILITIES> 2,887 4,887 6,407
<BONDS> 0 0 0
0 0 0
3,441 4,229 4,229
<COMMON> 28 31 31
<OTHER-SE> 1,500 5,586 6,855
<TOTAL-LIABILITY-AND-EQUITY> 9,537 19,467 22,360
<SALES> 12,217 26,185 8,844
<TOTAL-REVENUES> 12,217 26,185 8,844
<CGS> 0 0 0
<TOTAL-COSTS> 3,233 6,798 2,348
<OTHER-EXPENSES> 8,201 14,516 5,236
<LOSS-PROVISION> 687 1,525 365
<INTEREST-EXPENSE> (118) (142) 131
<INCOME-PRETAX> 665 4,796 1,322
<INCOME-TAX> 1 361 176
<INCOME-CONTINUING> 664 4,435 1,146
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 664 4,435 1,146
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