<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 15, 2000
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
INTERLAND, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
GEORGIA 7389 58-1632664
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
101 MARIETTA STREET, SUITE 200
ATLANTA, GEORGIA 30303
404-720-8301
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
H. CHRISTOPHER COVINGTON
SENIOR VICE PRESIDENT, GENERAL COUNSEL
101 MARIETTA STREET, SUITE 200
ATLANTA, GEORGIA 30303
404-720-8301
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID A. STOCKTON, ESQ. JOHN D. WATSON, JR., ESQ.
KILPATRICK STOCKTON LLP LATHAM & WATKINS
1100 PEACHTREE STREET, N.E., SUITE 2800 1001 PENNSYLVANIA AVENUE, N.W., SUITE 1300
ATLANTA, GEORGIA 30309 WASHINGTON, D.C. 20004-2505
404-815-6500 202-637-2200
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being 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 of 1933, 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 of 1933, 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 of 1933, 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
under the Securities Act of 1933, check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, no par value $115,000,000 $30,360
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON A 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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON A DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR A
SOLICITATION OF AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED , 2000
PRELIMINARY PROSPECTUS
SHARES
(INTERLAND LOGO)
COMMON STOCK
---------------------------
This is an initial public offering of shares of common stock of
Interland, Inc. We are selling all of the shares of common stock offered under
this prospectus.
It is currently estimated that the initial public offering price will be between
$ and $ per share. We have applied to have our common stock
approved for listing on the Nasdaq National Market under the symbol "ILND."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 ABOUT RISKS YOU SHOULD CONSIDER BEFORE
BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------------
<TABLE>
<CAPTION>
Per
Share Total
----------- -----------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to us............................ $ $
</TABLE>
---------------------------
The underwriters may purchase up to an additional shares of
common stock from us at the initial public offering price less the underwriting
discount to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York, New
York on , 2000.
---------------------------
BEAR, STEARNS & CO. INC. THOMAS WEISEL PARTNERS LLC
PAINEWEBBER INCORPORATED
The date of this prospectus is , 2000.
<PAGE> 3
(This page intentionally left blank)
<PAGE> 4
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our financial statements and
the accompanying notes included elsewhere in this prospectus.
Interland provides a broad range of web and applications hosting and other
related web-based business solutions specifically designed to meet the needs of
small to medium-sized businesses. Our solutions are secure, reliable, and
affordable and can be easily upgraded to provide additional capacity and
functionality. Our web and applications hosting services include the computer
hardware, software, network technology and systems management necessary to
support our customers' web sites and web-based applications. Our hosting
services are based primarily on the Microsoft NT and Red Hat Linux operating
systems, providing diversity and flexibility to our customers. We generally sell
our service to customers under fully pre-paid contracts which are typically
between three months and two years in length. We are committed to providing
superior customer service and believe that this commitment is among the reasons
that our web hosting services were selected as the "Editor's Choice" by Windows
NT magazine in September 1999 and by PC Magazine in December 1999.
Our web hosting business began in September 1997 and as of December 1999
had over 45,731 customer accounts, an increase of approximately 330% versus the
prior year. Over the same period our revenues have grown from approximately $1.4
million in 1998 to over $9.1 million in 1999, representing a growth rate of over
550%. We have achieved this growth without making any acquisitions and with less
than $6.8 million of total invested cash capital until December 1999, when we
closed a $25.0 million round of venture financing. However, we experienced net
losses of approximately $16.8 million for the year ended December 31, 1999 and
we anticipate continuing and increasing losses. The following are among the key
factors that we believe will continue to drive our growth:
- A broad and expanding portfolio of high quality services designed to
enable us to provide one-stop shopping for the specific hosting and
related needs of small to medium-sized businesses.
- Key strategic relationships with Microsoft and Network Solutions, both of
which have made equity investments in Interland, and with Road Runner,
which holds a warrant to purchase shares of our common stock.
- State-of-the-art data centers which provide a secure operating
environment and facilitate the delivery of our high quality, reliable
services.
- Global expansion to serve foreign small and medium-sized businesses in
Europe, Asia and South America.
- A creative, highly aggressive multimedia advertising campaign designed to
establish Interland as the first commonly recognized brand in the hosting
industry.
- An experienced, quota-driven direct sales force that has been trained in
consultative selling and is skilled in assessing the needs of small and
medium-sized businesses.
- Our proprietary provisioning system that allows our salespeople, during
the order process, to activate a web site or provide other services for a
customer in real-time.
1
<PAGE> 5
OUR SOLUTION
For a number of small and medium-sized businesses, many of whom do not have
internal technical resources dedicated to Internet services, establishing a
presence on the Internet and realizing the various benefits of the Internet has
proven to be a complicated and time consuming task. We are dedicated to
providing small to medium-sized businesses with a comprehensive bundle of
services, which enables them to quickly, easily and affordably capitalize on the
benefits of the Internet. The key elements of our solution include:
- A broad suite of high-quality web and applications hosting and other
related solutions;
- Services which are affordable, quick to deploy, and easy to use;
- State-of-the-art security and reliability; and
- Personalized customer service and 24x7 technical support.
OUR STRATEGY
Our goal is to become a leading global provider of web and applications
hosting and related business solutions to the small and medium-sized business
market. Our strategy for achieving our goal is comprised of the following key
components:
Provide a Broad Portfolio of Services on Multiple Platforms. We
intend to continue to broaden our services portfolio in order to better
serve the expanding needs of our existing customers and further enhance our
ability to attract new customers.
Expand Sales Capabilities and Distribution Channels. We intend to
grow our revenue through the continued expansion of our direct sales force,
our reseller network and our strategic relationships.
Expand International Presence. We are opening a sales and customer
service center in Amsterdam which will enable us to sell and support our
services throughout Western Europe from a centrally based location. We also
intend to pursue opportunities to expand our reach to other parts of the
world including Asia and Latin America.
Increase Brand Awareness and Market Presence. We believe that we have
a unique opportunity to be one of the first hosting providers to establish
a meaningful brand name in the web and applications hosting industry. We
intend to continue to build our brand recognition by continuing to
implement our aggressive multimedia advertising campaign.
Take Advantage of Innovative and Proprietary Technology. We have
developed proprietary technology, which assists in our customer support
efforts and our internal processes. We intend to continue to develop
specialized technology and systems to give us advantages in delivering
high-quality, price competitive services to our customers.
Pursue Additional Strategic Alliances and Relationships. We intend to
opportunistically pursue strategic alliances and acquisitions that will
enable us to expand our service portfolio, our technological capabilities
and our customer base.
---------------------------
We were incorporated in Georgia on August 21, 1985, and we were capitalized
and commenced web hosting operations in September 1997. The address of our
principal executive offices is 101 Marietta Street, Suite 200, Atlanta, Georgia
30303, and our telephone number is (404) 720-8301. Our web site address is
www.interland.net. The information on our web site is not a part of this
prospectus.
2
<PAGE> 6
THE OFFERING
Common stock offered................ shares
Common stock to be outstanding after
the offering........................ shares
Use of proceeds..................... We intend to use the net proceeds from
this offering for enhancement and
expansion of our network infrastructure
and other capital expenditures, to fund
operating losses including an expansion
of marketing activities, both
domestically and internationally, and
for working capital and general
corporate purposes.
Proposed Nasdaq National Market
symbol.............................. ILND
The number of shares that will be outstanding after this offering is based
on the 21,842,975 shares outstanding as of March 10, 2000, plus:
- shares of common stock to be sold by us in this offering;
- 12,163,968 shares of common stock to be issued at the completion of this
offering upon the conversion of all of our outstanding convertible
preferred stock; and
- and shares of common stock to be purchased
by Microsoft and Network Solutions, respectively, at a per share price
equal to the lesser of the midpoint of the expected range of offering
prices reflected in this prospectus or the actual price to the public of
common stock sold in this offering.
The number of shares of common stock that will be outstanding after this
offering excludes:
- shares of common stock issuable pursuant to the
over-allotment option;
- 5,680,000 shares of common stock issuable upon the exercise of
outstanding options at a weighted average exercise price of $3.15 as of
March 10, 2000;
- 3,020,000 shares of common stock reserved for issuance in connection with
future grants under our stock option plan;
- 500,000 shares of common stock reserved for issuance under our employee
stock purchase plan;
- up to 1,199,827 shares of common stock issuable upon the exercise of
currently outstanding warrants with a weighted average exercise price of
$6.73 per share. We have issued five-year, fully vested warrants to
purchase a total of 850,827 shares of our common stock to Microsoft and
Network Solutions in connection with their investments in our company. We
have also issued a warrant to purchase up to 349,000 shares of our common
stock to Road Runner in connection with a co-marketing agreement. Of the
shares subject to this warrant, 100,000 vested immediately upon the
execution of our co-marketing agreement on January 27, 2000 and the
balance vests in equal increments on June 30, 2000, September 30, 2000,
December 31, 2000, and December 31, 2001, subject to performance
criteria; and
- up to shares of common stock issuable upon the exercise of
additional warrants that will be issued to Microsoft and Network
Solutions at the time of this offering at an exercise price equal to the
lesser of the midpoint of the expected range of offering prices reflected
in this prospectus or the actual price to the public of common stock sold
in this offering.
Our board of directors is actively considering implementing a stock split
in connection with this offering. If the split is implemented, all share and
related data will be adjusted accordingly.
3
<PAGE> 7
SUMMARY FINANCIAL DATA
The following table shows our summary financial data for the period from
inception (September 18, 1997) to December 31, 1997 and for the years ended
December 31, 1998 and 1999. This data has been derived from financial statements
that have been audited by Arthur Andersen LLP, independent public accountants.
You should read this data together with "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," our
financial statements and accompanying notes and the other financial data
included elsewhere in this prospectus. The following data is in thousands,
except share, per share, and customer account data.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(SEPTEMBER 18, YEAR ENDED YEAR ENDED
1997) TO DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1997 1998 1999
----------------- ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... $ 5 $ 1,387 $ 9,121
Operating expenses................................ (119) (3,708) (25,891)
----------- ----------- -----------
Operating loss.................................... (114) (2,321) (16,770)
Interest expense, net............................. -- (18) (14)
----------- ----------- -----------
Net loss.......................................... (114) (2,339) (16,784)
Preferred stock beneficial conversion and
dividends....................................... -- -- (9,559)(1)
----------- ----------- -----------
Net loss applicable to common shareholders........ $ (114) $ (2,339) $ (26,343)
=========== =========== ===========
Basic and diluted net loss per common share....... $ (0.01) $ (0.14) $ (1.33)
=========== =========== ===========
Shares used in computing net loss per share....... 16,325,177 16,959,675 19,871,446
OTHER DATA:
EBITDA(2)......................................... $ (114) $ (2,206) $ (12,221)
Net cash used in operating activities............. (110) (30) (2,397)
Net cash used in investing activities............. (2) (1,102) (8,752)
Net cash provided by financing activities......... 139 1,811 34,953
Number of customer accounts....................... 0 10,611 45,731
</TABLE>
- ---------------
(1) This amount consists of approximately $9.4 million associated with the
beneficial conversion of our preferred stock into common stock and
approximately $150,000 in an accrued preferred stock dividend. The
beneficial conversion is a result of the difference between the initial
purchase price paid by the preferred stock holders and the actual conversion
price of the preferred stock into common stock.
(2) EBITDA consists of net loss excluding net interest expense, depreciation and
amortization. EBITDA does not represent funds available for discretionary
use and is not intended to represent cash flow from operations as measured
under generally accepted accounting principles. EBITDA should not be
considered as an alternative to net loss or net cash used in operating
activities, but may be useful to investors as an indication of operating
performance. Our calculations of EBITDA may not be consistent with similarly
titled calculations used by other companies.
4
<PAGE> 8
The following balance sheet data is presented:
- on a pro forma basis to reflect private sales of our capital stock
and grants of warrants to purchase our common stock between December
31, 1999 and the date of the initial filing of the registration
statement of which this prospectus is a part and the accrual of
preferred stock dividends; and
- on a pro forma as adjusted, basis to give effect to the sale of
and shares of our common stock at
$ per share to Microsoft and Network Solutions,
respectively at the time of this offering, the conversion upon the
completion of this offering of all convertible preferred stock into
12,163,988 shares of common stock and the $619,000 payment in cash
of related dividends, the grant of warrants to purchase up to
shares of common stock that will be issued to Microsoft and Network
Solutions at the time of this offering, and the sale of
shares of our common stock we are offering under this
prospectus, at an assumed initial offering price of $ per
share, after deducting the underwriting discount and estimated
offering expenses that we will pay.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $24,510 $ 28,510 $
Total assets................................................ 35,976 39,976
Working capital............................................. 13,250 16,781
Total long-term liabilities................................. 4,004 4,004
Total shareholders' equity.................................. 17,495 21,026
</TABLE>
The following summary financial and operating data for our most recent four
quarters have been derived in part from our unaudited consolidated financial
statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1)
-----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1999 1999 1999 1999
---------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT CUSTOMER ACCOUNT DATA)
<S> <C> <C> <C> <C>
Revenue.................................................. $ 1,009 $ 1,688 $ 2,582 $ 3,842
Operating expenses....................................... 2,434 5,280 7,457 10,720
Net loss................................................. (1,436) (3,610) (4,887) (6,851)
Customer accounts........................................ 16,658 24,235 33,705 45,731
</TABLE>
- ---------------
(1) The operating results for any quarter are not necessarily indicative of
results for any future period. See "Risk Factors -- Our quarterly and annual
results may fluctuate, resulting in fluctuations of the price of our common
stock" and "Management's Discussion and Analysis of Financial Conditions and
Results of Operations -- Selected Quarterly Operating Results."
5
<PAGE> 9
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described below and all
other information contained in this prospectus before deciding to purchase
shares of our common stock. While we have described all risks and uncertainties
that we believe to be material to our business, it is possible that other risks
and uncertainties that affect our business will arise or become material in the
future.
If we are unable to effectively address these risks and uncertainties, our
business, financial condition or results of operations could be materially and
adversely affected. In this event, the trading price of our common stock could
decline and you could lose part or all of your investment.
OUR BUSINESS AND PROSPECTS ARE DIFFICULT TO EVALUATE BECAUSE WE HAVE A LIMITED
OPERATING HISTORY AND OUR BUSINESS MODEL IS STILL EVOLVING.
We began operations as a web hosting business in September 1997. As a
result, we have a limited operating history and our business model is still
evolving. Our limited operating history therefore makes predicting our future
results difficult and makes it difficult to evaluate the execution of our
business model thus far. Our ability to execute our plans and our 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
applications hosting services. We may not achieve a significant rate of revenue
growth and may not achieve or sustain profitability in future quarterly or
annual periods.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT THESE LOSSES TO CONTINUE IN
THE FORESEEABLE FUTURE.
We have experienced operating losses and negative cash flows from
operations in each quarterly and annual period since we began operations as a
web hosting business in 1997. As of December 31, 1999, our accumulated losses
since September 17, 1997 have amounted to approximately $28.8 million. We had
net losses of $16.8 million for the year ended December 31, 1999. While our
revenues have grown in recent periods, we cannot assure you this growth will
continue. In connection with our expansion plans, we anticipate making
significant investments in sales, marketing, technical and customer support
personnel, as well as in our data center infrastructure. As a result of our
expansion plans, we expect our net losses and negative cash flow from operations
to continue for the foreseeable future. We cannot assure you that we will ever
become or remain profitable or that we will generate positive cash flows from
operations.
WE MAY NOT EFFECTIVELY EXECUTE OUR STRATEGY AND AS A RESULT, OTHERS MAY SEIZE
THE MARKET OPPORTUNITY THAT WE HAVE IDENTIFIED.
If we fail to execute our strategy in a timely or effective manner, our
competitors may be able to seize the opportunity we have identified to address
web hosting needs of small and medium-sized businesses. Our business strategy is
complex and requires that we successfully and simultaneously complete many
tasks, and the failure to complete any one of these may jeopardize our strategy
as a whole. In order to be successful, we will need to:
- market our services and build our brand name effectively;
- provide reliable and cost-effective services that can be expanded to meet
the demands of our customers;
- continue to grow our infrastructure to accommodate additional customers
and increased use of our network bandwidth;
- expand our channels of distribution and our international operations;
- continue to respond to competitive developments; and
- attract, retain and motivate qualified personnel.
6
<PAGE> 10
In addition, our management team has worked together for less than six
months. We can offer no assurances that we will be able to successfully execute
all elements of our strategy or that our strategy will be successful.
WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET, AND OUR BUSINESS WOULD SUFFER IF
WE ARE UNABLE TO COMPETE EFFECTIVELY.
The web hosting and applications hosting markets are highly competitive and
are becoming more so. There are few substantial barriers to entry, and we expect
that we will face additional competition from existing competitors and new
market entrants in the future. We may not have the resources, expertise or other
competitive factors to compete successfully in the future.
Many of our 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 we do.
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; and
- devote greater resources to the marketing and sale of their services and
adopt more aggressive pricing policies than we can.
In an effort to gain market share, some of our competitors have offered web
hosting services similar to ours at lower prices than ours or with incentives
not matched by us, including free start-up and domain name registration, periods
of free service, low-priced Internet access or free software. In addition, some
of our 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 ours. We may not be able to reduce the pricing of our
services or offer incentives in response to the actions of our competitors
without harming our business. Because of the fierce competition in the web
hosting and applications hosting industry, the number of competitors could lead
to a surplus in service providers, leading to further reductions in the prices
of services. We also believe that the market in which we compete is likely to
encounter consolidation in the near future, which could result in increased
price and other competition that could damage our business.
Our current and potential competitors in the market include web hosting
service providers, applications hosting providers, Internet service providers,
telecommunications companies, large information technology outsourcing firms,
and computer hardware suppliers. Our competitors may operate in one or more of
these areas and include companies such as AT&T Corp., Concentric Network
Corporation, Data Return Corp., Dell Computer Corporation, Digex Corporation,
EarthLink, Inc., Exodus Communications, Inc., Gateway, Inc., Globix Corporation,
and Navisite, Inc. See "Business -- Competition."
OUR QUARTERLY AND ANNUAL RESULTS MAY FLUCTUATE, RESULTING IN FLUCTUATIONS IN THE
PRICE OF OUR COMMON STOCK.
As our business develops and expands, we may experience significant
quarterly fluctuations in our results of operations. Because of these
fluctuations, comparisons of our operating results from period to period are not
necessarily meaningful and should not be relied upon as an indicator of future
performance. We expect to continue to experience significant fluctuations in our
quarterly and annual results of operations due to a variety of factors, many of
which are outside our control. These factors include:
- demand for and market acceptance of our services;
- introductions of products or services or enhancements by us and our
competitors;
- the mix of services we sell;
7
<PAGE> 11
- customer retention;
- the timing and success of our advertising and marketing efforts and
service introductions and the timing and success of the marketing efforts
and service introductions of our resellers;
- the timing and magnitude of capital expenditures, including construction
costs relating to the expansion of operations;
- increased competition in the web hosting and applications hosting
markets;
- changes in our pricing policies and the pricing policies of our
competitors;
- gains or losses of key strategic relationships; and
- other general and industry-specific economic factors.
In addition, a relatively large portion of our expenses are fixed in the
short-term, and therefore our results of operations are particularly sensitive
to fluctuations in revenues. Also, if we were unable to continue using
third-party products in our services offerings, our service development costs
could increase significantly.
WE MAY NEED ADDITIONAL CAPITAL TO FUND OUR OPERATIONS AND FINANCE OUR GROWTH,
AND WE MAY NOT BE ABLE TO OBTAIN IT ON TERMS ACCEPTABLE TO US OR AT ALL.
We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations through the end of 2001. However, we may require additional funds
during or after that period. Any required financing may not be available or may
be available only on terms that are not favorable to us. Further, if additional
funds are raised through the issuance of additional equity securities, the
percentage ownership of our shareholders would be diluted. Any new equity
securities may have rights, preferences or privileges senior to those of our
common stock. The failure to generate sufficient cash flows or to raise
sufficient funds may require us to delay or abandon some or all of our
development and expansion plans or otherwise forego market opportunities and may
make it difficult for us to respond to competitive pressures, any of which could
harm our business.
THE INTERNATIONAL MARKET FOR OUR SERVICES IS UNPROVEN, AND AS A RESULT, THE
REVENUE GENERATED BY ANY CURRENT OR FUTURE INTERNATIONAL OPERATIONS MAY NOT BE
ADEQUATE TO OFFSET THE EXPENSE OF ESTABLISHING AND MAINTAINING THOSE OPERATIONS.
The international market for web site and applications hosting and
management services is unproven, and we cannot assure you that we will be able
to market, sell and provide our services successfully to small and medium-sized
businesses outside the United States. In addition, our particular approach to
providing hosting services is unproven in international markets and may not be
successful outside the United States. In fiscal 1999, approximately 8% of our
revenues were derived from customers located outside the United States, and we
are seeking to expand our presence overseas. In March 2000, we opened a sales
and support center in Amsterdam as part of our plan to expand our European
operations. Our continued success depends in part on expanding our international
customer base and successfully operating data centers in foreign markets.
IF WE ARE UNABLE TO EXPAND OUR NETWORK INFRASTRUCTURE TO MEET INCREASING DEMAND,
WE COULD LOSE CUSTOMERS AND OUR OPERATING RESULTS COULD SUFFER.
We must continue to expand and adapt our network infrastructure to meet the
increase in the number of users and the amount of information they wish to
transport and to meet changing customer requirements. The expansion and
adaptation of our telecommunications infrastructure will require substantial
financial, operational and management resources as we negotiate
telecommunications capacity with existing and other network infrastructure
suppliers. If we are required to expand our network significantly and rapidly
due to increased usage, additional stress will be placed upon our network
hardware and traffic management systems. The ability of our network to connect
and manage a substantially larger
8
<PAGE> 12
number of customers at high transmission speeds is as yet unknown. In addition,
our network's ability to be scaled up to its expected customer levels while
maintaining superior performance is unknown.
OUR NETWORK INFRASTRUCTURE DEPENDS ON TELECOMMUNICATIONS NETWORK CAPACITY AND
PRICING.
Our success will depend upon the capacity, scalability, reliability and
security of our network infrastructure, including the capacity leased from our
telecommunications network suppliers. Our operating results depend, in part,
upon the pricing and availability of telecommunications network capacity from a
limited number of providers in a consolidated market. If capacity is not
available to us as our customers' usage increases, our network may not be able
to achieve or maintain sufficiently high data transmission capacity, reliability
or performance. In addition, our business would suffer if our network suppliers
increased the prices for their services and we were unable to pass along any
increased costs to our customers. Any failure on our part or the part of our
third-party suppliers to achieve or maintain high data transmission capacity,
reliability or performance could significantly reduce customer demand for our
services and damage our business.
WE MAY NOT BE ABLE TO DELIVER OUR SERVICES AND OUR BUSINESS MAY SUFFER IF OUR
THIRD-PARTY SUPPLIERS DO NOT PROVIDE US WITH KEY COMPONENTS OF OUR NETWORK
INFRASTRUCTURE ON REASONABLE TERMS OR AT ALL.
We depend on other companies to supply key components of our network
infrastructure. Any failure to obtain needed products or services in a timely
fashion or at an acceptable cost could adversely affect our business. We have no
guaranteed supply arrangements with our vendors and do not carry significant
inventories. We cannot assure you that we will have the necessary hardware or
parts on hand or that our suppliers will be able to provide them in a timely
manner in the event of equipment failure. Our inability or failure to obtain the
necessary hardware or parts on a timely basis could result in sustained
equipment failure and a loss of revenue due to customer loss or claims for
service credits under our service level guarantees. In addition, the inability
to obtain equipment or technical services on terms acceptable to us would force
us to spend time and money selecting and obtaining new equipment, training our
personnel to use different equipment and deploying alternative components needed
to integrate the new equipment, with the result that our business could be
adversely affected.
OUR RESELLER SALES CHANNEL MARKETS AND SELLS MANY OF OUR SERVICES.
An element of our strategy for growth is to continue to develop our
reseller sales channel. Many of our resellers are web development or web
consulting companies that also sell our web hosting services, but that generally
do not have established customer bases to which they can market our services.
Therefore, in those markets where we do not focus our direct marketing
efforts -- primarily international markets -- we are dependent on third parties
to stimulate demand for our services. Although we attempt to provide our
resellers with incentives such as price discounts on our services that the
resellers seek to resell at a profit, the failure of our services to be
commercially accepted in some markets, whether as a result of a reseller's
performance or otherwise, could cause our current resellers to discontinue their
relationships with us, and we may not be successful in establishing additional
reseller relationships as needed.
BECAUSE WE OPERATE IN A NEW AND EVOLVING MARKET WITH UNCERTAIN PROSPECTS FOR
GROWTH, WE MAY BE UNABLE TO SUSTAIN GROWTH IN OUR CUSTOMER BASE AND OUR
OPERATING RESULTS MAY SUFFER.
The market for web hosting and applications hosting services for small and
medium-sized businesses has only recently begun to develop and is evolving
rapidly. Our future growth, if any, will depend upon the willingness of small
and medium-sized businesses to outsource web hosting and applications hosting
services and our ability to increase our average revenue per customer and our
customers' willingness to execute long-term hosting contracts. The market for
our services may not develop further, our 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 our services do not achieve broader
market acceptance, our business, results of operations and financial condition
would be materially and adversely affected.
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In addition, we must be able to differentiate ourselves from our
competition through our service offerings and brand recognition in order to
attract customers and to grow our average revenue per customer. We may not be
successful in differentiating ourselves, achieving market acceptance of our
services or selling additional services to our existing customer base, and we
may experience difficulties that could delay or prevent the successful
development, introduction or marketing of these services. If we incur increased
costs or are 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, our business could be materially harmed.
WE MAY NOT BE ABLE TO ADAPT TO EVOLVING TECHNOLOGIES AND CUSTOMER DEMANDS, WHICH
COULD CAUSE OUR BUSINESS TO SUFFER.
Our future success will depend, in part, upon our ability to offer services
that incorporate leading technologies, address the increasingly sophisticated
and varied needs of our 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 our services is characterized by
rapidly changing and unproven technologies, evolving industry standards, changes
in customer needs, emerging competition and frequent new service introductions.
To be successful, we must continually improve the performance, features and
reliability of our services, including our proprietary technologies, and
modifying our business strategies accordingly. We could also incur substantial
costs if we need to modify our services or infrastructure in order to adapt to
these changes. Our business would suffer if we fail to respond to these changes
in a timely and cost-effective manner or at all. Technological advances may have
the effect of encouraging some of our current or future customers to rely on
in-house personnel and equipment to furnish the services that we currently
provide.
WE MUST MAINTAIN THE COMPATIBILITY OF OUR SERVICES WITH PRODUCTS OFFERED BY OUR
VENDORS.
We believe that our ability to compete successfully also depends upon the
continued compatibility and interoperability of our services with products
offered by various vendors. Enhanced or newly developed third-party products may
not be compatible with our infrastructure, and such products may not adequately
address the needs of our customers. Although we currently intend to support
emerging standards, industry standards may not be established, and, even if they
are established, we may not be able to conform to these new standards in a
timely fashion in order to maintain a competitive position in the market. Our
failure to conform to the prevailing standard, or the failure of a common
standard to emerge, could cause our business to suffer. In addition, products,
services or technologies developed by others could render our services
noncompetitive or obsolete.
OUR RECENT GROWTH HAS STRAINED OUR RESOURCES, AND IF WE ARE UNABLE TO MANAGE AND
SUSTAIN OUR GROWTH, OUR OPERATING RESULTS WILL BE NEGATIVELY AFFECTED.
We are currently experiencing a period of rapid expansion of our customer
base. In addition, the number of our employees increased from 17 on March 31,
1998 to 390 on March 3, 2000. This growth has placed and, if it continues, will
place a significant strain on our financial, management, operational and other
resources. In addition, we must manage relationships with a growing number of
third parties as we seek to complement our service offerings and increase our
indirect sales efforts. Our management, personnel, systems, procedures and
controls may not be adequate to support our existing and future operations. Our
ability to manage our growth effectively will require us to continue:
- enhancing management information systems and forecasting procedures;
- further developing our operating, administrative, financial, billing, and
accounting systems and controls;
- maintaining close coordination among our engineering, accounting,
finance, marketing, sales and operations organizations;
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- expanding, training and managing our employee base; and
- expanding our finance, administrative and operations staff.
If we are unable to manage growth effectively, our business, results of
operations and financial condition could be harmed.
OUR BUSINESS WILL SUFFER IF INTERNET USAGE DOES NOT CONTINUE TO INCREASE OR IF
THE INTERNET FAILS TO PERFORM RELIABLY.
Use of the Internet for retrieving, sharing and transferring information
among businesses, consumers, suppliers and partners has recently begun to
increase rapidly. 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 requires the adoption of a new medium of
conducting business and exchanging information. If the Internet as a commercial
or business medium fails to develop further or develops more slowly than
expected, our business could be materially adversely affected.
Our success depends in large part on continued growth in the use of the
Internet, and we would be adversely affected if Internet usage does not continue
to grow. Internet usage and growth may be inhibited for a number of reasons,
such as:
- inadequate network infrastructure;
- security concerns;
- uncertainty of legal and regulatory issues concerning the use of the
Internet;
- inconsistent quality of service;
- lack of availability of cost-effective, reliable, high-speed service; and
- failure of Internet use to expand internationally.
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth, or its performance and
reliability may decline. For example, web sites have experienced interruptions
in service as a result of outages and other delays occurring throughout the
Internet network infrastructure. If these outages or delays occur frequently,
use of the Internet as a commercial or business medium could in the future grow
more slowly or decline, which would harm our business.
WE COULD EXPERIENCE SYSTEM FAILURES WHICH COULD HARM OUR BUSINESS AND
REPUTATION.
We must be able to operate our network management infrastructure around the
clock without interruption. Our operations depend upon our ability to protect
our 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 we have taken, and plan to take, we do not have a
formal disaster recovery plan and the occurrence of a natural disaster or other
unanticipated problems at our data centers could result in interruptions in our
services. Although we have attempted to build redundancy into our network, our
network is currently subject to various points of failure, and a problem with
one of our routers or switches could cause an interruption in our services to a
portion of our customers. In the past we have experienced periodic interruptions
in service. In addition, failure of any of our telecommunications providers to
provide the data communications capacity we require, as a result of human error,
a natural disaster or other operational disruption, could result in
interruptions in our services. Any future interruptions could:
- cause customers or end users to seek damages for losses incurred;
- require us to replace existing equipment or add redundant facilities;
- damage our reputation for reliable service;
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- cause existing customers to cancel their contracts; or
- make it more difficult for us to attract new customers.
Any of these results could damage our business.
We currently offer to all customers a 99.9% service level warranty. Under
this policy, we guarantee 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 our web hosting services. If we incur significant obligations in
connection with system downtime, our business could be harmed.
OUR DATA CENTERS AND NETWORKS MAY BE VULNERABLE TO SECURITY BREACHES.
A significant barrier to electronic commerce and communications is the need
for secure transmission of confidential information over public networks. Some
of our services rely on security technology licensed from third parties which
provides the encryption and authentication necessary to effect the secure
transmission of confidential information. Despite our design and implementation
of a variety of network security measures, unauthorized access, computer
viruses, accidental or intentional actions and other disruptions could occur. In
the past, we have 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,
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 our computer systems, which could result in our
liability and the loss of existing customers or the deterrence of potential
customers. In addition, third parties could interfere with the operation of our
customers' web sites through intentional attacks including causing an overload
of traffic to these web sites.
Although we intend to continue to implement industry-standard security
measures, such measures have been circumvented in the past, and any such
measures that we implement 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 our customers, which
could have a material adverse effect on our 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.
DISRUPTION OF OUR SERVICES CAUSED BY UNKNOWN SOFTWARE DEFECTS COULD HARM OUR
BUSINESS AND REPUTATION.
Our service offerings depend on complex software, including our proprietary
software tools and software licensed from third parties. Complex software often
contains defects, particularly when first introduced or when new versions are
released. We may not discover software defects that affect our new or current
services or enhancements until after they are deployed. Although we have not
experienced any material software defects to date, it is possible that defects
may occur in the software. These defects could cause service interruptions,
which could damage our reputation or increase our service costs, cause us to
lose revenue, delay market acceptance or divert our development resources.
PROVIDING SERVICES TO CUSTOMERS WITH CRITICAL WEB SITES AND WEB-BASED
APPLICATIONS COULD POTENTIALLY EXPOSE US TO LAWSUITS FOR CUSTOMERS' LOST PROFITS
OR OTHER DAMAGES.
Because our web hosting and applications hosting services are critical to
many of our customers' businesses, any significant interruption in our services
could result in lost profits or other indirect or consequential damages to our
customers. Although the standard terms and conditions of our customer contracts
disclaim our liability for any such damages, a customer could still bring a
lawsuit against us claiming lost profits or other consequential damages as the
result of a service interruption or other web site or application problems that
the customer may ascribe to us. There can be no assurance a court would enforce
any limitations on our liability, and the outcome of any lawsuit would depend on
the specific facts
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of the case and legal and policy considerations. We also believe we would have
meritorious defenses to any such claims, but there can be no assurance we would
prevail. In such cases, we could be liable for substantial damage awards. Such
damage awards might exceed our liability insurance by unknown but significant
amounts, which would seriously harm our business.
WE MAY NOT BE ABLE TO SUCCESSFULLY SUSTAIN OUR GROWTH IF WE ARE UNABLE TO
ATTRACT AND RETAIN ADDITIONAL HIGHLY SKILLED PERSONNEL.
We are currently experiencing rapid growth and intend to continue
expanding. Since beginning our operations as a web hosting business in September
1997, we have grown to 390 employees as of March 3, 2000. We believe that we
will need to hire approximately 150 additional personnel in all areas of our
business over the next 12 months. Our future success will also depend on our
ability to attract, train, retain and motivate highly qualified technical,
marketing, sales and management personnel. Competition for qualified personnel
among Internet-related business is intense, and we may not be able to attract
and retain key personnel. The loss of the services of one or more of our key
employees or our failure to attract additional qualified personnel could harm
our business.
OUR BUSINESS COULD BE HARMED IF OUR MANAGEMENT TEAM, WHICH HAS WORKED TOGETHER
FOR ONLY A BRIEF TIME, IS UNABLE TO WORK TOGETHER EFFECTIVELY.
We have recently hired key employees and officers, including our Executive
Vice President, Chief Financial Officer, General Counsel, and Chief Technical
Officer. As a result, our management team has worked together for only a brief
time. Our success depends in significant part upon the continued services of our
senior management personnel. Any of our officers or employees can terminate his
or her relationship with us at any time. We currently have employment agreements
with only our most senior management personnel and we carry key-man life
insurance only for our President and Chief Executive Officer.
WE DEPEND ON THE PROTECTION AND ENFORCEMENT OF OUR INTELLECTUAL PROPERTY RIGHTS
AND THE USE OF INTELLECTUAL PROPERTY THAT WE LICENSE FROM OTHERS.
Third parties may infringe or misappropriate our technology or proprietary
rights, which could harm our business. In addition, our competitors or potential
competitors may independently develop technologies that are equivalent or
superior to our proprietary technology. We rely on a combination of copyright,
trademark, service mark and trade secret laws and contractual restrictions to
establish and protect certain proprietary rights in our services. We have filed
trademark registration applications in the U.S. that, even if granted, may not
fully protect our ability to use these trademarks in all areas of the U.S. Third
parties may object to our use of certain trademarks, service marks, trade names,
slogans or other devices, which could require that those indicia be changed or
altered. At this point, we have no patented technology that would preclude or
inhibit competitors from entering our market. While we contemplate that we will
file several patent applications on particular aspects of our technology, we
cannot be sure that we will receive any patents. We have entered into
confidentiality and invention assignment agreements with our employees and
contractors, and nondisclosure agreements with our suppliers, distributors and
certain customers in order to limit access to and disclosure of our proprietary
information. These contractual arrangements or the other steps we have taken to
protect our intellectual property may not prove sufficient to prevent
misappropriation of our technology or to deter independent third-party
development of similar technologies. The laws of certain foreign countries may
not protect our services or intellectual property rights to the same extent as
do the laws of the United States. For example, there may be potential conflicts
with the use of our name in other countries, including the Netherlands. We do
not know what the impact of being unable to use our name in other countries may
be, although this inability may harm our business.
We also rely on certain technologies that we license from third parties.
These third-party technology licenses may not continue to be available to us on
commercially reasonable terms. The loss of the ability to use such technology
could require us to obtain the rights to use substitute technology, which could
be more expensive or offer lower quality or performance, and therefore harm our
business, results of operations and financial condition.
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WE MAY BE ACCUSED OF INFRINGING THE PROPRIETARY RIGHTS OF OTHERS, WHICH COULD
SUBJECT US TO COSTLY AND TIME CONSUMING LITIGATION.
In addition to the technologies we develop or have developed, we license
certain technologies from third parties and may license additional technologies
in the future. To date, we have not been notified that our services infringe on
the proprietary rights of any third parties, but third parties could claim
infringement by us with respect to current or future services. We expect that
participants in our markets will be increasingly subject to infringement claims
as the number of services and competitors in our industry segment grows. Any
such claim, whether meritorious or not, could be time-consuming, result in
costly litigation, cause service installation delays or require us to enter into
royalty or licensing agreements. These royalty or licensing agreements might not
be available on terms acceptable to us or at all. As a result, any such claim
could have a material adverse effect upon our business, results of operations
and financial condition. In addition, third parties may change the terms of
their license agreements in ways that would prevent us from using technologies
licensed from them on commercially reasonable terms or that would prevent us
from using them at all. We may not be able to replace those technologies with
technologies that have the same features or functionality on commercially
reasonable terms or at all.
WE COULD FACE LIABILITY FOR INFORMATION DISSEMINATED THROUGH OUR NETWORK.
The law relating to the liability of on-line services companies for
information carried on or disseminated through their networks is currently
unsettled. Claims could be made against on-line services companies 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 other entities are currently pending against other
companies. In addition, legislation has been proposed that imposes liability for
or prohibits the transmission over the Internet of certain types of information.
Other countries may also enact legislation or take action that could impose
liability on us or cause us not to be able to operate in those countries. The
imposition upon us and other on-line services of potential liability for
information carried on or disseminated through our systems could require us to
implement measures to reduce our exposure to such liability, which may require
us to expend 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.
OUR BUSINESS MAY BE IMPACTED BY GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES.
We are 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, 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. The nature of future legislation and the manner in
which it may be interpreted and enforced cannot be fully determined and,
therefore, future legislation could subject us and/or our customers to potential
liability, which in turn could have a material adverse effect on our business,
results of operations and financial condition. For example, if legislation that
makes transacting business over the Internet, such as e-commerce, less favorable
or otherwise curtails the growth of the Internet is adopted in the U.S. or
internationally, our business would suffer. The adoption of any such laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for our services or increase the cost of doing business or
in some other manner harm our business.
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.
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Changes to laws intended to address these issues could create uncertainty in the
marketplace that could reduce demand for our services 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 our
business, results of operations and financial condition. In addition, because
our services are available over the Internet virtually worldwide, and because we
facilitate sales by our customers to end users located in multiple states and
foreign countries, such jurisdictions may claim that we are required to qualify
to do business as a foreign corporation in each such state or that we have a
permanent establishment in each such foreign country. Any new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on our business, results of operations and financial condition.
WE FACE RISKS INHERENT IN DOING BUSINESS IN INTERNATIONAL MARKETS WHICH COULD
ADVERSELY AFFECT THE SUCCESS OF OUR INTERNATIONAL OPERATIONS.
There are risks inherent in doing business in international markets,
including different regulatory requirements, trade barriers, challenges in
staffing and managing foreign operations, currency risk, different technology
standards, different tax structures which may adversely impact earnings,
different privacy, censorship and service provider liability standards and
regulations and foreign political and economic instability, any of which could
adversely affect the success of our international operations.
Because our international sales are denominated in U.S. dollars, currency
fluctuations may deter foreign customers from purchasing our services. In
addition, we face challenges in operating and servicing customers in foreign
markets, such as:
- different Internet access fees;
- different technology standards;
- different privacy, censorship and service provider liability standards
and regulations;
- less protective intellectual property laws;
- longer accounts receivable collection periods and greater difficulty in
accounts receivable collection; and
- difficulties and costs of staffing and managing international operations.
Any of these risks could adversely affect our ability to operate or expand
internationally, which would limit the growth of our business. In addition, we
could suffer significant operating losses if the revenue generated by our
current sales and support center or any future international data center or
other operations is not adequate to offset the expense of establishing and
maintaining those international operations.
WE HAVE BROAD DISCRETION IN THE USE OF THE NET PROCEEDS FROM THIS OFFERING AND
MAY NOT USE THEM EFFECTIVELY.
As of the date of this prospectus, we cannot specify with certainty the
particular uses for the net proceeds we will receive from this offering. We
currently intend to apply the net proceeds from the offering as described under
"Use of Proceeds" in this prospectus, but our management will have broad
discretion in the application of the net proceeds. If our management fails to
apply these funds effectively, we may not be successful in our efforts to grow
our business and revenues.
OUR PRINCIPAL SHAREHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS WILL OWN
APPROXIMATELY % OF OUR COMMON STOCK, WHICH MAY ALLOW THEM TO EXERT
INFLUENCE OVER US OR TO PREVENT A CHANGE OF CONTROL.
After this offering our shareholders who currently own over 5% of our
common stock, our directors and our executive officers will beneficially own
approximately % of our outstanding common stock. These shareholders will be
able to exercise significant influence over all matters requiring shareholder
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approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may also delay or
prevent a change in control of us even if beneficial to our shareholders.
SOME PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DISCOURAGE
TAKEOVERS THAT YOU MAY BELIEVE ARE IN YOUR INTEREST.
Our articles of incorporation and bylaws contain some provisions that may
delay, discourage or prevent an attempted acquisition or change in control. Our
articles and bylaws establish:
- the board's authority to issue series of preferred stock with special
powers, preferences and rights without shareholder approval;
- the board's authority to consider constituencies other than the
shareholders -- including employees, customers, suppliers and the
community -- in making decisions, including decisions regarding control
of Interland;
- the right of the board of directors to alter our bylaws without prior
shareholder approval; and
- the right of the board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors.
In addition, our board of directors may be divided into three classes to each
serve three year staggered terms. These provisions of our articles of
incorporation and bylaws could discourage tender offers or other transactions
that might otherwise result in your receiving a premium over the market price
for your common stock. See "Description of Capital Stock" in this prospectus for
more information about our articles of incorporation and bylaws.
Prior to the completion of this offering, we intend to adopt a shareholder
rights plan. This plan will entitle our shareholders to acquire additional
shares of our preferred stock when a third party acquires % of our common
stock or commences or announces its intent to commence a tender offer for at
least % of our common stock. This plan could delay, deter, or prevent a
change of control.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price of our common stock is substantially
higher than the net tangible book value of our common stock. Therefore, if you
purchase our common stock in this offering, you will incur immediate dilution of
approximately $ in the net tangible book value per share of common
stock from the initial public offering price of $ per share. We have
agreed to sell Microsoft and Network Solutions shares of our common stock at a
price that is the lesser of the midpoint of the expected range of offering
prices reflected in this prospectus or the actual price to the public of common
stock sold in this offering. This price could be less than the price you pay and
you may suffer additional dilution. You will also experience additional dilution
upon the exercise of outstanding stock options and warrants at prices below the
initial public offering price.
, OR %, OF OUR TOTAL OUTSTANDING SHARES ARE RESTRICTED FROM
IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE, WHICH COULD
ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
After this offering is completed, shares of our common stock
will be issued and outstanding, assuming no exercise of the underwriters'
over-allotment option. All of the shares of our common stock sold in this
offering will be freely tradable unless purchased by our "affiliates." In
connection with this offering, our officers, directors and some of our
shareholders who together own approximately shares of our common
stock agreed to refrain from selling any shares of our common stock for a period
of 180 days after the date of this prospectus. However, these restrictions may
be waived in some circumstances. We cannot be sure what effect, if any, future
sales of our common stock or the availability of shares for future sale will
have on the market price of our common stock. The market
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price of our common stock could drop due to sales of a large number of shares of
our common stock in the market after this offering or the perception that these
sales could occur. These factors could also make it more difficult to raise
funds through future offerings of our common stock.
THE RELIABILITY OF MARKET DATA INCLUDED IN THIS PROSPECTUS IS UNCERTAIN.
Since we operate in a new and rapidly changing market, we have included
market data from industry publications. The reliability of these data cannot be
assured. Market data used throughout this prospectus were obtained from internal
company surveys and industry publications. Industry publications generally state
that the information contained in these publications has been obtained from
sources believed to be reliable, but that its accuracy and completeness is not
guaranteed. Although we believe market data used in this prospectus to be
reliable, it has not been independently verified. Similarly, internal company
surveys, while believed by us to be reliable, have not been verified by any
independent sources.
FORWARD-LOOKING STATEMENTS
This prospectus contains statements about future events and expectations
which are characterized as forward-looking statements. Forward-looking
statements are based on management's beliefs, assumptions and expectations of
our future economic performance, taking into account the information currently
available to them. These statements are not statements of historical fact.
Forward-looking statements involve risks and uncertainties that may cause our
actual results, performance or financial condition to differ materially from the
expectations of future results, performance or financial condition we express or
imply in any forward-looking statements. Factors that could contribute to these
differences include those discussed in "Risk Factors" and in other sections of
this prospectus. The words believe, may, will, should, anticipate, estimate,
expect, intend, objective, seek, strive or similar words, or the negatives of
these words, identify forward-looking statements. We qualify any forward-looking
statements entirely by these cautionary factors.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of our common stock in this
offering will be approximately $ million, based on an assumed initial
public offering price of $ per share, after deducting the estimated
underwriting discount and our estimated offering expenses. If the underwriters'
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $ million.
We expect to use the net proceeds from this offering as follows:
- for enhancement and expansion of our network infrastructure and
other capital expenditures;
- to fund operating losses, including an expansion of marketing
activities, both domestically and internationally; and
- for working capital and general corporate purposes.
Our management will retain broad discretion in the allocation of the net
proceeds of this offering. Although we may use a portion of the net proceeds to
pursue possible acquisitions or strategic investments in complementary
businesses, technologies or products in the future, there are no current plans,
agreements or commitments with respect to any acquisitions or investments of
this type. Until we use the proceeds of this offering for the above purposes, we
intend to invest the funds in short-term, investment grade, interest-bearing
securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We anticipate that
we will retain earnings to support operations and to finance the growth and
development of our business. Therefore, we do not expect to pay cash dividends
in our foreseeable future.
18
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis;
- on a pro forma basis to reflect private sales of our capital stock and
grants of warrants to purchase our common stock between December 31, 1999
and the date of the initial filing of the registration statement of which
this prospectus is a part and the accrual of preferred stock dividends;
and
- on a pro forma as adjusted basis to give effect to the sale of
and shares of our common stock at
$ per share to Microsoft and Network Solutions, respectively at
the time of this offering, the conversion upon the completion of this
offering of all convertible preferred stock into 12,163,968 common stock,
and the $619,000 payment in cash of related dividends, the grant of
warrants to purchase up to shares of common stock that will be
issued to Microsoft and Network Solutions at the time of this offering,
and the sale of shares of our common stock we are offering
under this prospectus at an assumed initial offering price of
$ per share, after deducting the underwriting discount and
estimated offering expenses that we will pay.
This table does not reflect an increase in our authorized common stock to
200,000,000 on March 15, 2000. You should read the following capitalization data
in conjunction with "Use of Proceeds," "Selected Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
financial statements and accompanying notes and the other financial data
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 24,510 $ 28,510 $
======== ======== ========
Long-Term capital lease obligation.......................... $ 2,406 $ 2,406 $
-------- -------- --------
Shareholders' equity:
Preferred stock; no par value, 25,000,000 shares
authorized;
11,474,313 shares issued and outstanding, actual;
12,163,968 shares issued and outstanding, pro forma; no
shares issued and outstanding, pro forma, as
adjusted............................................... 34,423 40,630
Common stock; no par value, 100,000,000 shares authorized,
21,842,975 shares issued and outstanding, actual and pro
forma; and shares issued and outstanding, pro
forma, as adjusted..................................... 12,811 12,811
Warrants.................................................. 2,144 5,241
Deferred product development(1)........................... (2,133) (6,783)
Deferred compensation..................................... (954) (954)
Accumulated deficit....................................... (28,796) (29,919)
-------- -------- --------
Total shareholders' equity............................. 17,495 21,026
-------- -------- --------
Total capitalization.............................. $ 19,901 $ 23,432 $
======== ======== ========
</TABLE>
- ---------------
(1) This amount relates to the value of equity securities issued to Microsoft
and Network Solutions. For further discussion see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity
and Capital Resources."
19
<PAGE> 23
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was
$ , or $ per share of outstanding common stock, after giving
effect to the adjustments shown in the pro forma column under "Capitalization,"
the conversion upon completion of this offering of all convertible preferred
stock into common stock and payment of related dividends, and the sale of
shares and shares to Microsoft and Network
Solutions, respectively, at a price equal to the lesser of the midpoint of the
expected range of the offering price reflected in this prospectus or the actual
price to the public of common stock sold in the offering. The pro forma net
tangible book value per share represents our total tangible assets less total
liabilities, divided by the total number of shares of common stock outstanding
on a pro forma basis before this offering. Dilution per share represents the
difference between the amount per share paid by investors in this offering and
the pro forma net tangible book value per share after this offering. After
giving effect to this offering, our adjusted pro forma net tangible book value
as of December 31, 1999 would have been $ , or $ per share.
This represents an immediate increase in net tangible book value of
$ per share to existing shareholders and an immediate dilution in net
tangible book value of $ per share to new investors purchasing shares
at an assumed 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 before this
offering............................................... $
Increase per share attributable to new investors.......... --
------
Pro forma net tangible book value per share after this
offering.................................................. --
------
Dilution per share to new investors......................... $
====== ======
</TABLE>
The following table summarizes, on a pro forma, as adjusted basis as of
, 2000, the difference between existing shareholders and new investors
with respect to the number of shares of common stock purchased, the total
consideration paid and the average price per share paid. These amounts do not
include estimated underwriting discount and offering expenses that we will pay.
The table assumes that the initial public offering price will be $ per
share.
<TABLE>
<CAPTION>
TOTAL
SHARES PURCHASED CONSIDERATION AVERAGE
------------------ ---------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........................... % $ % $
New investors................................... $
-------- --- ---- ----
Total................................. 100% $ 100%
======== === ==== ====
</TABLE>
The foregoing table assumes no exercise of stock options or warrants. As of
March 10, 2000, there were options outstanding to purchase 5,680,000 shares of
common stock at a weighted exercise price of $3.15 per share, and warrants to
purchase up to 1,199,827 shares of our common stock at a weighted average
exercise price of $6.73 per share. We have also agreed to issue additional
warrants to Microsoft and Network Solutions at the time of this offering. To the
extent outstanding options and warrants are exercised, there will be further
dilution to new investors.
20
<PAGE> 24
SELECTED FINANCIAL DATA
The following table shows our selected financial data for the period from
inception (September 18, 1997) to December 31, 1997 and for the years ended
December 31, 1998 and 1999. This data has been derived from our audited
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants.
You should read the following selected financial data in conjunction with
"Use of Proceeds," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the consolidated financial statements and
accompanying notes and the other financial data included elsewhere in this
prospectus. The following data is in thousands, except share, per share and
customer account data.
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
INCEPTION
(SEPTEMBER 18,
1997) TO YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
------------------- ----------------- -----------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ 5 $ 1,387 $ 9,121
Operating expenses........................... (119) (3,708) (25,891)
----------- ----------- -----------
Operating loss............................... (114) (2,321) (16,770)
Interest expense, net........................ -- (18) (14)
----------- ----------- -----------
Net loss..................................... (114) (2,339) (16,784)
Preferred stock beneficial conversion and
dividends.................................. -- -- (9,559)(1)
----------- ----------- -----------
Net loss applicable to common shareholders... $ (114) $ (2,339) $ (26,343)
=========== =========== ===========
Basic and diluted net loss per common
share...................................... $ (0.01) $ (0.14) $ (1.33)
=========== =========== ===========
Shares used in computing net loss per
share...................................... 16,325,177 16,959,675 19,871,446
OTHER DATA:
EBITDA(2).................................... $ (114) $ (2,206) $ (12,221)
Net cash used in operating activities........ (110) (30) (2,397)
Net cash used in investing activities........ (2) (1,102) (8,752)
Net cash provided by financing activities.... 139 1,811 34,953
Number of customer accounts.................. 0 10,611 45,731
</TABLE>
- ---------------
(1) This amount consists of approximately $9.4 million associated with the
beneficial conversion feature of our preferred stock into common stock and
approximately $150,000 in an accrued preferred stock dividend. The
beneficial conversion is a result of the difference between the initial
purchase price paid by the preferred stock holders and actual conversion
price of the preferred stock into common stock.
(2) EBITDA consists of net loss excluding net interest expense, depreciation and
amortization. EBITDA does not represent funds available for management's
discretionary use and is not intended to represent cash flow from operations
as measured under generally accepted accounting principles. EBITDA should
not be considered as an alternative to net loss or net cash used in
operating activities, but may be useful to investors as an indication of
operating performance. Our calculations of EBITDA may not be consistent with
similarly titled calculations used by other companies.
21
<PAGE> 25
The following balance sheet data is presented:
- on a pro forma basis to reflect private sales of our capital stock and
grants of warrants to purchase our common stock between December 31, 1999
and the date of the initial filing of the registration statement of which
this prospectus is a part and the accrual of preferred stock dividends;
and
- on a pro forma as adjusted, basis to give effect to the sale of
and shares of our common stock at
$ per share to Microsoft and Network Solutions, respectively at
the time of this offering, the conversion upon the completion of this
offering of all convertible preferred stock into 12,163,968 shares of
common stock common stock and the $619,000 payment in cash of related
dividends, the grant of warrants to purchase up to shares of
common stock that will be issued to Microsoft and Network Solutions at
the time of this offering, and the sale of shares of our
common stock we are offering under this prospectus, at an assumed initial
offering price of $ per share, after deducting the underwriting
discount and estimated offering expenses that we will pay.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998 DECEMBER 31, 1999
------------ ------------ ---------------------------------
PRO FORMA
ACTUAL ACTUAL ACTUAL PRO FORMA AS ADJUSTED
------------ ------------ ------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $28 $ 706 $24,510 $28,510 $
Total assets.............................. 30 1,781 35,976 39,976
Working capital........................... 24 (1,627) 13,250 16,781
Total long-term liabilities............... -- 350 4,004 4,004
Total shareholders' equity................ 26 (938) 17,495 21,026
</TABLE>
22
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the financial statements and the
accompanying notes included elsewhere in this prospectus. This discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in those
forward-looking statements as a result of certain factors, including, but not
limited to, those described under and included in other portions of the
prospectus.
OVERVIEW
We provide a broad range of web hosting and applications hosting and other
related web-based business solutions specifically designed to meet the needs of
small and medium-sized businesses. Our business is rapidly evolving and we have
limited operating history. As a result, we believe that period-to-period
comparisons of our revenue and operating results, including our cost of revenue
and other operating expenses as a percentage of total revenue, are not
meaningful and should not be relied upon as indicators of future performance. We
do not believe that our historical growth rates are indicative of future
results. See "Risk Factors" beginning on page 6 for a discussion of risks
related to buying shares of our common stock.
Currently, we derive a substantial majority of our revenues from shared and
dedicated hosting services. We also derive revenue from applications hosting and
consulting services. Our strategy is to grow our customer base and revenues
primarily by marketing value-added services to small and medium-sized
businesses. We expect that our number of customer accounts will grow rapidly,
and that the revenue from the sale of higher margin services, such as dedicated
hosting, applications hosting and consulting services, will increase more
rapidly than our base shared hosting revenue. Currently, most of our hosting
revenues are generated from recurring monthly fees. The remainder is derived
from one-time-set-up fees for installation. We currently sell our services under
agreements having terms of three months to two years. Most of our customer
agreements may be canceled within the first thirty days. We receive payment in
advance typically for the full contract amount by direct charges to credit or
debit cards. We recognize all revenues, including set-up fees, ratably over the
term of the contract.
Our expenses consist of:
- Cost of revenue, which is primarily comprised of compensation and
related expenses for technical operations, internet connectivity and
other related telecommunications expense, lease expense in
particular related to our data centers, and depreciation of
equipment;
- Sales and marketing, which is primarily comprised of compensation
costs and costs associated with marketing our products and services.
Compensation costs include salaries and related benefits,
commissions and bonuses. Our marketing expenses include the costs of
direct mail, advertising and other mass market programs;
- General and administrative, which is primarily comprised of
compensation and related expenses and occupancy costs; and
- Amortization of deferred compensation, which relates to stock and
options granted prior to December 31, 1999 at exercise prices less
than the fair market value of our common stock at the time of grant.
We have incurred significant losses and experienced negative cash flow from
operations since our inception and, as of December 31, 1999, had an accumulated
deficit of approximately $28.8 million. We intend to invest heavily in sales and
marketing, the continued development of our network infrastructure and
technology, and the expansion of our international operations. We expect to
expand our operations and workforce, including our network operations, technical
support, sales, marketing and administrative resources. We expect to continue to
incur substantial losses for the foreseeable future. Our ability to
23
<PAGE> 27
achieve profitability and positive cash flow from operations will be dependent
upon our ability to grow our revenues substantially and achieve operating
efficiencies.
RESULTS OF OPERATIONS
The following table sets forth percentage of revenue data for the years
ended December 31, 1998 and 1999.
<TABLE>
<CAPTION>
% OF REVENUES
--------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Revenues................................................... 100.0% 100.0%
Operating expenses:
Cost of revenue.......................................... 79.0 86.6
Sales and marketing...................................... 130.0 86.6
General and administrative............................... 58.3 71.7
Amortization of deferred compensation.................... -- 39.0
------ ------
Operating loss........................................... (167.3) (183.9)
Interest income.......................................... 0.1 2.3
Interest expense......................................... (1.4) (2.4)
------ ------
Net loss......................................... (168.6)% (184.0)%
====== ======
</TABLE>
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 AND 1999
Revenues
Our revenues increased $7.7 million, or 557.6%, to $9.1 million for 1999
from $1.4 million during 1998. This increase was primarily due to the growth of
our business and number of customers served. The number of customer accounts
increased from 10,611 at December 31, 1998 to 45,731 at December 31, 1999.
Approximately 42% of our fiscal 1999 revenue was recognized in the fourth
quarter.
Cost of revenue
Our cost of revenue increased $6.8 million to $7.9 million, or 86.6% of
revenue, during 1999 from $1.1 million, or 79.0% of revenue during 1998, due to
the growth of our business and related expenses, including increased costs
related to additional systems and customer support personnel, increased
telecommunication and Internet connection costs, higher depreciation and lease
expense and increased license fee payments. We expect our cost of revenue to
continue to increase as we increase capacity to meet customer demand. We
anticipate, however, that these costs will decline as a percentage of revenues
as we expand our facilities and achieve a more cost-effective scale of
operations.
Sales and marketing
Sales and marketing expenses increased $6.1 million to $7.9 million, or
86.6% of revenues, during 1999 from $1.8 million, or 130.0% of revenues during
1998. This increase was due primarily to an increase in the number of sales
personnel, higher compensation and increased placement of advertising. We intend
to significantly increase our sales and marketing expenditures in 2000.
General and administrative
General and administrative expense increased $5.7 million to $6.5 million,
or 71.7% of revenue, during 1999 from $809,000, or 58.3% of revenue, during
1998. This increase was primarily due to an increase in the number of general
and administrative personnel, increased professional fees and travel costs, as
well as severance expense of $660,000 related to the termination of an officer.
We expect to significantly increase our general and administrative expenditures
in the future to support a higher level of operations.
24
<PAGE> 28
Amortization of deferred compensation
We recorded amortization of deferred compensation totaling $4.5 million in
1999 in connection with the grant of stock options and issuance of common stock
to consultants and employees. In the case of stock option grants, this amount
represents the difference between the deemed fair market value of our common
stock and the exercise price of the options granted on the dates the options
were granted. In those cases where common stock was issued, this amount
represents the deemed fair market value of our common stock on the date of
issuance. This amount is included as a reduction of shareholders' equity and is
being amortized ratably over the vesting period. For the year ended December 31,
1999 we recorded $3.6 million in amortization of deferred compensation, leaving
$954,000 to be recognized over the remaining vesting periods of the stock
options.
In the first three months of 2000, we granted options to purchase 1,231,500
shares of our common stock to employees at exercise prices ranging from $5.80 to
$9.00 per share. We granted the options with an exercise price of $5.80 per
share at prices below the deemed market value of our common stock of $9.00 per
share. We recorded deferred compensation of approximately $3.5 million to
additional paid in capital, which will be amortized over the vesting period of
the options, which is generally three years. Upon completion of this offering,
223,260 of these options will vest immediately. As a result, we expect to
recognize amortization of deferred compensation of $1.1 million, $790,000,
$910,000 and $660,000, in each of the years ended December 31, 2000, 2001, 2002
and 2003, respectively.
There were no stock based compensation awards prior to 1999 and accordingly
there was no amortization of deferred compensation in 1998.
Interest expense, net
Interest expense, net consists of interest income on our cash balances less
interest expense on our capital lease obligations. Interest earned on our cash
and cash equivalents increased $204,000 to $206,000 during 1999 from $2,000
during 1998. This increase was primarily due to the closing of private
placements of preferred stock in December 1999, which resulted in higher cash
balances available for investment. During the year ended December 31, 1999 we
incurred interest expense of $220,000, compared to $20,000 in 1998.
Income taxes
No provision for federal income taxes has been recorded as we have incurred
net operating losses from inception through December 31, 1999. As of December
31, 1999, we had approximately $19.8 million of federal net operating loss carry
forwards available to offset future taxable income which expire in varying
amounts beginning in 2013. We have recorded a valuation reserve for all our net
deferred tax benefit for the period ended December 31, 1999 due to uncertainty
that we will generate sufficient taxable income during the carry forward period
to realize the benefit of our net deferred tax asset. In addition, in the past
and after this offering, we may experience a change in control under Section 382
of the Revenue Code, which would limit our use of this net operating loss carry
forwards.
Net Loss
Our net loss increased $14.5 million to $16.8 million during 1999 from $2.3
million during 1998. Our net loss increased primarily as a result of increased
cost of revenues, sales and marketing, and general and administrative expense in
1999 from 1998. These increases were partially offset by an increase in revenue
of $7.7 million to $9.1 million for 1999 from $1.4 million for 1998.
COMPARISON OF THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1997) TO DECEMBER 31,
1997 AND THE YEAR ENDED DECEMBER 31, 1998
We did not conduct any significant operations or realize any significant
revenue for the period from inception (September 18, 1997) to December 31, 1997.
During this period we incurred general and
25
<PAGE> 29
administrative expenses of approximately $119,000, consisting primarily of rent
and salaries, as we commenced operations.
No comparison of the period from inception (September 18, 1997) to December
31, 1997 to the year ended December 31, 1998 is provided as it would not be
meaningful due to the startup nature of our operations and the insignificance of
the related expenses during 1997.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited statement of operations
data for each of the four quarters in the year ended December 31, 1999, as well
as the percentage of our revenue represented by each item. This data has been
derived from unaudited interim financial statements prepared on the same basis
as the audited financial statements contained in this prospectus. The interim
financial statements include all adjustments, consisting of normal recurring
adjustments, that we consider necessary for a fair presentation of such
information when read in conjunction with our financial statements and notes
thereto appearing elsewhere in this prospectus. The operating results for any
quarter should not be considered indicative of the results for any future
period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------
MARCH 31, 1999 JUNE 30, 1999 SEPTEMBER 30, 1999 DECEMBER 31, 1999
----------------- ----------------- ------------------- ------------------
% OF % OF % OF % OF
$ REVENUE $ REVENUE $ REVENUE $ REVENUE
------- ------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................................ $ 1,009 100.0% $ 1,688 100.0% $ 2,582 100.0% $ 3,842 100.0%
------- ------ ------- ------ ------- ------ ------- ------
Operating expenses:
Cost of revenues...................... 861 85.3 1,484 87.9 2,177 84.3 3,375 87.8
Sales and marketing................... 896 88.8 1,504 89.1 2,371 91.8 3,130 81.5
General and administrative............ 576 57.1 1,080 64.0 1,613 62.5 3,267 85.0
Amortization of deferred
compensation........................ 101 10.0 1,212 71.8 1,296 50.2 948 24.7
------- ------ ------- ------ ------- ------ ------- ------
Total operating expenses........ 2,434 241.2 5,280 312.8 7,457 288.8 10,720 279.0
------- ------ ------- ------ ------- ------ ------- ------
Operating loss.......................... (1,425) (141.2) (3,592) (212.8) (4,875) (188.8) (6,878) (179.0)
Other income (expense):
Interest income....................... 7 0.7 14 0.8 30 1.2 155 4.0
Interest expense...................... (18) (1.8) (32) (1.9) (42) (1.6) (128) (3.3)
------- ------ ------- ------ ------- ------ ------- ------
Net loss........................ $(1,436) (142.3)% $(3,610) (213.9)% $(4,887) (189.2)% $(6,851) (178.3)%
======= ====== ======= ====== ======= ====== ======= ======
EBITDA.................................. $(1,213) $(2,182) $(3,316) $(5,510)
======= ======= ======= =======
</TABLE>
Revenues increased 41.5% during the quarter ended March 31, 1999, 67.3%
during the quarter ended June 30, 1999, 53.0% during the quarter ended September
30, 1999 and 48.8% for the quarter ended December 31, 1999, as the number of new
customers rose significantly during each quarter. Cost of revenue increased in
each quarter relatively proportional to the increased revenue. Sales and
marketing and general and administrative increased quarter over quarter
primarily due to the addition of personnel as our business increased.
We expect to experience significant fluctuations in our future results of
operations due to a variety of factors, many of which are outside of our
control, including:
- demand for and market acceptance of our products and services may decline
or fail to increase enough to offset our costs;
- introductions of new products and services or enhancements by us and our
competitors may increase our costs or make our existing products and
services obsolete;
- the mix of products and services we sell may change, and the new mix may
generate less revenue and gross margin;
- the gain or loss of a significant number of customers;
- the timing and success of advertising, marketing efforts and new service
introductions, both by us and our resellers;
26
<PAGE> 30
- the timing and magnitude of our capital expenditures, including
construction costs related to the expansion of operations, may vary from
quarter to quarter;
- the prices we charge our customers may decline due to price competition;
- utilization of our network may increase beyond our capacity and we may
incur expenses to increase our capacity;
- the availability and cost of bandwidth may reduce our ability to increase
bandwidth as necessary, reducing our revenue;
- the gain or loss of a key strategic relationship; and
- conditions specific to the Internet industry and other economic factors
may affect the prices we can charge or the expenses we incur.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations to date primarily through private equity
placements that generated net proceeds of $33.2 million and capital leases from
vendors of $2.6 million. At December 31, 1999 we had an accumulated deficit of
$28.8 million and unrestricted cash and cash equivalents of $24.5 million. This
balance of cash and cash equivalents is primarily the result of our raising net
proceeds $23.4 million from the sale of preferred stock in the fourth quarter of
1999.
During the years ended December 31, 1999 and 1998, we used cash to fund
operations of $2.4 million and $30,000, respectively. The increase in cash used
in operations was due primarily to working capital requirements and net losses,
offset by increases in accounts payable, deferred revenue and accrued expenses.
Net cash used in investing activities was $8.8 million for the year ended
December 31, 1999 and is comprised of equipment purchases of $7.8 million and
deposits of $1.0 million in restricted cash. Net cash provided by financing
activities was $35.0 million and is related primarily to the issuance of our
Series A preferred stock and common stock, as well as borrowings under capital
leases. Total borrowings under our capital lease obligations as of December 31,
1999 were approximately $3.6 million.
On December 24, 1999, we entered into a stock purchase agreement with
Microsoft Corporation. In connection with this financing transaction, we issued
2,300,000 shares of Series A preferred stock to Microsoft, at a purchase price
of $2.18 per share. We also issued a warrant to Microsoft to purchase 506,000
shares of common stock at an exercise price of $5.80 per share. In addition,
under the stock purchase agreement, on the day following the effective date of
the registration statement of which this prospectus is a part, we will issue the
number of shares of common stock to Microsoft equal to $7.5 million divided by
the lesser of the midpoint of the expected range of offering price as reflected
in this prospectus or the actual price to the public of common stock sold in the
offering. In connection with this issuance, we will issue an additional warrant
to purchase a number of shares of common stock equal to 75% of the number of
shares sold to Microsoft at an exercise price equal to the price paid at the
closing. In connection with this investment, we entered into a five-year
co-marketing agreement with Microsoft. We recorded deferred development costs
for the value of the warrant issued on December 24, 1999 of approximately $2.1
million. We will also record additional deferred expense for the value of the
warrants to be issued upon the second closing and for the difference, if any,
between the midpoint of the expected offering range and the offering price. This
deferred expense will be amortized over the five-year term of the co-marketing
agreement.
On January 28, 2000, we issued a warrant to purchase up to 349,000 shares
of our common stock to Road Runner whose cable affiliates include Time Warner,
Media One, and Cox Cable, in connection with a co-marketing agreement. Of the
shares subject to this warrant, 100,000 vested immediately upon the execution of
our co-marketing agreement and the balance vest in equal installments on June
30, 2000, September 30, 2000, December 31, 2000 and December 31, 2001, subject
to performance criteria. In January 2000, we recorded expense of approximately
$650,000 associated with the vested portion of the
27
<PAGE> 31
warrant. We will record additional expense in the future based on the fair value
of the portion of the warrant that has been earned and that vests in each period
based on meeting the performance criteria.
On March 15, 2000, we entered into a stock purchase agreement with Network
Solutions. In connection with this financing transaction, we issued 698,655
shares of Series A preferred stock to Network Solutions, at a purchase price of
$5.80 per share. We also issued a warrant to Network Solutions to purchase
344,827 shares of common stock at an exercise price of $5.80 per share. In
addition, under the stock purchase agreement, on the day following the effective
date of the registration statement of which this prospectus is a part, we will
issue the number of shares of common stock to Network Solutions equal to $6.0
million divided by the lesser of the midpoint of the expected range of offering
price as reflected in this prospectus or the actual price to the public of
common stock sold in the offering. In connection with this issuance, we will
issue an additional warrant to purchase a number of shares of common stock equal
to 75% of the number of shares sold to Network Solutions at an exercise price
equal to the price paid at the closing. In connection with this investment, we
entered into a four year premier program agreement with Network Solutions. We
will record deferred expense of approximately $2.5 million for the value of the
warrant issued on March 15, 2000 of approximately $2.5 million and deferred
expense of approximately $2.2 million for the difference between the purchase
price of $5.80 per share and the fair value of our common stock on that date of
$9.00 per share. We will also record additional deferred expense for the value
of the warrants to be issued upon the second closing and for the difference, if
any, between the midpoint of the expected offering range and the offering price.
This deferred expense will be amortized over the four year term of the premier
program agreement.
We are pursuing an aggressive internal growth strategy that we anticipate
will require significant additional funding before we begin to generate positive
cash flow. We believe that our current cash and cash equivalent balances, equity
proceeds from strategic alliances closed since December 31, 1999, and the
proceeds of this offering will be sufficient to meet our working capital and
capital expenditure requirements through the end of 2001. The execution of our
business plan may require additional capital to fund our operating losses,
working capital needs, sales and marketing expenses, lease payments and capital
expenditures. At December 31, 1999 we have commitments of $2.7 million in
capital expenditures outstanding for expanded network and facilities. In view of
future expansion plans, we will consider our financing alternatives, which may
include the incurrence of debt, additional public or private equity offerings,
or an equity investment by a strategic partner. Actual capital requirements may
vary based upon the timing and success of the expansion of our operations. Our
capital requirements may also change based upon technological and competitive
developments. In addition, several factors may affect our capital requirements:
- demand for our services or our anticipated cash flow from operations
being less than expected;
- our development plans or projections proving to be inaccurate;
- our engaging in strategic relationships or acquisitions; and
- our acceleration of, or otherwise altering, the schedule of our expansion
plan.
If additional funds are raised through the issuance of equity or
convertible securities, the percentage ownership of our shareholders will be
reduced and our shareholders may experience additional dilution. There can be no
assurance that additional financing, if required, will be available on
satisfactory terms, or at all. If we do not obtain additional financing, we
believe that our existing cash balances may be adequate to continue expanding
the operations on a reduced scale.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 established accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
is effective for fiscal years beginning after June 15, 2000. We do not believe
the adoption of SFAS 133 will have a material effect on our results of
operations or financial condition.
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IMPACT OF YEAR 2000
In late 1999, we completed our remediation and testing of systems for the
Year 2000 problem. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe those systems
successfully responded to the Year 2000 date change. Expenses in connection with
remediating our systems were not significant. We are not aware of any material
problems resulting from Year 2000 issues, either with our products, our internal
systems, or the products and services of third parties. We will continue to
monitor our mission critical computer applications and those of our suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
All of our customer contracts are currently denominated in U.S. dollars,
and we do not currently invest in derivative financial instruments. However, we
invest our excess cash balances in cash equivalents and are therefore subject to
market risk related to changes in interest rates. We believe, but cannot be
certain, that the effect on our financial position, results of operations and
cash flows of any reasonably likely changes in interest rates would not be
material.
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BUSINESS
Interland provides a broad range of web and applications hosting and other
related web-based business solutions specifically designed to meet the needs of
small to medium-sized businesses. These high-quality solutions are secure,
reliable, and affordable and can be easily upgraded to provide additional
capacity and functionality. In addition, our services are backed by superior
customer support 24 hours a day, seven days a week and 365 days a year. We sell
our service to customers primarily under fully pre-paid contracts which are
typically between three months and two years in length. Our hosting services are
based on the Microsoft NT and Red Hat Linux operating systems, providing
diversity and flexibility to our customers. We are committed to providing
superior customer service and believe this commitment is among the reasons our
web hosting services were selected as the "Editor's Choice" by Windows NT
magazine in September 1999 and by PC Magazine in December 1999.
We began operations as a web hosting business in September 1997 and as of
December 31, 1999 had 45,731 customer accounts, an increase of approximately
330% versus the prior year. Over the same period our revenues have grown from
approximately $1.4 million in 1998 to over $9.1 million in 1999, representing a
growth rate of over 550%. We have achieved this growth without making any
acquisitions and with less than $6.8 million of total invested cash capital
until December 1999, when we closed a $25.0 million round of venture financing.
The following are among the key factors that we believe will continue to drive
our growth:
- A broad and expanding portfolio of high quality services designed to
enable us to provide one-stop shopping for the specific hosting and
related needs of small to medium-sized businesses. Our goal is to deliver
a bundle of services that not only meets a customer's needs today, but
that also can easily and seamlessly be augmented to provide greater
capacity and functionality to address the customer's growing needs in the
future. In so doing, we expect to maintain our high customer retention
rate, while continuing to increase our average revenue per customer.
- Key strategic relationships with Microsoft and Network Solutions, both of
which have made equity investments in Interland, and with Road Runner,
which holds a warrant to purchase shares of our common stock. Microsoft
has invested $5.0 million in our convertible preferred stock and has
agreed to invest an additional $7.5 million in our common stock at the
time of this offering. Network Solutions has invested $4.0 million in our
convertible preferred stock and has agreed to invest an additional $6.0
million in our common stock at the time of this offering. We have also
issued warrants to Microsoft and Network Solutions to purchase shares of
our common stock in connection with these investments. In addition we
have strong business relationships with leading technology providers
including Cisco, Cobalt Networks, Hewlett-Packard, Red Hat and Road
Runner.
- State-of-the-art data centers which provide a secure operating
environment and facilitate the delivery of high quality, reliable
services. In addition, because our current data centers are located in
close proximity to the major access points of our Internet connectivity
providers, we are able to provide our customers with greater data speeds
while we enjoy lower overall connectivity costs.
- Global expansion to serve foreign small and medium-sized businesses in
Europe, Asia and South America. We believe the web hosting market in
these areas represents a growth opportunity as great or greater than the
domestic market. To take advantage of this opportunity, we have opened
our first international sales and customer service center in Amsterdam
and will continue to evaluate other locations as well as foreign
strategic relationships and acquisition candidates.
- A creative, highly aggressive multimedia advertising campaign designed to
establish Interland as the first commonly recognized brand in the hosting
industry.
- An experienced, quota-driven direct sales force that has been trained in
consultative selling and is skilled in assessing the needs of small and
medium-sized businesses. Once a customer makes contact with an Interland
salesperson, that salesperson is the primary ongoing contact for the
customer. Through a continuing dialogue, the salesperson assesses the
customer's needs and works
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with the customer to create tailored solutions. The salesperson will
continually monitor the customer's account to proactively offer
additional products and services as the customer's needs change and
expand. In addition, we also have created a growing network of resellers
who provide us with a highly effective distribution channel for our
services. Our current largest private label reseller is Road Runner,
whose cable affiliates include Time Warner, Media One, and Cox Cable.
Under our exclusive private label agreement with Road Runner, we have
agreed to provide web hosting services to the customers of Road Runner
under Road Runner's name.
- Our proprietary provisioning system that allows our salespeople, during
the order process, to activate a web site or provide other services for a
customer in real-time. This system also supports and integrates our
internal functions such as customer relationship management,
administration of accounts, billing and reporting. We believe these
systems allow us to activate and support our customers at a lower cost
compared to our competitors, and enables us to sell additional and more
complex services to our existing customer base.
THE INDUSTRY
The Internet
The Internet continues to demonstrate significant growth. International
Data Corporation (IDC) estimates that the number of Internet users world-wide
will grow from approximately 97.3 million at the end of 1998 to 319.8 million by
the end of 2002. This represents a compound annual growth rate of 34.6%. The
number of Internet users in the United States is predicted to increase from
approximately 51.6 million at the end of 1998 to 135.9 million by the end of
2002, a 27.4% compound annual growth rate. This indicates that the international
market is expected to grow faster than the United States market.
One of the many reasons for the overall growth in Internet users has been
the rapid emergence of the Internet as a global business-to-business and
business-to-consumer commerce medium. Since the commercialization of the
Internet in the early 1990s, businesses have rapidly established web sites as a
means to expand customer reach and improve communications and operational
efficiency. As businesses become more familiar with the Internet as a
communications and commerce platform, an increasing number of businesses have
begun to implement more complex and mission-critical applications over the
Internet. These applications include sales, customer service, customer
acquisition and retention programs, communication tools such as e-mail and
messaging, and business-to-business and business-to-consumer e-commerce.
The increasing reliance on the Internet and the growing complexity and
functionality of web sites has made the management and maintenance of web sites
an increasingly complex task. As a result, many businesses, particularly small
and medium-sized businesses, have elected to outsource the implementation and
management of their web sites. We believe outsourcing can provide a business
with a number of benefits including:
- Lower start-up and operating costs;
- Faster time to market;
- Greater security and reliability; and
- Less attention diverted from a company's core business activities.
Web Hosting Market
IDC predicts that the United States market for web hosting will grow from
$806 million in 1998 to $17.7 billion in 2003, representing a compound annual
growth rate of 85.4%. IDC also estimates that the international market for web
hosting services will grow at a faster rate, from $16.5 million in 1998 to $1.3
billion in 2003, a compound annual growth rate of 138.7%.
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According to IDC, small businesses, those with less than 100 employees,
accounted for 46% of the total web hosting market in 1998 in the U.S., and IDC
predicts this percentage will grow to 61% by 2003, at which time small
businesses are projected to account for $10.7 billion of the total $17.7 billion
U.S. web hosting market. In addition, IDC predicts that the small business
segment of the market will grow at a compound annual growth rate of
approximately 96% between 1998 and 2003, versus 73% for medium and 78% for the
large business segments. According to IDC, at the end of 1998 only 17% of an
estimated 7.4 million small businesses in the U.S. had web sites. IDC predicts
that by the end of 2003, the number of small businesses in the U.S. will grow to
8.2 million, 62% of which are estimated to have web sites.
Applications Hosting Market
Applications hosting enables software applications to be deployed, managed,
supported and upgraded from an applications service provider's centrally located
servers, rather than on individual desktop computers. Applications service
providers typically rent software applications over the Internet to customers
for a monthly fee. Advantages of applications hosting to customers include
reduced upfront capital expenditures, lower operating costs and faster
applications implementation. Due to these advantages, the applications hosting
market is growing rapidly. Forrester Research, Inc. projects that the
applications services market will grow to over $11.3 billion in 2003 from less
than $1 billion in 1999. Forrester also projects that 22% of all U.S.-based
applications revenue will flow through applications service providers in 2003.
Current Market Fragmentation
Both the web and applications hosting markets today are fragmented and
consist primarily of the following types of providers:
- Small web hosting providers who do not have the capital, resources and
focus to develop and offer a broad selection of high quality services and
support at competitive prices;
- Large providers whose core service offerings tend to be geared toward
large businesses or only toward those businesses which seek to implement
or maintain the most complex types of web sites;
- National and local Internet service providers or ISPs whose core business
focus centers around the provision of Internet connectivity rather than
hosting; and
- Web design and consulting firms for which hosting is not their core
expertise.
OUR OPPORTUNITY
We believe that small to medium-sized businesses, while representing a
large and rapidly growing segment of the market, have traditionally been
underserved by web and applications hosting companies. For a number of small and
medium-sized businesses, many of whom do not have internal technical resources
dedicated to Internet services, establishing a presence on the Internet and
realizing the various benefits of the Internet has proven to be a complicated
and time consuming task. In addition, many small and medium-sized businesses
have not had access to the type and quality of Internet-based services that
larger, more sophisticated companies currently enjoy. We therefore believe that
a significant market opportunity exists for us to deliver a comprehensive and
easy-to-use suite of services designed to address the specific needs of the
small and medium-sized business customer.
OUR SOLUTION
We are dedicated to providing small to medium-sized businesses with a
comprehensive bundle of services, which enables them to quickly, easily and
affordably capitalize on the benefits of the Internet. The key elements of our
solution include:
- A full suite of high-quality web and applications hosting and other
related services;
- Solutions which are affordable, quick to deploy, and easy to use;
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- State-of-the-art security and reliability; and
- Personalized customer service and 24x7 support.
OUR STRATEGY
Our goal is to become the leading global provider of web and applications
hosting and related business solutions to the small and medium-sized business
market. Our strategy for achieving our goal is comprised of the following key
components:
Provide a Broad Portfolio of Services on Multiple Platforms. A key element
of our growth to date has been our ability to provide and support a wide variety
of hosting services on multiple hardware and software platforms. Currently, we
have four key service areas comprised of shared hosting, dedicated hosting,
applications hosting and e-commerce solutions, and consulting services. Within
these service categories, we believe we have a solution which can effectively
address the web hosting and related needs of most small and medium-sized
businesses, both now and as their needs evolve and expand. For example, many of
our customers may outgrow the capabilities of shared hosting services and may
ultimately need a dedicated service. When this need arises, we are able to
provide this service for them with relative ease. In addition, a business that
begins a relationship with us as a dedicated hosting customer may desire access
to the applications we host or the e-commerce services we provide. We intend to
continue to broaden our services portfolio in order to better serve our existing
customers and further enhance our ability to attract new customers. We have also
developed the technical expertise to provide our services on multiple operating
systems, including Microsoft Windows NT and Red Hat Linux. We can therefore
offer our customers additional flexibility in deploying their web sites and
applications. In short, our goal is to ensure that a customer or potential
customer need never look beyond Interland to fulfill any hosting or e-commerce
need.
Expand Sales Capabilities and Distribution Channels. We intend to grow our
revenue through the continued expansion of our sales and distribution channels.
Our sales efforts currently occur through a number of channels, including our
direct sales force, active resellers and strategic relationships we have
developed. We will expand all of these efforts. Specifically, we will continue
to hire new sales employees for our internal direct sales efforts. To complement
our direct sales efforts, we will also distribute our services through a network
of over 100 active resellers. These resellers typically offer our services under
the Interland brand name to their existing and new customers and retain
responsibility for most of their clients' customer service needs. We believe
this reseller network, which accounted for 16% of our revenue for the year ended
December 31, 1999, is a highly effective distribution channel for our services
with minimal cost to us. Some of our most valued resellers offer our services
under their own private label brand names. Our recent agreement with Road
Runner, which provides access to the Internet through the cable operations of
Time Warner, Cox Media, Media One and other cable operators, is an example of
this strategy. We will also continue to seek strategic relationships that enable
us to reach new customers. For example, our marketing arrangements with
Hewlett-Packard, Microsoft, and Network Solutions allow us to introduce our
services to potential customers that we might not otherwise reach. All of these
efforts should increase the exposure of our service offerings to potential
customers.
Expand International Presence. For the year ended December 31, 1999, we
derived approximately 8% of our revenues from customers outside the United
States. We believe that the hosting services needs of many foreign small and
medium-sized businesses located outside the U.S. are not being adequately served
and therefore represent a significant growth opportunity. In order to capitalize
on these opportunities, we are opening a sales and customer service center in
Amsterdam. This facility will be staffed with multilingual professionals
enabling us to sell and support our services throughout Western Europe from a
centrally based location. Initially, we intend to host web sites and
applications for our European customers from our servers located in the U.S. As
a result of this arrangement, we expect to have lower operating costs than
companies that have data centers and connection to the Internet in Europe. We
also expect to be able to defer significant capital expenditures associated with
building additional international data centers, and to offer our services at
lower prices than our competitors in
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Europe. We will, however, continually reassess the need for a data center in
Europe. In addition, we intend to identify suitable foreign acquisition
candidates and will strive to develop relationships in other international
markets. To date, we have been able to retain international resellers in over 50
countries without a significant marketing effort. We believe that all of these
efforts could potentially lead to a significant expansion in our customer base
in international markets.
Increase Brand Awareness and Market Presence. We believe that we have a
unique opportunity to be one of the first hosting providers to establish a
meaningful brand name in the web and applications hosting industry. We intend to
continue to build our brand recognition by continuing to implement multimedia
advertising campaign. We also intend to take advantage of our strategic
co-marketing relationships with industry leaders such as Microsoft,
Hewlett-Packard, Network Solutions and Road Runner. We believe these programs
will enable us to continue to expand our customer base and assist us in our
customer retention efforts.
Take Advantage of Innovative and Proprietary Technology. We have developed
proprietary technology that assists in our customer support efforts and our
internal processes. For example, an internally developed tool provides an
auto-provisioning function that allows our customers to alter their sites
through the Internet without having to contact us. We have also developed a
platform for complex web sites that allows our customers to incorporate
sophisticated Internet functions into their web sites easily, including
e-commerce, merchant capabilities, on-line transactions and e-mail. We believe
these technologies help us attract and support our customers at a lower cost
compared to our competitors. Our integrated customer manager system supports our
internal processes with features such as customer relationship management,
automated installation and provisioning of services, administration of accounts,
billing, and reporting. We also use these tools to offer additional services to
our existing customer base. We will continue to develop specialized technology
and systems to give us advantages in delivering quality and price competitive
services to our customers.
Pursue Additional Strategic Alliances and Relationships. We will continue
to pursue strategic alliances and acquisitions that will enable us to expand our
service portfolio, our technological capabilities and our customer base. In
December 1999, we entered into a license, development and marketing agreement
with Microsoft. In January 2000, we entered into an agreement with Road Runner
to provide web hosting services for the cable customers of its affiliates. In
March 2000, we entered into a premier program agreement. We intend to seek
additional opportunities like these as well as to explore possible acquisitions.
OUR SERVICES
We offer an integrated suite of web and applications hosting and related
business services designed to specifically address the needs of small and
medium-sized businesses. These services include:
- shared hosting;
- dedicated hosting;
- applications hosting; and
- consulting services.
During the three month period ended December 31, 1999, 70% of revenues was
derived from our shared servers, 12% was derived from dedicated services and 18%
was from applications hosting and consulting services.
Shared Hosting. Shared hosting services are entry-level service plans
designed for web sites with relatively low volumes of traffic. Our shared
hosting packages minimize the cost for customers by providing hosting services
for multiple customers on a single shared server, spreading the cost of the
service over many users. Shared hosting is particularly attractive to small to
medium-sized businesses looking to build their presence on the web. Our shared
hosting service plans also include many standard features and more complex
options for database support, e-commerce support, multi-media services and
extensive e-mail
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support. The large majority of our customers currently use our shared hosting
services. Our intention is to reassess continually the needs of our shared
hosting customers and, when appropriate, to encourage them to add capacity and
functionality to their web sites by migrating to dedicated hosting services.
Dedicated Hosting. Dedicated hosting services are designed for customers
with complex requirements and high traffic volumes. Web sites on dedicated
servers typically have database driven content that requires multiple
applications and database servers to operate. Our dedicated service plans
provide each customer with a complete web site hosting solution including all of
the hardware, software, network equipment and support necessary to run the web
site. These service plans offer a number of advantages to our customers in
addition to those received in our shared hosting packages, including:
- Capacity -- the customer receives greater processing and storage
resources;
- Reliability -- the customer's web site is located on its own server
reducing the possibility of server related difficulties;
- Flexibility -- we can custom configure a specific customer's server or
servers to optimize performance and enhance security; and
- Speed -- dedicated servers can reduce response time and increase
processing speed of the customer's web site, allowing for faster access
to the web sites information and services and an improved experience for
the end-user.
As our customer base continues to migrate from shared hosting to more
sophisticated, higher margin services such as dedicated hosting, we believe our
average revenues per customer will continue to increase.
Applications Hosting. Our applications hosting services allow our
customers to outsource to us the deployment, configuration, hosting, management
and support of various software applications. Our applications hosting services
allow our customers to deploy a software application more quickly and with
reduced up-front costs. In addition, many small and medium-sized businesses do
not have the internal technical resources to support multiple software
applications. We therefore believe that outsourcing these functions to us is a
desirable and increasingly preferred alternative for these businesses. The types
of applications we host for our customers include collaboration tools, business
tools, mail-service tools, and e-commerce applications. Currently, the
applications we host consist primarily of Microsoft Exchange Server, Office
Server Extension and various e-commerce and security products.
Consulting Services. Our consulting and professional services provide
assistance to customers with unique requirements. These services include:
- web site design and re-modeling or enhancement of existing sites to
optimize performance;
- e-commerce enabling;
- system configuration and integration; and
- provisioning of customized applications.
Our consulting engagements typically range from a few hours to a few days
depending upon the complexity of the services needed. Because many of our
customers are new to the Internet, we believe these services are critical to the
success of our customers and are necessary for us to be a complete hosting
services provider. Most of the services are billed on an hourly basis and are
pre-packaged and priced in standard blocks.
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Pricing
We sell our services under contracts which typically range from three
months to two years in length. We typically require payment for the full
contract amount at the initiation of the service. Our web site hosting offerings
and prices for new installations as of February 29, 2000 are generally described
in the table below.
<TABLE>
<CAPTION>
MONTHLY
SERVICE TYPE SERVICE LEVEL SET-UP FEE FEE(1)
- ------------ ----------------------- ------------------- ---------------
<S> <C> <C> <C>
Shared Hosting Services............ Feature Plan $40.00 $19.95-$29.95
$40.00 $39.95-$49.95
Feature Plus
$149.95-$199.95 $149.95-$199.95
Business Plan
$349.95-$699.95 $399.95
Enterprise Plan
Dedicated Hosting Services......... Basic Business $599.00-$699.00 $499.00
$699.00-$899.00 $799.00
Select Business
$1,199.00-$1,399.00 $999.00
Select Business Plus
$2,299.00-$2,499.00 $1,499.00
Corporate Business
$2,799.00-$2,999.00 $1,999.00
Corporate Business Plus
</TABLE>
- ---------------
(1) The monthly fees listed above are for short-term contracts. We typically
offer our customers discounts for longer-term contracts.
Our applications hosting services are also provided on a monthly basis. The
fees for these services vary depending on the applications being provided.
To further simplify the purchasing process for our customers, all web
hosting service plans, including features and prices, are described on our web
site. This enables our customers to evaluate the various service offerings
before contacting one of our sales representatives, which in turn shortens our
selling cycle, reduces our customer acquisition costs and ultimately enhances
customer satisfaction by making readily available the necessary technical and
business information for choosing the appropriate service level. We upgrade our
web site regularly to provide more product information and enhanced purchasing
capabilities for our existing and prospective customers.
ADVERTISING AND MARKETING
We actively advertise and market our comprehensive hosting services to
small and medium-sized businesses in the U.S. and intend to increase the
frequency of our advertising and marketing into other countries. Our advertising
strategy is based on the primary foundation of building brand recognition and
increasing market share. In addition to our internal advertising and marketing
efforts, we have engaged the services of a leading technology advertising firm.
This firm is helping us plan, design and execute an integrated advertising and
marketing communication plan. Our current marketing campaign incorporates:
- Advertising (print, on-line, outdoor, TV and radio);
- Direct marketing by mail and telephone;
- Public relations;
- Product/service promotions;
- Product/service literature;
- Trade show/event marketing; and
- Web/electronic marketing.
Our product marketing team supports the direct advertising and marketing
activities that we conduct. The focus of this team is to develop and launch a
portfolio of products and services that will meet our customer's needs. Product
marketing activities include product strategy and definition, pricing,
competitive
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analysis, product launch, channel program management and product life cycle
management. By aligning the product marketing organization around our four key
services, we are able to focus and deliver product and services quickly.
SALES AND DISTRIBUTION
We utilize multiple sales and distribution channels in an effort to
maximize our market share. These channels include direct sales through sales
professionals, indirect sales through reseller and private-label arrangements,
co-marketing relationships, and other channels.
Direct Sales
Our direct sales efforts are carried out by two primary groups, in-bound
and out-bound sales professionals.
In-Bound Sales Force. Our in-bound sales force primarily responds to
incoming inquiries about our services. Our sales force is trained in a
relationship selling methodology that allows them to better assess the needs of
customers and to recommend tailored solutions. This methodology gives our
customers a one-on-one consultative relationship with a sales professional in
which the specific desires of the customer are appropriately addressed. As this
relationship develops and our customer grows, the salesperson can assess the
customer's needs and work to provide the customer with tailored services. The
salesperson can also carefully monitor the customer's account to make sure that
we are proactive in offering additional products and services as the customer's
needs change and expand.
Out-Bound Sales Force. Our out-bound sales force generates sales leads
through direct contact with potential customers. These sales specialists
generate new business through telemarketing, direct mail and Internet contact.
These sales specialists are also provided specific training so that they can
effectively consult and sell to potential customers.
In addition to initial training, every sales specialist must attend two
hours per week of on-going training. This training helps to educate all of our
sales personnel about our technological advances and our latest service
offerings.
Resellers and Private Label Relationships
We currently have a network of resellers consisting of businesses including
system integrators, value added hardware and software resellers, web developers
and web consulting companies and Internet service providers. These resellers
allow us to cost-effectively address a large customer audience that we could not
otherwise reach.
One of the recent additions to our reseller channel is Road Runner. Road
Runner provides Internet access through several cable companies including the
cable operations of Time Warner, Cox Cable, Media One and other cable operators.
We have agreed to provide shared and dedicated web hosting services for
customers of Road Runner under the Road Runner brand name. Road Runner has
designated us as the exclusive provider of these services, although Road Runner
may end the exclusive nature of our relationship at any time.
Other Sales and Distribution Channels
We also pursue sales through a number of other indirect channels, including
Internet marketing, customer referrals, and industry referrals.
Internet Marketing. A portion of our new customers come to us through
on-line registrations. Our Internet marketing sales programs offer an automated
on-line sales interface to potential customers. This enables our customers to
purchase services at any time from our web site.
Customer Referrals. We believe that customer referrals are an excellent
source of new customers. Many new customers have come to us through referrals
from other customers who have had a good
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relationship with us. While we reward our customers for these referrals with
discounts on their services, we also believe that our reputation for excellent
customer service leads to many of these referrals.
Industry Referrals. We received many referral customers from other
providers of Internet related services, including web designers. Web designers
and other Internet industry professionals who work with us on a regular basis
have experience and knowledge of our services that make them a valuable source
of new customers.
Customer Manager System
All of our sales efforts are supported by our customer manager system, a
proprietary system that helps us manage our entire relationship with our
customers. After a customer has initiated service with us, the customer manager
system automatically provisions the service on the web server the customer has
selected, verifies correct setup, e-mails the customer its contract and service
information, prints a label to mail the new customer information (including a 30
page manual), and queues the customer for future billing. All subsequent calls
for customer service and any invoicing are also stored inside the customer
manager system, along with usage statistics, referral information, and other
pertinent customer information. The system automatically invoices, debits
checking accounts and credit cards, generates late notices, initiates human
follow-up calls, and cancels delinquent accounts. The system also provides us
with useful information to spot troubled servers, estimate cost of customer
acquisitions by advertising medium or lead source, and spot abusive users, among
dozens of other reports.
KEY STRATEGIC RELATIONSHIPS
We have established and will continue to forge strategic relationships with
leading technology providers, including major software, hardware, development
and Internet marketing organizations, to enhance our products and services.
These relationships enable us to gain quicker access to innovative technologies,
provide more creative solutions for our customers, and allow us to offer our
customers many of the same resources that would otherwise be prohibitively
expensive for them to acquire. We are also able to build upon the research and
development and expertise of these companies in developing and launching new
products. We therefore believe that these relationships will enable us to
continue to provide our customers with the necessary tools to create, host and
maintain a successful web presence have access to sophisticated and e-commerce
and applications solutions. These relationships also provide us with unique
marketing and sales opportunities to customers to which we might not otherwise
have access.
Microsoft Corporation
We are a Microsoft Certified Solution Partner and are currently engaged in
several initiatives with Microsoft. We recently entered into a development,
license and co-marketing agreement with Microsoft. We agreed to develop software
and related materials that will enable the installation of packaged hosted
service on Microsoft's Window NT platform and have granted Microsoft a license
to the software. We will pay Microsoft five percent of the total gross revenues
that we receive from licensing or otherwise exploiting the software. In return,
Microsoft will provide us with an opportunity to be involved in beta programs
and training initiatives for Microsoft's IIS program and the Windows 2000 and
Exchange Server products. At the same time we entered into this agreement,
Microsoft invested $5.0 million in our convertible preferred stock and agreed to
invest an additional $7.5 million in our common stock at the time of this
offering. We have also issued warrants to Microsoft to purchase shares of our
common stock in connection with these investments.
We have also entered into a separate co-marketing agreement in which
Microsoft agreed to include a special offer advertisement in every FrontPage
2000 product box that is packaged for retail sale. FrontPage 2000 is a software
product which enables a company to design its web site. The agreement also
allows us to distribute a CD that includes a 45-day trial version of FrontPage
2000, packaged with our set-up software and other useful tools. Our CD is
periodically mailed to prospective customers and enables them to design a web
site and host it with us.
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Other initiatives include:
- Application Services. We have entered into an application services
agreement which establishes the framework by which we can obtain and
license various Microsoft products to use in our applications hosting
services. Under this framework we have licensed server software,
including Exchange Server and Office Server Extension. Depending upon the
specific software we license, we pay a license fee on either a per server
or per user basis.
- Microsoft Big Day. Microsoft has chosen us to be the exclusive hosting
service partner for the Microsoft Big Day Seminars, a series of seminars
that will travel to 230 cities over 6 months. The average seminar
attracts 130 small business owners. The purpose of the seminar is to
educate small business owners as to Microsoft Technology, the Internet,
how to build a web site, and how to take advantage of the new ASP model.
We will be the direct resource for web hosting, web site maintenance,
database management, and domain registrations for these seminars. Compaq
and Softchoice are also involved in this project.
- Microsoft ISP Telemarketing. Microsoft selected us as one of two
companies to use in promoting Windows 2000 shared hosting solutions to
over 1,000 Internet service providers. Microsoft will be promoting sales
of Windows 2000 and our dedicated hosting solutions to a select group of
Internet service providers beginning in the first quarter of 2000.
Network Solutions
We have entered into a strategic alliance with Network Solutions, the
premier domain registration entity. We have entered a premier program agreement
with Network Solutions whereby Network Solutions will process domain names that
we request for our customers, license access to their domain name servers and
databases to us, and promote us as a member of their program. In return, we will
use Network Solutions as our exclusive registrar of second-level domain names
and promote Network Solutions' services. We also use the services of Image-Cafe
and ID Names, both of which are owned by Network Solutions. Image-Cafe gives our
customers access to a variety of web design templates. Through ID Names, our
customers can search for and secure worldwide domain registrations, including
country code top level domain services to our customers.
In addition, Network Solutions has recently invested $4.0 million in our
convertible preferred stock and has agreed to invest $6.0 million in our common
stock at the time of this offering. We have also issued warrants to Network
Solutions to purchase shares of our common stock in connection with these
investments.
Road Runner
We have recently entered into an exclusive relationship with Road Runner.
Road Runner is a joint venture among affiliates of Time Warner Inc., Media One
Group, Inc., Microsoft, Compaq and Advance/Newhouse. Road Runner provides
high-speed Internet access through the cable television infrastructure,
including through the cable television operations of Time Warner, Media One, Cox
Communications, Bend Cable, and Cable Atlantic. One of the services Road Runner
offers to its customers is web hosting. Pursuant to our agreement, Road Runner
has engaged us as the exclusive provider of these services. These services will
be branded under the Road Runner brand, but we will be providing all web hosting
and support services. We will also provide training for the sales and support
representatives of Road Runner. Pursuant to this relationship, we have granted a
warrant to Road Runner to purchase up to 349,000 shares of our common stock
based on its achievement of certain performance criteria.
Hewlett-Packard
Hewlett-Packard manufactures hardware equipment, including servers that we
utilize in our hosting operations. We have entered into several arrangements
with Hewlett-Packard, including an Electronic
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Services Strategic Alliance Agreement. Under this agreement, Hewlett-Packard
provides us its Millennium Commerce Solution, which consists of a package of
hardware and software products. This package is marketed as a complete
e-commerce solution, with redundancy, firewall protection, web-based
configuration, complete reporting, real-time credit card processing, and high
availability services. The arrangement enables us to provide our customers with
the type of sophisticated e-commerce services that would generally be
prohibitively expensive for the small to medium-sized business. We offer this
package to our customers whose web sites and other applications run on Linux
platforms and we pay Hewlett-Packard a percentage of the fees we receive from
our customers when they use these services. In addition, Hewlett-Packard has
agreed to fund 50% of the advertising cost allocated towards this project and
provide all hardware and software at no cost to us.
Other Co-Marketing and Supplier Arrangements
We have entered into a number of other co-marketing and supplier
relationships. Some of these relationships include:
<TABLE>
<CAPTION>
CO-MARKETING RELATIONSHIPS SUPPLIER RELATIONSHIPS REFERRAL RELATIONSHIPS
- -------------------------- ---------------------- ----------------------
<S> <C> <C>
Ecommerce Exchange Allaire (Software -- Cold Fusion) International Webmasters
Netscape Communications Cisco (Hardware) Association
(At Web) Cobalt Networks (Hardware) Small Business Alliance
Stamps.com Elemental Software (Elemental World Organization of
Drumbeat 2000) Webmasters
Red Hat (Linux platform)
SoftQuad Software Inc.
(Software -- HotMetal Pro 6.0)
</TABLE>
The nature of these relationships is generally to enable us to further promote
our brand identity while seeking cost-effective access to a larger addressable
market. Some of these relationships impose mutual minimum levels of advertising
expenditure commitment.
CUSTOMERS
We began our operations in the web solutions market in September 1997. As
of February 29, 2000 we were delivering services to approximately 57,000
customer accounts. A large majority of our customers are located in the United
States and are traditional small and medium-sized businesses. Less than 10% of
our customers are in other countries with some of them being local Internet
service providers in their countries.
The number of our customer accounts grew from 10,611 at December 31, 1998
to 45,731 at December 31, 1999, a growth rate of 331% during 1999. This growth
resulted from the internal development of our customer base through advertising
and reseller efforts. We believe that a significant percentage of our new
customers switched to us from our competitors and we tend to lose relatively few
customers.
We enter into contracts with customers, the majority of which range from
three months to two years. As of February 29, 2000, we had contracts with an
average length of 12 months and approximately 63% of our contracts have a length
of at least 12 months. All contracts are typically prepaid at the time they are
initiated. If the contract is canceled in the first thirty days we give the
customer a full refund.
CUSTOMER SERVICE AND SUPPORT
We believe customer service and support is critical to our future success
and growth. We offer superior customer service by understanding the technical
requirements and business objectives of our customers and by fulfilling their
needs proactively on an individual basis. Our customer service staff is focused
on direct and indirect customer service and support. We provide customer support
24 hours a day, seven days a week, 365 days a year, and have developed a
customized, life-cycle support management approach to our operations.
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In servicing and supporting our customers, we utilize a number of
sophisticated automated systems, including a problem resolution and
trouble-ticketing system, an enterprise system monitoring platform,
sophisticated telephone system, on-line trouble management system, and workforce
management system. We also conduct customer satisfaction surveys on a regular
basis to help us improve our support and product offerings. We believe that our
approach to customer service and our ability to respond rapidly to customer
needs provides us with a significant competitive advantage.
NETWORK AND TECHNOLOGY INFRASTRUCTURE
Our high performance server network is designed to provide superior
availability and reliability for our customers' hosting operations. The network
currently consists of a single data center in Atlanta connected by a high
performance network to the Internet. Within the data center, a virtual
local-area-network provides redundant, high-speed internal connectivity.
Data Centers
Our two data centers are secure, redundant, and high-speed hosting
facilities. Due to the current growth of our business, we opened our second data
center in Atlanta in March 2000. As with our first data center, the new data
center is in close proximity to all major carrier network centers. This new data
center is a secure, redundant, fault tolerant, high-speed network capable of
supporting any of the current and future products we plan to deploy. We maintain
two backup systems for each component of the hosting process ranging from backup
servers to multiple access lines. Additionally, we have purchased several power
generators to ensure that even in the event of a power failure, our facilities
will continue to operate. Our server computer rooms have cooling and fire
suppression systems. We remove all tape backups to a remote facility for storage
in a fireproof facility. We also have a highly trained and experienced technical
staff that continually monitors the operations of the network and servers on a
24x7x365 basis through our network operations center. We plan to have third data
center in the western U.S. in the next 12 months and may consider opening a data
center in Europe in the future.
Customer Load Balancing
We maintain a customer ratio on our shared servers that allows quick access
to our shared customers' web sites, even under heavy loads. More importantly, as
our customer's web sites become more interactive, our customer ratio will allow
the web server to handle the additional loads without further hardware
investment. We believe that this future planning will offer significant
advantages over competitors who have higher customer ratios and central
processing unit utilization. We believe these competitors will have to purchase
additional hardware and move customers onto multiple web servers as the sites
become more interactive, and thus more central processing unit intensive.
Proprietary Technology
We have developed various proprietary technologies that address the
back-end processing and customer interface components of our services, allowing
customers to order, change and manage their web hosting accounts easily
regardless of their level of technical expertise. Our auto-provision technology
is designed to let customers make modifications to their site from the Internet
without having to contact one of our support staff members. For example, we
provide customers with the ability to change passwords, protect specific
directories, and create database sources without interacting with one of our
representatives. We also provide graphical statistics free to all customers.
These statistics provide detailed reports on web site usage, including
categories such as top referring sites, number of unique web hits, origin of web
hits, and periods of highest usage. In sum, our proprietary technology allows us
to provide flexibility to our customers and help them create the services they
need.
Our proprietary technology also results in greater operational efficiency
for us. We have developed innovative billing technology that simplifies the
accounting process and leads to effective cash management.
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Connectivity
We utilize multiple DS-3 connections to the Internet. Our data centers are
provisioned directly off Packet of Sonet interconnections to the major Internet
carriers. Our new facility opened in March 2000 with multiple OC3 connections,
and we are planning for the addition of multiple OC12 connections in the next
two months.
Our high-speed network and high-speed Internet backbone is designed to have
sufficient capacity to assure that our customers' web site traffic is processed
as quickly as possible. By utilizing top tier connectivity, we are able to offer
highly resilient, redundant, and high-speed connectivity between the Internet
and our data centers.
Location Advantage
An important component of our connectivity is our Atlanta location. We use
multiple connectivity providers, including UUnet, Qwest, and Digex, to prevent
any single failure point. We are in the process of adding another connectivity
provider to build in further redundancy.
Our proximity to our connectivity providers provides us with several
benefits. First, it enhances the connection speed to the Internet as the
distance to the providers has been reduced. Second, the cost of connecting to
our connection points of our major providers is minimized. Third, we are able to
add capacity to our connections to Internet access providers more quickly as our
needs expand. We therefore believe that our location provides us with a
competitive advantage over hosting companies located in remote locations,
relative to major Internet connection points. These competitors may experience
delays in adding capacity to handle increased demand and will probably pay
premiums to have the capacity delivered to their locations.
Network Operations Center
Our Atlanta network operations center is fully staffed 24-hours a day,
seven-days-a-week with technical experts in Windows NT and Linux operating
platforms. The network operations center personnel monitor each piece of
equipment, including routers, switches, and servers. The design and systems used
in the network operations center allows our systems engineers and administrators
and support staff to be promptly alerted to problems. We have documented
procedures for rapidly resolving any technical problems that arise. The network
operations center and our customer care center are fully integrated and have
documented communication and escalation procedures. Our network operations
center is also responsible for monitoring all Internet and communication
connections to make sure they are functional and properly loaded.
Network Security
Our network incorporates host-based security with Cisco router access
control lists, as well as SecurID token-based authentication. In addition to
these physical security measures, we have a formal security policy in place,
including employee training, that governs all facets of our business and
guidelines governing internal and external access to information housed in our
network system.
COMPETITION
The markets in which we compete are highly competitive. Because there are
no substantial barriers to entry, we expect that we will face competition from
both existing competitors and new market entrants in the future. We believe that
participants in these markets must grow rapidly and achieve a significant
presence to compete effectively. We believe that the primary competitive factors
determining success in our markets include:
- Technical expertise in developing advanced web hosting solutions;
- Internet system engineering and technical expertise;
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- Quality of service, including speed, network capability, scalability,
reliability, security and functionality;
- Brand name recognition;
- Competitive pricing;
- Ability to maintain and expand distribution channels;
- Customer service and support;
- Broad geographic presence;
- A complete portfolio of services and products;
- Timing of introductions of new and enhanced services and products;
- Network security and reliability;
- Financial resources; and
- Conformity with industry standards.
As a developing company, we may lack the financial and other resources,
expertise or capabilities to capture increased market share in this environment
in the future.
Our current and prospective competitors include:
- Web site hosting and related services providers, including Digex
Corporation, Globix Corporation, Interliant, Inc. Data Return Corp.,
Navisite, Inc. and USinternetworking, Inc. and a large number of local
and regional hosting providers;
- Application-specific hosting service providers such as Critical Path;
- Co-location providers such as AboveNet Communications, Inc., Exodus,
Digital Island and Frontier GlobalCenter Inc.;
- National and regional Internet service providers, including Concentric
Network Corporation, EarthLink, Inc., PSINet Inc., UUNet, and Verio,
Inc.;
- Customized Internet application service providers, including AppNet
Systems, Inc., CORIO, Inc., USinternetworking, Inc. and USWeb/CKS;
- Application developers and Internet application software vendors,
including Open Market, Inc., DoubleClick Inc. and broadcast.com inc.;
- Large system integrators and information technology outsourcing firms,
including Electronic Data Systems Corporation and International Business
Machines Corporation;
- Global telecommunications companies, including AT&T Corp., MCI WorldCom,
Inc. and Sprint Corporation, and regional and local telecommunications
companies, including MediaOne Group, Inc. and regional Bell operating
companies, such as Bell Atlantic Corporation; and
- Computer hardware providers, including Dell Computer Corporation,
Gateway, Inc., Compaq Computer Corporation and Micron Technology.
Although it is impossible to quantify our relative competitive position in
our market, many of these 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 we have. As a result, many 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 acquisitions, consolidation
opportunities and other opportunities more readily, devote greater resources to
the marketing and sale of their services and adopt more aggressive pricing
policies than we can. In addition, these competitors have entered and will
likely
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continue to enter into joint ventures or consortia to provide additional
services competitive with those provided by us.
INTELLECTUAL PROPERTY RIGHTS
We rely on a combination of trademark, service mark, copyright and trade
secret laws and contractual restrictions to establish and protect our
proprietary rights and promote our reputation and the growth of our business. We
do not own any patents that would prevent or inhibit competitors from using our
technology or entering our market although we intend to apply for patent
protection on certain aspects of our technology and business. While it is our
practice to require all of our employees to enter into agreements containing
non-disclosure, non-competition and non-solicitation restrictions and covenants,
and while our agreements with some of our customers and suppliers include
provisions prohibiting or restricting the disclosure of proprietary information,
we can not assure you that these contractual arrangements or the other steps
taken by us to protect our proprietary rights will prove sufficient to prevent
misappropriation of our proprietary rights or to deter independent, third-party
development of similar proprietary assets. In addition, we provide our services
in other countries where the laws may not afford adequate protection for our
proprietary rights.
We license or lease many technologies used in our Internet application
services. Our technology suppliers may become subject to third-party
infringement claims which could result in their inability or unwillingness to
continue to license their technology to us. The loss of certain of our
technologies could impair our ability to provide services to our customers or
require us to obtain substitute technologies of lower quality or performance
standards or at greater cost. We expect that we and our customers increasingly
will be subject to third-party infringement claims as the number of web sites
and third-party service providers for web-based businesses grows. Although we do
not believe that our technologies or services otherwise infringe the proprietary
rights of any third parties, we cannot assure you that third parties will not
assert claims against us in the future or that these claims will not be
successful. Any infringement claim as to our technologies or services,
regardless of its merit, could be time-consuming, result in costly litigation,
cause delays in service, installation or upgrades, adversely impact our
relationships with suppliers or customers or require us to enter into royalty or
licensing agreements.
GOVERNMENT REGULATION
We are not currently subject to direct federal, state or local government
regulation, other than regulations applicable to businesses generally. There is
currently only a limited body of laws and regulations directly applicable to
businesses that provide access or commerce on the Internet.
The "Digital Millennium Copyright Act" became effective in October 1998 and
provides a limitation on liability of on-line service providers for copyright
infringement for transmitting, routing or providing connections, transient
storage, caching or storage at the direction of a user, if the service provider
had no knowledge or awareness that the transmitted or stored material was
infringing and meets certain other conditions. Since this law is new and does
not apply outside of the United States, we are unsure of how it will be applied
to limit any liability we may face in the future for any possible copyright
infringement or copyright-related issues. This new law also requires service
providers to follow "notice and take-down" procedures and to meet other
conditions in order to be able to take advantage of the limitation on liability.
We have recently implemented the procedures and believe we meet the conditions
to qualify for the protection provided by the Digital Millennium Copyright Act.
Moreover, our customers are subject to an acceptable use policy which prohibits
them from transmitting, storing or distributing material on or through any of
our services which, in our sole judgment is (1) in violation of any United
States local, state or federal law or regulation, or infringes on the copyright
of a third party (2) fraudulent on-line marketing or sales practices or (3)
fraudulent customer information, including identification and payment
information. Although this policy is designed to promote the security,
reliability and privacy of our systems and network, we cannot be certain that
our policy will accomplish this goal or effectively limit our liability.
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Despite enactment of the Digital Millennium Copyright Act, the law relating
to the liability of on-line services companies and Internet access providers for
information carried on or disseminated through their networks remains largely
unsettled. It is possible claims could be made against on-line services
companies and Internet access providers under both United States and foreign law
for defamation, obscenity, negligence, 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 on-line services companies and Internet access providers are
currently pending.
Although sections of the Communications Decency Act of 1996 that 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, in
October 1998, Congress passed the Child Online Privacy Protection Act, which
sought to make it illegal to communicate, for commercial purposes, information
that is harmful to minors. In February 1998, the United States District Court
judge issued a preliminary injunction against the enforcement of the Child
Online Protection Act on constitutional grounds. An appeal from the District
Court's ruling is pending. While we cannot predict the ultimate outcome of this
proceeding, even if the Child Online Protection Act is ruled unconstitutional,
similar laws may be proposed, adopted, or upheld in the future. 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
Communications Decency Act could subject us and/or our customers to potential
liability, which in turn could harm our business. The adoption of any of these
types of laws or regulations might decrease the growth of the Internet, which in
turn could decrease the demand for our services or increase our cost of doing
business or in some other manner harm our business.
The Children's Online Privacy Protection Act of 1998, and the rules
promulgated by the Federal Trade Commission implementing the provisions of the
act, regulate the collection, use or disclosure of personally identifiable
information from and about children on the Internet by operators of web sites or
on-line services directed to children, and operators of general audience web
sites who knowingly collect information from children. The act and the FTC rules
require the operators of such web sites and on-line services to (1) provide
notice of its information collection, use, and disclosure practices, (2) obtain
parental consent prior to any collection, use or disclosure of personal
information collected from children, (3) provide an opportunity for parental
review of personal information collected from children and the right to prohibit
further use or maintenance of that information, (4) not condition a child's
participation in any on-line activity on disclosing more personal information
than is necessary, and (5) to establish and maintain reasonable procedures to
protect the confidentiality, security and integrity of personal information
collected from children. An operator will be deemed to be in compliance with the
requirements of the act and the FTC rules if the operator complies with any
industry self-regulatory guidelines approved by the FTC. The FTC is authorized
to bring enforcement actions and impose civil penalties for violations of the
FTC rule. We may operate web sites that are directed to children on behalf of
some of our customers. The Children's Online Privacy Protection Act and the FTC
rules implementing it will go into effect on April 21, 2000. We have not yet
taken affirmative steps to adopt or comply with any FTC-approved industry
self-regulatory guidelines.
In February 1995, the European Union adopted Directive 95/46/EC on the
protection of individuals with regard to the processing of personal data and on
the free movement of such data. Pursuant to this directive the 15 member
countries of the European Union are required to pass specific privacy protection
legislation by October 1998 regarding the collection and use of personally
identifiable information. One section of the directive requires member states to
ensure that personally identifiable information is only transferred outside of
the EU to countries with adequate privacy protection. In response to the
directive, the U.S. Department of Commerce has proposed seven "Safe Harbor"
principles designed to serve as guidelines for United States companies. In light
of the "Safe Harbor" principles, the EU announced in the fall of 1998 that it
would avoid disrupting the exchange of information with the United States by
allowing its member countries to transfer information to the U.S. so long as it
continues good faith negotiations with the EU. However, if an EU member country
determines that a web site administered by a U.S. company has a significant
presence in the country and is in violation of the Safe Harbor Principles, it
may
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nonetheless prosecute and sanction the U.S. company through its regulatory
agency for improper data collection. Most EU member countries, including the
United Kingdom, have enacted legislation consistent with the directive that has
forced some U.S. companies to take actions to comply with the directive.
Although we currently provide services over the Internet in the United Kingdom
and other countries that are members of the EU, we have not taken affirmative
steps to comply with the "Safe Harbor" principles announced by the Department of
Commerce.
While there currently relatively are few laws or regulations directly
applicable to the Internet or to applications hosting providers, due to the
increasing popularity of the Internet and Web-based applications it is likely
that such laws and regulations may be adopted. These laws may cover a variety of
issues including, for example, user privacy and the pricing, characteristics and
quality of products and services. The adoption or modification of laws or
regulations relating to commerce over the Internet could substantially impair
the future growth of our business or expose us to unanticipated liabilities.
Moreover, the applicability of existing laws to the Internet and Internet
application service providers is uncertain. These existing laws could expose us
to substantial liability if they are found to be applicable to our business. For
example, we provide services over the Internet in many states in the United
States and in the United Kingdom, and we facilitate the activities of our
customers in those jurisdictions. As a result, we may be required to qualify to
do business, be subject to taxation or be subject to other laws and regulations
in these jurisdictions, even if we do not have a physical presence or employees
or property there. The application of existing laws and regulations to the
Internet or our business, or the adoption of any new legislation or regulations
applicable to the Internet or our business, could materially adversely affect
our financial condition and operating results.
EMPLOYEES
As of March 3, 2000, we had 390 employees, of which 112 were in sales,
distribution and marketing, 14 were in programming, 217 were in customer service
and technical support and 47 were in finance and administration. None of our
employees is represented by a labor union, and management believes that employee
relations are good.
FACILITIES
Our executive offices and new data center are located in Atlanta, Georgia
and consist of approximately 72,400 square feet leased pursuant to an agreement
that expires in July 2009. We also have an option for an additional 36,200
square feet of space in the same building. Our original data center and our
network operations center are located in a nearby building in Atlanta and
consists of approximately 17,000 square feet leased pursuant to agreements that
expire in the year 2009. We also lease a facility in Amsterdam that serves as a
sales and customer service center for our European operations.
In addition, we are currently planning to lease an additional facility in
the western United States that will serve as a redundant network operations
center. This facility should be open and operational in the latter part of 2000.
LEGAL PROCEEDINGS
We are not currently a party to any legal proceedings that we believe are
likely to have a material adverse affect on our results of operation or
financial condition.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY EMPLOYEES
The following contains information concerning our directors and executive
officers as of March 10, 2000, each of whom will continue to serve in the
following capacities for both us and our operating subsidiary after this
offering:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS:
Kenneth Gavranovic......................... 29 Chairman of the Board, President and Chief
Executive Officer
Rahim Shah................................. 38 Executive Vice President and Director
David N. Gill.............................. 45 Executive Vice President, Chief Financial
Officer and Director
H. Christopher Covington................... 50 Senior Vice President, General Counsel and
Secretary
Clyde A. Heintzelman....................... 61 Director
Andrew E. Jones............................ 36 Director
Gregg A. Mockenhaupt....................... 30 Director
William E. Whitmer......................... 66 Director
OTHER KEY EMPLOYEES:
Maryjane Stevens........................... 43 Senior Vice President, Finance
Robert Malally............................. 29 Chief Technology Officer
Richard Coleman............................ 34 Vice President of Engineering
Chris Rogers............................... 27 Vice President of Sales, North America
E. Dean Holland............................ 46 Vice President of Operations
Fabrice Klein.............................. 32 Vice President of Corporate Development
</TABLE>
EXECUTIVE OFFICERS AND DIRECTORS
Kenneth Gavranovic has served as our Chairman of the Board of Directors
since March 2000, President and Chief Executive Officer since December 1999, a
director since September 1997, and is one of our co-founders. During his ten
years of technology related entrepreneurial experience, Mr. Gavranovic served as
Vice President with Worldwide Internet Publishing Corporation, a web hosting
company that he co-founded, from 1995 to 1997. From 1992 to 1994, he served as
Vice President with Interactive Media Solutions, a company he founded to allow
international callers to arbitrage the difference between long-distance calling
rates in the United States and abroad through the use of his exclusively
developed proprietary software.
Rahim Shah has served as our Executive Vice President since October 1999
and a director since December 1999. Mr. Shah previously served as the Director
of Enterprise Resource Management and Director of Mass Market and Business
Customer Operations for the Internet division of BellSouth from November 1997 to
October 1999. From November 1996 to November 1997, he served as the Director of
Customer Service and Sales for the Long Distance Division of Frontier
Corporation. From 1989 to 1996, Mr. Shah served in various capacities with MCI
Communication Corporation, including Managing Director of Quality Management
Consulting. Mr. Shah received a B.S. in Civil Engineering and an MBA in Finance
and Marketing from Southern Illinois University at Edwardsville.
David N. Gill has served as our Executive Vice President, Chief Financial
Officer and a director since March 2000. Mr. Gill served as Chief Financial
Officer from July 1996 to March 2000 and as Chief Operating Officer from
February 1997 to March 2000 of Novoste Corporation, a publicly traded medical
device company. From August 1995 to June 1996, he served as Chief Financial
Officer of SPEA Software AG prior to its sale to Diamond Multimedia, Inc. From
1992 to 1995, Mr. Gill served as President and director of Dornier Medical
Systems, Inc., a medical device company and a member of the Daimler Benz
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Group, and from 1990 to 1992 he served as Dornier's Vice President of Finance.
Mr. Gill received an M.B.A. from Emory University and a B.S. degree in
Accounting from Wake Forest University, and is a Certified Public Accountant.
H. Christopher Covington has served as our Senior Vice President, General
Counsel and Secretary since February 2000. From October 1990 to February 1999,
Mr. Covington served in various capacities for Vanstar Corporation, a publicly
traded seller of computer products and services. These capacities included
Senior Vice President, General Counsel and Secretary from August 1994 to
February 1999, Vice President from March 1993 to August 1994 and Assistant
General Counsel from November 1990 to August 1994. Mr. Covington received a B.A.
degree in Political Science from the University of California at Santa Barbara,
a J.D. from the University of the Pacific, McGeorge School of Law and an L.L.M.
from the University of the Pacific, McGeorge School of Law.
Clyde A. Heintzelman has served as a director since December 1999. Mr.
Heintzelman has served as the President of Net2000 Communications, Inc., a
publicly traded telecommunications company, since November 1999. Mr. Heintzelman
has been a director of Net2000 since March 1997. From December 1998 to November
1999, Mr. Heintzelman served as President and Chief Executive Officer of SAVVIS
Communications Corporation, a national Tier 1 Internet service provider. From
May 1995 to September 1997, he was President and Chief Operating Officer of
DIGEX Incorporated, an Internet service provider providing service to markets
among the 50 largest metropolitan areas in the U.S. In mid-1997, DIGEX was sold
to Intermedia Communications, Inc., a national CLEC, and from October 1997 to
November 1998, he served as a retained business consultant to Intermedia. In
addition, from 1964 to 1992, Mr. Heintzelman was in several executive capacities
with Bell Atlantic Corporation and its predecessor companies (AT&T). Mr.
Heintzelman also serves on the boards of directors of Optelecom, Inc., a fiber
optic device company, and SAVVIS Communications. Mr. Heintzelman received a B.A.
in Marketing from University of Delaware and attended graduate school at
Wharton, the University of Pittsburgh, and the University of Michigan.
Andrew E. Jones has served as a director since December 1999. Mr. Jones is
a General Partner of Boulder Ventures Limited, a venture capital investing firm.
Prior to joining Boulder Ventures in January 1999, Mr. Jones was an Investment
Analyst with Grotech Capital Group from March 1996 through December 1998. Prior
to joining Grotech, Mr. Jones was a manager with the telecommunications practice
of Deloitte & Touche Consulting Group from 1992 through 1996. Prior to Deloitte
and Touche, Mr. Jones was with Andersen Consulting from 1990 through 1992. Mr.
Jones currently serves on several private company boards of directors. Mr. Jones
received a B.S. in Electrical Engineering from Cornell University, a Master of
Electrical Engineering from Cornell University, and an MBA from the University
of Chicago.
Gregg A. Mockenhaupt has served as a director since December 1999. Since
March 1996, Mr. Mockenhaupt has served as a Managing Director of Crest
Communications Holdings, LLC, a private investment firm that was formed in 1996
to focus on communications-related investments and which is the manager of Crest
Communications Partners, L.P. and Crest Entrepreneurs Fund, L.P. Prior to
joining Crest in March 1996, Mr. Mockenhaupt was an Associate in the Mergers &
Acquisitions Group of Smith Barney Inc. from June 1994 to March 1996. Mr.
Mockenhaupt currently serves on several private company boards of directors. Mr.
Mockenhaupt received a B.S. in Economics from the Wharton School of the
University of Pennsylvania.
William E. Whitmer has served as a director since March 2000. He retired in
1992 as a Certified Public Accountant and management consultant. From 1989 until
his retirement in 1992, he was a partner of Ernst & Young, having served as the
Associate Managing Director of that firm's southern United States management
consulting group. From 1968 through 1989, Mr. Whitmer was a partner of Arthur
Young & Company, having served as the Managing Partner of its East and Southeast
United States regions of the management consulting practice from 1975 through
1989. Mr. Whitmer served on the board of directors of Novoste Corporation, a
medical device company, since October 1992. Mr. Whitmer received a B.A. in
Economics from Denison University.
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<PAGE> 52
OTHER KEY EMPLOYEES
Maryjane Stevens has served as our Senior Vice President, Finance since
March 1999 and as a director from December 1999 to March 2000. From August 1996
to February 1999, she was employed by Vanstar Corporation in the roles of
Finance Director, Mergers and Acquisitions and Internal Audit Director. Prior to
her employment with Vanstar, from 1983 to 1994, Ms. Stevens served in a number
of financial positions with Digital Equipment Corporation. Ms. Stevens received
a B.S. in Accounting from Bentley College in Waltham, Massachusetts.
Robert Malally has served as our Chief Technology Officer since February
2000. From March 1999 to February 2000 he was employed by Sprint Paranet as
Chief Network Architect. From March 1997 to March 1999, Mr. Malally served as
Senior WAN Technical Consultant for Sun Data, Inc. In addition, from December
1996 to March 1997, he was employed by Universal Data Consultants as WAN
technical consultant and from August 1994 to December 1996, Mr. Malally was
employed by IBM as a network specialist. Mr. Malally received a B.S. in Applied
Physics from Auburn University.
Richard Coleman has served as our Vice President of Network Operations
since January 1999, and is responsible for managing the Company's network of
UNIX web servers. From October 1994 to January 1998, Mr. Coleman served as the
Network Administrator at the Georgia Institute of Technology. He has also been
employed as a Software Engineer at General Electric Aerospace. Mr. Coleman
received a B.S. and M.S. in Applied Mathematics from Georgia Institute of
Technology.
Chris Rogers has served as our Vice President of Sales since January 2000
and as our Director of Sales from May 1999 to January 2000. Mr. Rogers joined
Interland as a sales representative in October 1998. Prior to that time, Mr.
Rogers served as the director of sales for Profession Management Technologies,
Inc., a technology consulting firm providing network solutions to law firms from
August 1996 to October 1998. Mr. Rogers had previously served as an independent
technology consultant to law firms. Mr. Rogers received a B.A. from Georgia
Southern University.
E. Dean Holland has served as our Vice President of Operations since
December 1999. Prior to joining us, Mr. Holland was employed by the Internet
division of BellSouth Corporation from October 1995 to December 1999. At
BellSouth.net, Mr. Holland served as the Senior Manager of Provisioning
Engineering from February 1997 to December 1999 and the Network Operation Center
Manager from 1995 to 1997. From 1975 to 1995, Mr. Holland was employed in
various capacities with The Southern Company, including as the Manager of the
Network Operations Center from 1991 to 1995. Mr. Holland attended DeKalb
Community College in Atlanta, Georgia and has received numerous industry
certifications.
Fabrice Klein has served as our Vice President of Corporate Development
since March 2000. Prior to joining Interland, Mr. Klein was a Vice President in
Chase H&Q's Global Telecom and Media group where he focused on the Internet
sector. Prior to joining Chase Securities in 1998, Mr. Klein managed the
development of Internet banking services in Chase.com's Electronic Commerce
group. From 1994 to 1997, Mr. Klein was with Coopers & Lybrand Consulting,
focusing on Internet strategy for clients in the media and telecom industries.
Mr. Klein previously served in the French Army as a Lieutenant. Mr. Klein
graduated with honors from the Institut Superieur de Gestion in Paris, France,
and received an MBA from the Yale School of Management.
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<PAGE> 53
EXECUTIVE COMPENSATION
The table below provides information concerning the total compensation of
our Chief Executive Officer who is the only executive officer whose total salary
and bonus for 1999 exceeded $100,000. In addition, we have provided information
for our Executive Vice President who commenced employment on October 26, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------- ------------------------
OTHER
ANNUAL RESTRICTED SECURITIES ALL OTHER
COMPEN- STOCK UNDERLYING COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS SATION AWARD(S) OPTIONS SATION
--------------------------- ---- -------- ------- ------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Kenneth Gavranovic,........... 1999 $142,154 $23,190 -- -- 300,000 --
Chief Executive Officer and
President
Rahim Shah,................... 1999 $ 25,385 -- $12,000(1) -- 175,000 --
Executive Vice President
</TABLE>
- ---------------
(1) Mr. Shah's employment with us commenced on October 26, 1999. We paid Mr.
Shah a signing bonus of $12,000.
The following table shows information concerning stock option grants to
each of the named officers during the fiscal year ended December 31, 1999.
STOCK OPTION GRANTS IN 1999 (1)
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(2)
------------------------------------------------------- ---------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO
UNDERLYING EMPLOYEES
OPTION IN FISCAL EXERCISE EXPIRATION
NAME GRANTED YEAR PRICE DATE 5% 10%
---- ---------- ----------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Kenneth Gavranovic........... 300,000(3) 10.7% $3.00 7/1/09 $566,005 $1,434,368
Rahim Shah................... 75,000(3) 2.7 3.00 11/1/09 141,501 358,592
100,000(4) 3.6 3.00 12/1/09 188,668 478,123
</TABLE>
- ---------------
(1) Options to purchase 2,815,000 shares of our common stock were granted in the
year ended December 31, 1999. The options expire ten years after the date of
the grant.
(2) Potential realizable value is based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until expiration of the ten-year term. These numbers are calculated
based on SEC requirements and do not reflect our projection or estimate of
future stock price growth. Potential realizable values are computed by
multiplying the number of shares of common stock subject to a given option
by the fair market value of the common stock on the date of grant,
determined to be $3.00 as of July 1, 1999, November 1, 1999, and December 1,
1999 and assuming that the aggregate stock value derived from that
calculation compounds at the annual 5% or 10% rate shown in the table for
the entire ten-year term of the option and subtracting from that result the
aggregate option exercise price. Actual realizable value, if any, will be
dependent on the future price of the common stock on the actual date of
exercise, which may be earlier than the stated expiration date.
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<PAGE> 54
(3) These options vest in 33 1/3% increments beginning at the earlier of July 1,
2000 or the closing of this offering and continuing thereafter on the
anniversary date of the earlier of July 1, 2000 or closing of this offering.
(4) These options vest beginning one year from the date of grant in 33 1/3%
increments on the anniversary of the date of grant.
The following table shows information concerning stock options held by each
of the named officers at December 31, 1999. There were no option exercises in
1999.
1999 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1999 AT DECEMBER 31, 1999(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Kenneth Gavranovic........................... -- 300,000 -- $840,000
Rahim Shah................................... -- 175,000 -- 490,000
</TABLE>
- ---------------
(1) Calculated using $5.80 per share, the deemed fair market value of our common
stock at December 31, 1999.
STOCK OPTION PLANS
Stock Incentive Plan
In July 1999, we adopted our Stock Incentive Plan to provide our key
employees, officers, directors, contractors and consultants an opportunity to
own our common stock and to provide incentives for these persons to promote our
financial success. Awards under the Stock Incentive Plan may be structured in a
variety of ways, including as "incentive stock options" as defined in Section
422 of the Internal Revenue Code, as amended, non-qualified stock options,
restricted stock, stock awards, stock appreciation rights, and performance share
awards. Incentive stock options may be granted only to our employees (including
officers). Other awards may be granted to any person employed by or performing
services for us, including directors and consultants. The Stock Incentive Plan
provides for the issuance of options and awards for up to 7,000,000 shares of
common stock.
Incentive stock options are also subject to certain limitations prescribed
by the Internal Revenue Code, including the requirement that such options may
not be granted to employees who own more than 10% of the combined voting power
of all classes of our voting stock, unless the option price is at least 110% of
the fair market value of the common stock subject to the option, and may be
exercised for no more than five years from the grant date. Our board of
directors (or a committee designated by the board) otherwise generally has
discretion to interpret and administer the plan and to set the terms and
conditions of options and other awards, including the term, exercise price and
vesting conditions, if any, to select the persons who receive such grants and
awards.
As March 10, 1999 we had granted options to purchase an aggregate of
4,047,500 shares of common stock under the Stock Incentive Plan, including
options for 300,000 shares to Mr. Gavranovic, 175,000 shares to Mr. Shah,
450,000 shares to Mr. Gill, and 200,000 shares to Mr. Covington. The options to
Mr. Gavranovic and Mr. Shah are exercisable at $3.00 per share and the options
to Mr. Gill and Mr. Covington are exercisable at $5.80 per share.
Employee Stock Purchase Plan
Prior to the closing of the offering, we intend to adopt an Employee Stock
Purchase Plan under which qualified employees will have the right to purchase
shares of our common stock on a quarterly basis through payroll deductions by
the employee. The plan will be administered by the compensation committee of our
board of directors. The price to be paid for a share of common stock under the
plan is 85% of the fair market value of a share of common stock at the beginning
or the end of each quarterly purchase period, whichever is lower. The amount of
any participant's payroll deductions or cash contributions made pursuant to the
stock purchase plan may not exceed 10% of the participant's total
51
<PAGE> 55
annual compensation and may not exceed $25,000 per year. Up to 500,000 shares of
common stock may be issued under the plan. The plan may be terminated or amended
by the board of directors. No amendment may, however, disqualify the stock
purchase plan under Section 423 of the Internal Revenue Code or without the
consent of a participant, materially impair the rights of the participant with
respect to any shares of common stock previously purchased for him or her under
the plan.
Under applicable tax rules, no income will be recognized by a participant
when shares are acquired pursuant to the plan. With some exceptions, when a
participant disposes of such shares, he or she will recognize a capital gain
equal to the difference between the acquisition price and the amount realized on
such disposition. We will not be allowed a deduction with respect to any shares
transferred to a participant pursuant to the plan.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with Kenneth Gavranovic, our
Chairman, President and Chief Executive Officer; Rahim Shah, our Executive Vice
President; David N. Gill, our Executive Vice President and Chief Financial
Officer; and H. Christopher Covington, our Senior Vice President, General
Counsel and Secretary. Each agreement is for a three-year term. In addition to
the specific terms of each agreement that are described below, each of the
agreements provides for participation in benefits of the type normally provided
to our key executives, including participation in our Stock Incentive Plan.
Specific terms of each executive's employment agreement are as follows:
- Mr. Gavranovic's agreement, ending December 2, 2002, provides for a base
salary of $250,000. In addition, Mr. Gavranovic's agreement provides for
an annual stock option bonus for a minimum number of shares of common
stock equal to $200,000 divided by the fair market value of our common
stock on the date of grant.
- Mr. Shah's agreement, ending November 1, 2002, provides for an initial
base salary of $150,000, which was increased to $200,000 effective March
1, 2000. Mr. Shah's agreement provides for an annual bonus of up to 15%
of his base salary, and in connection with the commencement of his
employment, Mr. Shah was also granted an option for 175,000 shares of our
common stock.
- Mr. Gill's agreement, ending February 16, 2003, provides for an initial
base salary of $250,000. Mr. Gill's agreement provides for an annual
bonus of up to 20% of his base salary, and a one-time grant of an option
to purchase 450,000 shares of our common stock.
- Mr. Covington's agreement, ending February 14, 2003, provides for an
initial base salary of $200,000. Mr. Covington's agreement provides for
an annual bonus of up to 15% of his base salary, and a one-time grant of
an option to purchase 200,000 shares of our common stock.
Under each agreement, if the executive's employment is terminated without
cause, or is terminated by either executive as a result of disability or other
good reason as described in his respective agreement, the executive will
continue to receive payment of his base salary for the greater of one year or
the unexpired portion of the term of the agreement. Each executive also has
agreed not to compete with us during the term of their respective agreements,
and for a period of one year following the termination of their employment. The
agreements contain customary proscriptions against solicitation of our employees
and the misuse of our confidential information, and contain work-for-hire
provisions addressing works, inventions or other ideas developed by each
executive during their respective terms of employment.
DIRECTOR COMPENSATION
Directors who are employees or affiliated with principal shareholders
receive no additional compensation for their services as directors. We plan to
compensate other directors as follows: $1,000 for each Board or committee
meeting attended in person, and $500 for each Board or committee meeting
attended by telephone. We reimburse all of our directors for the travel and
other expenses they incur in connection with attending Board or committee
meetings. Non-employee directors are also eligible to participate in our Stock
Incentive Plan at the discretion of the full board of directors. We have granted
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<PAGE> 56
Messrs. Heintzelman and Whitmer options to purchase 52,500 and 35,000 shares,
respectively, of our common stock at $5.80 and $9.00 per share, respectively.
These options vest monthly over the first 24 months after the date of grant.
BOARD COMPOSITION
In connection with the sale of our Series A preferred stock, all our
founding shareholders and the purchasers of the Series A preferred stock entered
into a shareholders agreement. This agreement provides for, among other things,
the nomination of and voting for a total of eight directors of Interland, as
follows:
- two representatives designated jointly by Boulder Ventures III, L.P.,
Crest Communications Partners, L.P., and Crest Entrepreneurs Fund,
L.P. -- these representatives are Messrs. Jones and Mockenhaupt;
- four representatives designated by the management of Interland -- these
representatives are Messrs. Gavranovic, Shah, Gill, and Whitmer; and
- two representatives designated by the management of Interland who are not
employees of Interland -- one of these representatives is Mr. Heintzelman
and the other representative has not been chosen.
The shareholders agreement requires each stockholder to vote all securities
over which they have voting control and to take all other necessary or desirable
action within their control to effect the preceding election of directors. The
provisions of the shareholders agreement regarding the nomination and election
of directors automatically terminate upon the closing of this offering.
Following this offering, the board of directors may be divided into three
classes, each of whose members would serve for a staggered three-year term.
Messrs. and will serve as Class I directors whose
terms will expire at the annual meeting of shareholders held in 2001. Messrs.
, and will serve as Class II
directors whose terms will expire at the annual meeting of shareholders held in
2002. Messrs. and will serve as Class III
directors whose terms will expire at the annual meeting of shareholders held in
2003.
BOARD COMMITTEES
Our board of directors has appointed an audit committee and a compensation
committee.
The audit committee will review, act on and report to the board of
directors on various auditing and accounting matters, including the
recommendation of our independent auditors, the scope of the annual audits, fees
to be paid to the independent auditors, the performance of our independent
auditors and our accounting practices. The members of the audit committee are
William E. Whitmer, Gregg A. Mockenhaupt and Andrew E. Jones.
The compensation committee will determine the salaries and benefits for our
employees, consultants, directors and other individuals compensated by our
company. The compensation committee will also administer our stock incentive
plan, including determining the stock option grants for our employees,
consultants, directors and other individuals however, stock option grants to our
executive officers will be determined by the entire board of directors. The
members of the compensation committee are Kenneth Gavranovic, Gregg A.
Mockenhaupt and Clyde A. Heintzelman.
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<PAGE> 57
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a compensation committee of our board of directors during
1999. Instead, our entire board of directors, including our present Chief
Executive Officer, who is also a director, determined the compensation of our
executive officers.
As noted above, the members of our compensation committee are now Messrs.
Gavranovic, Mockenhaupt, and Heintzelman. Mr. Gavranovic is our Chairman,
President and Chief Executive Officer. Mr. Mockenhaupt is a Managing Director of
Crest Communications Holdings, LLC, which is the manager of Crest Communications
Partners, L.P. and Crest Entrepreneurs Fund L.P., which purchased a total of
3,669,725 shares of our Series A Preferred Stock on December 2, 1999 for $8.0
million.
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<PAGE> 58
PRINCIPAL SHAREHOLDERS
The following table presents information regarding the beneficial ownership
of common stock as of March 10, 2000 by (1) each of our directors and named
executive officers; (2) each person who beneficially owns more than 5% of our
common stock; and (3) all current executive officers and directors as a group.
Beneficial ownership is determined under the rules of the Securities and
Exchange Commission.
To our knowledge, except under applicable community property laws or as
otherwise indicated, the persons named in the table have sole voting and sole
investment control with regard to all shares beneficially owned. The applicable
percentage ownership for each shareholder is based on 34,006,943 shares of
common stock outstanding as of March 10, 2000 after giving effect to the
conversion of all of our outstanding shares of convertible preferred stock into
common stock.
<TABLE>
<CAPTION>
PERCENT
BENEFICIALLY OWNED
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF SHAREHOLDERS BENEFICIALLY OWNED OFFERING OFFERING
- -------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Kenneth Gavranovic (1)...................................... 8,435,670 24.73%
Rahim Shah (2).............................................. 25,000 *
David N. Gill (3)........................................... 150,000 *
Andrew E. Jones (4)......................................... 1,605,505 4.72%
Clyde A. Heintzelman (5).................................... 13,128 *
Gregg A. Mockenhaupt (6).................................... 3,669,725 10.79%
William E. Whitmer (7)...................................... 8,750 *
Waldemar Fernandez (8)...................................... 8,585,670 25.06%
Crest Partners II, LLC (9).................................. 3,669,725 10.79%
Microsoft Corporation (10).................................. 2,806,000 8.13%
BancBoston Ventures Inc. (11)............................... 2,293,578 6.74%
All Executive Officers and Directors as a group (8 persons)
(12)...................................................... 13,974,444 40.16%
</TABLE>
- ---------------
* Less than one percent.
(1) Includes 100,000 shares of common stock issuable pursuant to options
exercisable upon the closing of this offering and within 60 days of
, 2000. Does not include an aggregate of 20,000 shares of
common stock issuable to Mr. Gavranovic's mother pursuant to options
exercisable within the 60-day period following , 2000, with
respect to which Mr. Gavranovic disclaims beneficial ownership. Does not
include an aggregate of 23,332 shares of common stock issuable to Mr.
Gavranovic's fiancee and brother, pursuant to options exercisable within
the 60-day period following , 2000, with respect to which
Mr. Gavranovic disclaims beneficial ownership. Mr. Gavranovic's address is
101 Marietta Street, Suite 200, Atlanta, GA 30303.
(2) Includes 25,000 shares of common stock issuable pursuant to options
exercisable upon the closing of this offering and within 60 days of
, 2000.
(3) Includes 150,000 shares of common stock issuable pursuant to options
exercisable upon the closing of this offering and within 60 days of
, 2000.
(4) Includes 1,605,505 shares of common stock beneficially owned by Boulder
Ventures Limited, of which Andrew E. Jones is a general partner, and with
respect to which he disclaims beneficial ownership. The 1,605,505 shares
consist of 1,513,514 shares of common stock issued to Boulder Ventures III,
L.P. and 91,991 shares of common stock issued to Boulder Ventures III
(Annex), L.P., both as a result of the mandatory conversion of Series A
Convertible Participating Preferred Stock, pursuant to a Stock Purchase
Agreement dated December 2, 1999. Boulder Ventures Limited serves as the
general partner of both Boulder Ventures III, L.P. and Boulder Ventures III
(Annex), L.P.
(5) Includes 13,128 shares of common stock issuable pursuant to options
exercisable upon the closing of this offering and within 60 days of
, 2000.
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<PAGE> 59
(6) Includes 3,669,725 shares of common stock beneficially owned by Crest
Partners II, LLC, of which Mr. Mockenhaupt is a member, and which is the
general partner of Crest Communications L.P. and Crest Entrepreneurs Fund
L.P. with respect to which he disclaims beneficial ownership.
(7) Includes 8,750 shares of common stock issuable pursuant to options
exercisable upon the closing of this offering and within 60 days of
, 2000.
(8) Includes 250,000 shares of common stock issuable pursuant to options
exercisable upon the closing of this offering and within 60 days of
, 2000. Does not include an aggregate of 200,000 shares of
common stock owned by Mr. Fernandez' daughter, with respect to which Mr.
Fernandez disclaims beneficial ownership. Mr. Fernandez' address is 6268
Jericho Turnpike, Commack, New York 11725.
(9) The 3,669,725 shares of common stock consists of 3,566,141 shares of common
stock issued to Crest Communications Partners L.P. and 103,584 shares of
common stock issued to Crest Entrepreneurs Fund L.P., both as a result of
the mandatory conversion of Series A Convertible Participating Preferred
Stock, pursuant to a Stock Purchase Agreement dated December 2, 1999. Crest
Communications Holdings, LLC serves as the manager of both Crest
Communications Partners L.P. and Crest Entrepreneurs Fund L.P. The address
of Crest Communications Holdings, LLC is 320 Park Avenue, New York, New
York 10022.
(10) The 2,806,000 shares of common stock beneficially owned by Microsoft
Corporation consist of 2,300,000 shares issued immediately prior to the
effective date of this registration statement as a result of the mandatory
conversion of Series A Convertible Participating Preferred Stock and
506,000 shares of common stock subject to a warrant that is exercisable
within the 60-day period following , 2000. At the time of this
offering, in exchange for $7.5 million in cash from Microsoft, we will
issue a number of shares of common stock to Microsoft equal to $7.5 million
divided by the lesser of the midpoint of the expected range of offering
prices reflected in this prospectus or the actual price to the public of
common stock sold in this offering. In connection with this issuance, we
will also issue an additional warrant to purchase a number of shares of
common stock equal to 75% of the number of shares sold to Microsoft at an
exercise price equal to the price paid at the closing. The address of
Microsoft Corporation is One Microsoft Way, Redmond, WA 98052-6399.
(11) The address of BancBoston Ventures, Inc. is 175 Federal Street, 10th Floor,
Boston, MA 02110.
(12) Includes an aggregate of 363,544 shares of common stock issuable pursuant
to options exercisable upon the closing of the offering and within 60 days
of , 2000.
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<PAGE> 60
CERTAIN TRANSACTIONS
LOANS
In December 1998, we loaned $25,000, and in May 1999, we loaned $200,000 to
each of Kenneth Gavranovic, our President and Chief Executive Officer, and
Waldemar Fernandez, our former Chairman and one of our principal shareholders.
Each loan is evidenced by a promissory note which bears interest at the rate of
10% per annum. The principal balances of Mr. Gavranovic's notes are payable on
demand, the principal balance of Mr. Fernandez' $25,000 note is payable on
demand and the principal balance of Mr. Fernandez' $200,000 note is payable at
the earlier of 6 months after the effective date of the registration statement
of which this prospectus is a part, and November 19, 2004. Interest on each of
the notes is payable quarterly on the first day of the calendar month following
the quarter in which it accrues. The rate of interest payable under each
promissory note may be increased upon the occurrence of any event of default, as
specified in the notes.
Each note is secured by a separate stock pledge agreement, whereby Mr.
Gavranovic and Mr. Fernandez each pledged 400,000 of his shares of common stock
to secure his obligations under his respective notes. The stock pledge
agreements permit us to dispose of the pledged shares upon the occurrence of an
event of default, as that term is described in the stock pledge agreements. The
proceeds of any disposition will be applied first to any unpaid balance due
under the respective note, and any remaining surplus will be distributed to the
respective borrower.
SERIES A CONVERTIBLE PARTICIPATING PREFERRED STOCK FINANCINGS
On December 2, 1999, our board of directors designated shares of our
authorized but unissued preferred stock as Series A convertible participating
preferred stock and Series A-1 convertible participating preferred stock.
Additionally, on that date we issued 9,174,313 shares of our Series A stock at a
stated value per share of $2.18 for total cash consideration to us of
approximately $20.0 million. In this transaction, we sold 3,566,141 shares to
Crest Communications Partners L.P., 103,584 shares to the Crest Entrepreneurs
Fund L.P., 1,513,514 shares to Boulder Ventures III, L.P., 91,991 shares to
Boulder Ventures III (Annex), L.P., 2,293,578 shares to BancBoston Ventures,
Inc., and 1,605,505 shares to Private Equity Co-Invest Ltd. Gregg A.
Mockenhaupt, one of our directors, is a Managing Director of Crest
Communications Holdings, LLC, which is the manager of Crest Communications
Partners, L.P. and Crest Entrepreneurs Fund L.P. Andrew E. Jones, one of our
directors, is a general partner of Boulder Ventures Limited, the general partner
of Boulder Ventures III, L.P. and Boulder Ventures III (Annex), L.P.
On December 24, 1999, we entered into a Stock Purchase Agreement with
Microsoft Corporation. In connection with this financing transaction, we issued
2,300,000 shares of our Series A preferred stock to Microsoft, at a purchase
price of $2.18 per share. We also issued a warrant to Microsoft to purchase
506,000 shares of our common stock at an exercise price of $5.80 per share,
subject to customary anti-dilution provisions. Microsoft may exercise its rights
under the warrant, in whole or in part, at any time until December 24, 2004. In
the alternative, Microsoft may surrender the warrant in exchange for a number of
shares of our common stock equal to quotient obtained by dividing (1) the
product of (a) the total number of shares issuable under the warrant and (b) the
difference between the fair market value of our common stock and the exercise
price per share under the warrant by (2) the fair market value of our common
stock. The number of shares subject to the warrant may be adjusted to prevent
dilution, and each warrant will expire five years after its date of issuance.
Shares purchased by Microsoft under the warrant are subject to a lock-up
agreement, and may not be sold until 180 days after the date of this offering.
Microsoft paid a total of $5.0 million for the Series A preferred stock and the
warrant.
In addition, under the Stock Purchase Agreement, on the day following the
effective date of the registration statement of which this prospectus is a part,
in exchange for an additional $7.5 million in cash from Microsoft, we will issue
a number of shares of common stock to Microsoft equal to $7.5 million divided by
the lesser of the midpoint of the expected range of offering prices reflected in
this prospectus or
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the actual price to the public of common stock sold in this offering. In
connection with this issuance, we will also issue an additional warrant to
purchase a number of shares of common stock equal to 75% of the number of shares
sold to Microsoft at an exercise price equal to the price paid at that closing.
The warrant will be subject to the same terms as the warrant we issued in
connection with Microsoft's initial investment. Based on the current filing
range, Microsoft would acquire shares under the stock purchase
agreement and the warrant would entitle Microsoft to acquire
additional shares at an exercise price of $ per share.
On March 15, 2000, we entered into a stock purchase agreement with Network
Solutions. In connection with this financing transaction, we issued 689,655
shares of our Series A preferred stock to Network Solutions, at a purchase price
of $5.80 per share. We also issued a warrant to Network Solutions to purchase
344,827 shares of our common stock at an exercise price of $5.80 per share,
subject to customary anti-dilution provisions. Network Solutions may exercise
its rights under the warrant, in whole or in part, at any time until March 15,
2005. In the alternative, Network Solutions may surrender the warrant in
exchange for a number of shares of our common stock equal to quotient obtained
by dividing (1) the product of (a) the total number of shares issuable under the
warrant and (b) the difference between the fair market value of our common stock
and the exercise price per share under the warrant by (2) the fair market value
of our common stock. The number of shares subject to the warrant may be adjusted
to prevent dilution and each warrant will expire five years after its issuance.
Shares purchased by Network Solutions under the warrant are subject to a lock-up
agreement, and may not be sold until 180 days after the date of this offering.
Network Solutions paid a total of $4.0 million for the Series A preferred stock
and the warrant.
In addition, under the Stock Purchase Agreement, on the day following the
effective date of the registration statement of which this prospectus is a part,
in exchange for an additional $6.0 million in cash from Network Solutions, we
will issue a number of shares of common stock to Network Solutions equal to $6.0
million divided by the lesser of the midpoint of the expected range of offering
prices reflected in this prospectus or the actual price to the public of common
stock sold in this offering. In connection with this issuance, we will also
issue an additional warrant to purchase a number of shares of common stock equal
to 75% of the number of shares sold to Network Solutions at an exercise price
equal to the price paid at that closing. The warrant will be subject to the same
terms as the warrant we issued in connection with Network Solution's initial
investment. Based on the current filing range, Network Solutions would acquire
shares under the stock purchase agreement and the warrant would
entitle Network Solutions to acquire additional shares at an
exercise price of $ per share.
Holders of our Series A preferred stock will receive dividends at a rate of
9% compounded annually, payable on a semi-annual basis in additional shares of
Series A-1 preferred stock or in cash at our option. The Series A preferred
stock will also participate on an as-converted basis in any common stock
dividends or distributions. The shares of Series A preferred stock rank senior
to any other series or class of the Company's capital stock, whether now
existing or created after the issuance of the Series A preferred stock, except
for any series of preferred stock that is established by the our board of
directors with a rank that is senior to the Series A preferred stock, with
respect to rights upon liquidation, winding up, dissolution, and redemption and
distribution rights. As such, the holders of shares of the Series A preferred
stock are generally entitled to the return of an amount equal to the stated
value per share plus any accrued and unpaid dividends prior to any distribution,
redemption or liquidation, and may also participate in such distribution,
redemption or liquidation on an as-converted basis. Each holder of preferred
stock votes with the holders of common stock on an on-converted basis. In
addition, the holders of the Series A preferred stock also possess a veto power
to prevent some transactions that effect the shares of the Series A preferred
stock, but we may override any such veto by converting the shares of the Series
A preferred stock into either three or four times (determined by the date on the
which the transaction takes place) the number of shares of common stock into
which they might otherwise be converted. Under the conversion rate set forth in
the terms of the preferred stock, the preferred stock was originally convertible
into common stock on a one-for-one basis. However, to the extent we implement a
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stock split before this offering, the conversion rate will automatically be
adjusted to take into account the split.
Immediately prior to the completion of this offering, the outstanding
shares of Series A stock issued in these transactions will be automatically
converted into 12,163,968 shares of our common stock. At that time, rights and
restrictions applicable to the Series A stock, including redemption rights and
special voting rights, will terminate and be of no further force and effect.
Holders of the Series A stock will be entitled to "piggy-back" and certain
demand registration rights with respect to the shares of common stock into which
the shares of Series A stock are converted. For additional information, see
"Description of Capital Stock."
OPTION GRANTS TO NEW EXECUTIVES
In February 2000, we granted an option to purchase 200,000 shares of our
common stock to H. Christopher Covington, our Senior Vice President, General
Counsel and Secretary, in connection with his employment with us. In March 2000,
we granted an option to purchase 450,000 shares of common stock to David Gill,
our Executive Vice President, Chief Financial Officer and a director, in
connection with his employment with us. These options are exercisable at an
exercise price of $5.80 per share.
SEPARATION AGREEMENT WITH FORMER CHAIRMAN
In connection with the resignation of Waldemar Fernandez as chairman of our
board of directors, we entered into a separation agreement with Mr. Fernandez on
November 19, 1999. Under the agreement, we paid Mr. Fernandez $330,000, and will
make additional payments of $165,000 to Mr. Fernandez on each of the first two
anniversaries of the agreement as severance and consideration for the releases
and non-competition covenants from him and the termination of all obligations by
us in connection with Mr. Fernandez' employment. In addition, Mr. Fernandez was
granted registration rights under the agreement, including piggy-back
registration rights effective after the completion of this offering, and we
agreed to accelerate the vesting of Mr. Fernandez' options such that they will
become fully exercisable as of the effective date of this offering.
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DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Our articles of incorporation authorize the issuance of up to 200,000,000
shares of common stock and 25,000,000 shares of preferred stock, the rights and
preferences of which may be established from time to time by our board of
directors. Immediately prior to this offering, 21,842,975 shares of common stock
and 12,163,968 shares of preferred stock were issued and outstanding. Upon
completion of this offering, shares of common stock and no shares
of preferred stock will be outstanding. As of March 10, 2000, we had 131 holders
of common stock and 8 holders of preferred stock.
The following summary of our capital stock does not purport to be complete.
It is qualified in its entirety by reference to our amended and restated
articles of incorporation and our its amended and restated bylaws, filed as
exhibits to the registration statement of which this prospectus forms a part,
and the applicable provisions of the Georgia Business Corporation Code.
COMMON STOCK
Holders of common stock are entitled to one vote per share on any issue
submitted to a vote of the shareholders and do not have cumulative voting rights
in the election of directors. Accordingly, the holders of a majority of the
outstanding shares of common stock voting in an election of directors can elect
all of the directors then standing for election, if they choose to do so. All
shares of common stock are entitled to share equally in any dividends our board
of directors may, in its discretion, declare out of sources legally available
therefor. If Interland dissolves, liquidates or winds up, holders of common
stock are entitled to receive on a ratable basis all of our assets available for
distribution, in cash or in kind, after payment or provision for payment of all
of our debts and liabilities and any preferential amount due to holders of
preferred stock. Holders of common shares do not have preemptive or other
subscription rights, conversion or redemption rights, or any rights to share in
any sinking fund. All currently outstanding common stock shares are, and the
shares offered hereby (when sold in the manner contemplated by this prospectus)
will be, fully paid and nonassessable.
PREFERRED STOCK
Our articles of incorporation authorize the board of directors, from time
to time, to issue shares of preferred stock in one or more series. They may
establish the number of shares to be included in any such series, and may fix
the designations, powers, preferences and rights (including voting rights) of
the shares of each such series and any qualifications, limitations, or
restrictions on preferred shares. No shareholder authorization is required for
the issuance of these shares of preferred stock unless imposed by then
applicable law. Shares of preferred stock may be issued for any general
corporate purposes, including acquisitions. The board of directors may issue one
or more series of preferred stock with rights more favorable with regard to
voting, dividends and liquidation than the rights of holders of common stock.
Issuance of a series of preferred stock also could be used for the purpose of
preventing a hostile takeover of Interland, even if the takeover is considered
to be desirable by the holders of the common stock. Issuance of a series of
preferred stock could otherwise adversely affect the voting power of the holders
of common stock, and could serve to perpetuate the board of directors' control
of Interland under certain circumstances. Other than the issuance of the series
of preferred stock previously authorized by the board of directors in connection
with the Series A convertible preferred stock, all of which converts to common
stock upon the completion of this offering, and our shareholder rights plan
described below, we have no current plans that would result in the issuance of
any shares of preferred stock.
WARRANTS
We have issued warrants to Microsoft Corporation and Network Solutions and
will issue a second warrant to each of them to purchase shares of our common
stock at the time of this offering. For
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additional information about these warrants, see "Certain Transactions -- Series
A Convertible Participating Preferred Stock Financings."
We have issued a warrant to Road Runner to purchase shares of our common
stock. The warrant, issued on January 27, 2000, entitles Road Runner to purchase
up to 349,000 shares of our common stock at an exercise price of $9.00 per share
based upon its achievement of certain performance criteria. The number of shares
subject to the warrant may be adjusted to prevent dilution, and the warrant
expires on December 3, 2002.
OPTIONS
We have granted options to purchase an aggregate of 4,047,500 shares of our
common stock under our Stock Incentive Plan, including options for 1,125,000
shares to our executive officers. The weighted average exercise price of the
options to purchase the 4,047,500 shares is $4.12 as of March 10, 2000.
CERTAIN PROVISIONS OF GEORGIA LAW AND THE COMPANY'S ARTICLES OF INCORPORATION
AND BYLAWS
Staggered Board of Directors; Removal; Filling Vacancies
Our bylaws provide that our Board of Directors will consist of between five
and fifteen directors. Our Board currently consists of seven directors, four of
whom are not employees of Interland. Our Board of Directors may be divided into
three classes of directors serving staggered three-year terms. The
classification of directors would have the effect of making it more difficult
for shareholders to change the composition of our Board of Directors. We
believe, however, that the longer time required to elect a majority of a
classified Board of Directors will help to ensure the continuity and stability
of our management and policies. The classification provisions could also have
the effect of discouraging a third party from accumulating large blocks of our
stock or attempting to obtain control of Interland, even though such an attempt
might be beneficial to us and to you. Accordingly, you could be deprived of
certain opportunities to sell your shares of common stock at a higher market
price than might otherwise be the case. Our shareholders will be entitled to
vote on the election or removal of directors, with each share entitled to one
vote.
Our bylaws provide that, unless our Board of Directors otherwise
determines, any vacancies may be filled by the affirmative vote of a majority of
the remaining directors, even if less than a quorum. A director may be removed
with or without cause by the vote of the holders of a majority of the shares
entitled to vote for the election of directors at a special meeting of the
shareholders called for the purpose of removing such director. A vacancy
resulting from an increase in the number of directors may be filled by action of
our Board of Directors.
Shareholder Rights Plan
We intend to adopt a shareholder rights plan to help ensure that our
shareholders receive fair and equal treatment in the event of any proposed
acquisition of Interland. Under the rights plan, our Board of Directors will
declare a dividend of one preferred share purchase right for each outstanding
share of our common stock. Each preferred share purchase right entitles the
registered holder to purchase one one-hundredth of a share of our Series B
junior participating cumulative preferred stock, par value $0.01 per share at a
price of $ per share, subject to adjustments to the exercise price and
the number of preferred shares issuable upon exercise from time to time to
prevent dilution. These rights are not exercisable until the earlier to occur of
(1) ten days following a public announcement that a person or group of
affiliated or associated persons have acquired beneficial ownership of 15% or
more of our outstanding common stock or (2) ten business days following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding shares of our
common stock.
If we are acquired in a merger or other business combination transaction or
50% or more of our assets or earning power is sold after a person or group
acquires % or more of our outstanding common stock
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or announces an intention to make a tender offer or exchange offer that would
result in the beneficial ownership of % or more of our outstanding shares
of common stock, proper provision will be made so that each holder of a
preferred share purchase right, other than those rights beneficially owned by
the acquiring person (which will become void), will then have the right to
receive upon exercise that number of shares of common stock having a market
value of times the exercise price of the right.
Shares of Series B junior participating cumulative preferred stock
purchasable upon exercise of the preferred share purchase rights will not be
redeemable. Each share of preferred stock will be entitled to a minimum
preferential quarterly dividend payment of $ per share but will be
entitled to an aggregate dividend of one one-hundredth times the dividend
declared per share of our common stock. In the event of liquidation, the holders
of the preferred stock will be entitled to a minimum preferential liquidation
payment of $ per share but will be entitled to an aggregate payment of
one one-hundredth times the payment made per share of our common stock. Each
share of preferred stock will have one one-hundredth of a vote, voting together
with the shares of our common stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of our common stock are
exchanged, each share of preferred stock will be entitled to receive one
one-hundredth times the amount received per share of our common stock. These
rights are protected by customary antidilution provisions.
Unless the preferred share purchase rights are either triggered or expire,
the rights may not be detached or transferred separately from our common stock.
The preferred share purchase rights will expire on , 2010, unless
this date is extended or unless we redeem or exchange the preferred share
purchase rights earlier. At any time prior to the acquisition by a person or
group of affiliated or associated persons of beneficial ownership of % or
more of our outstanding common stock, our Board of Directors may redeem the
preferred share purchase rights in whole, but not in part, at a price of
$ per right. Immediately upon any redemption of the preferred share
purchase rights, the right to exercise these rights will terminate and the only
right of the holders of those rights will be to receive the redemption payment.
Ability to Consider Other Constituencies
Our Articles of Incorporation permit our Board of Directors, in determining
what is believed to be in our best interest, to consider the interests of our
employees, customers, suppliers and creditors, the communities in which our
offices or other establishments are located and all other factors the directors
consider pertinent, in addition to considering the effects of any actions on
Interland and our shareholders. This provision permits our Board of Directors to
consider numerous judgmental or subjective factors affecting a proposal,
including certain non-financial matters, and on the basis of these
considerations may oppose a business combination or other transaction which,
viewed exclusively from a financial perspective, might be attractive to some, or
even a majority, of our shareholders.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of approximately 12,163,968
shares of our common stock, and rights to acquire our common stock, will be
entitled to rights with respect to the registration of those shares under the
Securities Act of 1933, as amended. Under the terms of the Registration Rights
Agreement we entered with the holders of these registrable shares, following the
completion of this offering, if we propose to register any additional securities
under the Securities Act, the holders must be notified and will be entitled to
have their shares of common stock included in the registration. In addition, the
holders of the registrable shares are also entitled to specified demand
registration rights. These demand registration rights permit the holders to
require us, on up to two separate occasions, to file a registration statement
with respect to their shares of common stock and to use our best efforts to
cause the registration statement to be declared effective. Furthermore, under
the Registration Rights Agreement, subject to various conditions, the holders of
registrable shares may require us to file an unlimited number of additional
registration statements on Form S-3, but no more than two in any eighteen month
period.
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The rights granted under the Registration Rights Agreement are subject to
various conditions and limitations, among them the right of Interland and the
underwriters of an offering to limit the number of shares included in a
registration and our right to delay registration if within 180 days prior to a
request for registration, a registration of our securities has been effected in
which the requesting holder had a right to participate, or if a holder's request
is received less than 90 days before the anticipated effective date of a
proposed underwritten offering approved by our board of directors prior to
receipt of the request. Holders of registrable securities must pay any transfer
taxes and any underwriting discounts or commissions associated with the sale of
their shares. Otherwise, we will bear all expenses incident to the registration
of shares under the Registration Rights Agreement. We do not expect that the
expenses we will incur in connection with any exercise of these registration
rights will exceed the expenses customarily incurred by companies registering
their securities. Subject to certain conditions, if the holders of registration
rights request that we withdraw a requested registration statement, those
holders will be obligated to reimburse us for the expenses of that registration.
INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
We plan to enter into indemnification agreements with each of our directors
and executive officers. The form of indemnification agreement provides that we
will indemnify our directors and executive officers for expenses incurred
because of their status as a director or officer, to the fullest extent
permitted by Georgia law, our articles of incorporation and our bylaws.
Our bylaws provide for indemnification of each of our directors and
officers, and our Amended and Restated Articles of Incorporation eliminate, to
the extent permitted by the Georgia Business Corporation Code, the personal
liability of our directors to us and to our shareholders for monetary damages
for certain breaches of fiduciary duty and the duty of care. The indemnification
provided by our bylaws may be available for liabilities arising in connection
with this offering. Insofar as indemnification for liabilities under the
Securities Act of 1933, as amended, may be permitted to directors, officers or
controlling persons pursuant to our bylaws, we have been informed 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. At present there is no pending material litigation or proceeding
involving any director, officer, employee or agent of Interland in which
indemnification will be required or permitted.
Our bylaws provide for indemnification of our directors and officers with
respect to any liability and reasonable expense incurred by such person in
connection with any civil or criminal action, suit or proceeding to which such
person was (or is made or threatened to be made) a party or is otherwise
involved, by reason of the fact that such person is or was one of our directors
or officers, and such person acted in a manner he believed to be in good faith
and not opposed to our best interests, and had no reasonable cause to believe
that his conduct was unlawful. Our bylaws obligate us to indemnify each of our
directors and officers to the extent that they are successful in the defense of
any action, suit or proceeding. In addition, our bylaws may obligate us, under
certain circumstances, to advance reasonable expenses incurred by each director
or officer in the defense of any civil or criminal action, suit or proceeding
for which indemnification may be sought. However, we will not indemnify any
director or officer to the extent that they are adjudged liable to us, or liable
for the receipt of improper personal benefit. Pursuant to conditions described
in our bylaws, any determination with respect to indemnification will be made by
our board of directors or a committee thereof, by special legal counsel
appointed by our board of directors or a committee thereof, or by our
shareholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for our common
stock, and we cannot predict the effect, if any, that sales of our common stock
or the availability of common stock for sale will have on its market price.
Nevertheless, sales of substantial amounts of our common stock in the public
market, or the perception that such sales could occur, could negatively affect
the market price of our common stock and impair our ability to raise capital
through the sale of our equity securities in the future.
Upon completion of this offering, we will have shares of
common stock outstanding. Of these shares, the shares sold in
this offering will be freely transferable without restriction or further
registration under the Securities Act, unless held by affiliates of our company,
as that term is defined in Rule 144 under the Securities Act. For purposes of
Rule 144, an affiliate is a person that, directly or indirectly through one or
more intermediaries, controls, or is controlled by or is under common control
with, Interland. The remaining shares of common stock are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
The restricted securities generally may not be sold unless they are registered
under the Securities Act or sold under an exemption from registration, such as
the exemption provided by Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year is entitled
to sell, within any three-month period, a number of shares that is not more than
the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after this
offering, or
- the average weekly trading volume of the common stock during the four
calendar weeks before a notice of the sale is filed.
Sales under Rule 144 must also comply with manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who has not been one of our affiliates at any
time during the 90 days before a sale, and who has beneficially owned the
restricted shares for at least two years, is entitled to sell the shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144.
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 may be relied upon regarding the resale of securities
originally purchased from us by our employees, directors, officers, consultants
or advisors before the date we become subject to the reporting requirements of
the Exchange Act, under written compensatory benefit plans or written contracts
relating to compensation of those persons. In addition, the SEC has indicated
that Rule 701 will apply to the typical stock options granted by an issuer
before it becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, along with the shares acquired upon exercise of these
options, including exercises after the date of this prospectus. Securities
issued in reliance on Rule 701 are restricted securities and beginning 90 days
after the date of this prospectus, may be sold (1) by persons other than
affiliates, subject only to the manner of sale provisions of Rule 144, and (2)
by affiliates under Rule 144 without compliance with its one-year holding period
requirement. Based on stock option grants as of the date of this prospectus,
options for shares will be exercisable upon the expiration of the
90-day restricted period.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
between us and the underwriters named below, who are represented by Bear,
Stearns & Co. Inc., Thomas Weisel Partners LLC and PaineWebber Incorporated, the
underwriters have severally agreed to purchase from us the following respective
numbers of shares of common stock at the public offering price less the
underwriting discount set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Thomas Weisel Partners LLC..................................
PaineWebber Incorporated....................................
Total.............................................
=======
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration statement,
the continuing correctness of our representations to them, the receipt of a
comfort letter from our accountants, the listing of the common stock on the
Nasdaq National Market and no occurrence of an event that would have a material
adverse effect on our business. The underwriters are obligated to purchase and
accept delivery of all the shares, other than those covered by the
over-allotment option described below, if they purchase any of the shares.
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to additional shares at
the public offering price less the underwriting discount. The underwriters may
exercise such option solely to cover over-allotments, if any, made in connection
with this offering. To the extent that the underwriters exercise such option,
each underwriter will become obligated, subject to conditions, to purchase a
number of additional shares approximately proportionate to such underwriter's
initial purchase commitment.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less a
concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on
sales to other dealers. After the initial offering of the shares to the public,
the representatives of the underwriters may change the public offering price and
such concessions. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The following table shows the underwriting discount to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of the common stock.
<TABLE>
<CAPTION>
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share................................................... $ $
Total............................................. $ $
</TABLE>
The underwriting discount per share is equal to the public offering price
per share of common stock less the amount paid by the underwriters to us per
share of common stock.
We estimate that our total expenses in connection with this offering, other
than the underwriting discount, will be approximately $ million.
At our request, the underwriters have reserved for sale at the initial
public offering price up to
shares of our common stock to be sold in this offering for sale to certain
persons designated by us. The number of shares available for sale to the general
public will be reduced to the extent that any reserved shares are purchased. Any
reserved shares not so purchased will be offered by the underwriters on the same
basis as the other shares offered hereby.
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Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 135 filed
public offerings of equity securities, of which 101 have been completed, and has
acted as a syndicate member in an additional 73 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement entered into in connection with this offering.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the common stock. Specifically, the underwriters may over-allot
shares of the common stock in connection with this offering, thereby creating a
short position in the common stock for their own account. Additionally, to cover
such over-allotments or to stabilize the market price of the common stock, the
underwriters may bid for, and purchase, shares of the common stock in the open
market. Finally, the representatives, on behalf of the underwriters, also may
reclaim selling concessions allowed to an underwriter or dealer if the
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
We intend to apply to list our common stock on the Nasdaq National Market
under the symbol "ILND."
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock will
be determined by negotiation among us and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalization and stages of development of generally
comparable companies; and
- estimates of our business potential.
In connection with this offering, our existing officers and directors and
some of our shareholders, who will own a total of shares of
common stock after the offering, have entered into lock-up agreements pursuant
to which they have agreed not to offer or sell any shares of common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of Bear, Stearns & Co. Inc., which may in its sole discretion, at any
time and without notice, waive any of the terms of these lock-up agreements.
Bear, Stearns & Co. Inc. presently has no intention to allow any shares of
common stock to be sold or otherwise offered by Interland prior to the
expiration of the 180 day lock-up period, although it may decide to do so in
light of the purpose for which any such shares are requested to be sold or
otherwise offered, prevailing market conditions and any other factor which Bear,
Stearns & Co. Inc., in its sole discretion, may deem to be relevant. Following
the lock-up period, these shares will not be eligible for sale in the public
market without registration under the Securities Act unless such sale meets the
conditions and restrictions of Rule 144.
In addition, we have agreed that for a period of 180 days after the date of
this prospectus, we will not sell or offer to sell or otherwise dispose of any
shares of common stock without the prior written consent of Bear, Stearns & Co.
Inc., except that we may issue, and grant options to purchase, shares of common
stock under our stock option and employee stock purchase plans.
66
<PAGE> 70
LEGAL MATTERS
Certain legal matters with respect to the validity of common stock offered
hereby are being passed upon for us by Kilpatrick Stockton LLP, Atlanta,
Georgia. Kilpatrick Stockton LLP owns 15,523 shares of our common stock. Certain
legal matters related to the sale of the common stock offered hereby will be
passed upon for the underwriters by Latham & Watkins, Washington, D.C.
EXPERTS
The financial statements of Interland, Inc. as of December 31, 1999 and
1998 and for the period from inception (September 18, 1997) to December 31, 1997
and for the years ended December 31, 1999 and 1998 included in this prospectus
have been audited by Arthur Andersen LLP, independent public accountants, and
are included in this prospectus in reliance upon the authority of said firm as
experts in, giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
This prospectus is part of a registration statement on Form S-1 that
Interland has filed with the SEC covering the shares of common stock that
Interland is offering. This prospectus does not contain all of the information
presented in the registration statement, and you should refer to that
registration statement with its exhibits for further information. Statements in
this prospectus describing or summarizing any contract or other document are not
complete, and you should review the copies of those documents filed as exhibits
to the registration statement for more detail. You may read and copy the
registration statement at the SEC's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. For information on the operation of the Public
Reference Room, call the SEC at 1-800-SEC-0330. You can also inspect our
registration statement on the Internet at the SEC's web site,
http://www.sec.gov.
After this offering, we will be required to file annual, quarterly, and
current reports, proxy and information statements and other information with the
SEC. You can review this information at the SEC's Public Reference Room or on
the SEC's web site, as described above.
67
<PAGE> 71
INTERLAND, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Balance Sheets as of December 31, 1998 and 1999............. F-3
Statements of Operations for the Period From Inception
(September 18, 1997) to December 31, 1997 and for the
Years Ended December 31, 1998 and 1999.................... F-4
Statements of Shareholders' Equity (Deficit) for the Period
From Inception (September 18, 1997) to December 31, 1997
and for the Years Ended December 31, 1998 and 1999........ F-5
Statements of Cash Flows for the Period From Inception
(September 18, 1997) to December 31, 1997 and for the
Years Ended December 31, 1998 and 1999.................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 72
After the stock split discussed in Note 7 to the financial statements of
Interland, Inc. is resolved, we expect to be in a position to render the
following audit report.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 13, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO INTERLAND, INC.:
We have audited the accompanying balance sheets of INTERLAND, INC. (a
Georgia corporation) as of December 31, 1998 and 1999 and the related statements
of operations, shareholders' equity (deficit), and cash flows for the period
from inception (September 18, 1997) to December 31, 1997 and for the years ended
December 31, 1998 and 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interland, Inc. as of
December 31, 1998 and 1999 and the results of its operations and its cash flows
for the period from inception (September 18, 1997) to December 31, 1997 and for
the years ended December 31, 1998 and 1999 in conformity with accounting
principles generally accepted in the United States.
F-2
<PAGE> 73
INTERLAND, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 706 $ 24,510
Restricted cash........................................... -- 1,007
Accounts receivable....................................... -- 655
Prepaid commissions....................................... 36 825
Other current assets...................................... -- 730
-------- --------
Total current assets............................... 742 27,727
-------- --------
PROPERTY AND EQUIPMENT:
Internet access and computer equipment.................... 770 4,072
Construction in progress.................................. -- 2,499
Other furniture and equipment............................. 85 660
Office computer equipment................................. 223 445
Software.................................................. 26 451
Leasehold improvements.................................... -- 398
-------- --------
1,104 8,525
Less accumulated depreciation and amortization............ (115) (982)
-------- --------
Property and equipment, net............................. 989 7,543
-------- --------
OTHER LONG-TERM ASSETS:
Notes receivable--related parties......................... 50 481
Deposits and other long-term assets....................... -- 225
-------- --------
Total other long-term assets....................... 50 706
-------- --------
Total assets....................................... $ 1,781 $ 35,976
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,022 $ 3,387
Accrued expenses.......................................... 328 2,863
Capital lease obligation.................................. 124 1,185
Unearned revenue.......................................... 895 7,042
-------- --------
Total current liabilities.......................... 2,369 14,477
UNEARNED REVENUE............................................ 38 1,433
CAPITAL LEASE OBLIGATION.................................... 312 2,406
OTHER LONG-TERM LIABILITIES................................. -- 165
COMMITMENTS AND CONTINGENCIES (NOTE 6)
</TABLE>
<TABLE>
<S> <C> <C>
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, no par value, 25,000,000 shares
authorized:
Series A, $2.18 stated value, 15,000,000 shares
authorized; 11,474,313 shares issued and outstanding as
of December 31, 1999; no shares issued and outstanding,
pro forma.............................................. -- 34,423
Series A-1, 947,421 shares authorized, no shares issued
and outstanding as of December 31, 1998 and 1999....... -- --
Common stock, no par value; 100,000,000 shares authorized;
18,002,940 and 21,842,975 shares issued and outstanding
as of December 31, 1998 and 1999, respectively, and
33,317,288 shares outstanding, pro forma................ 1,515 12,811
Warrants.................................................. -- 2,144
Deferred product development costs........................ -- (2,133)
Deferred compensation..................................... -- (954)
Accumulated deficit....................................... (2,453) (28,796)
-------- --------
Total shareholders' equity (deficit)............... (938) 17,495
-------- --------
Total liabilities and shareholders' equity
(deficit)......................................... $ 1,781 $ 35,976
======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE> 74
INTERLAND, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1997)
TO DECEMBER 31, 1997 AND
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
-------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
REVENUES................................................ $ 5 $ 1,387 $ 9,121
OPERATING EXPENSES:
Cost of revenues...................................... -- 1,096 7,897
Sales and marketing................................... -- 1,803 7,901
General and administrative............................ 119 809 6,536
Amortization of deferred compensation................. -- -- 3,557
----------- ----------- -----------
Total operating expenses...................... 119 3,708 25,891
----------- ----------- -----------
OPERATING LOSS.......................................... (114) (2,321) (16,770)
OTHER INCOME (EXPENSE):
Interest income....................................... -- 2 206
Interest expense...................................... -- (20) (220)
----------- ----------- -----------
Total other expense........................... -- (18) (14)
----------- ----------- -----------
NET LOSS................................................ (114) (2,339) (16,784)
PREFERRED STOCK BENEFICIAL CONVERSION AND DIVIDENDS..... -- -- (9,559)
----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS.............. $ (114) $ (2,339) $ (26,343)
=========== =========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE............. $ (0.01) $ (0.14) $ (1.33)
=========== =========== ===========
SHARES USED IN COMPUTING NET LOSS PER SHARE............. 16,325,177 16,959,675 19,871,446
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 75
INTERLAND, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1997)
TO DECEMBER 31, 1997 AND
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED PREFERRED COMMON COMMON DEFERRED
STOCK STOCK STOCK STOCK DEVELOPMENT
SHARES AMOUNT SHARES AMOUNT WARRANTS COSTS
---------- --------- ---------- ------- -------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 18,
1997..................... -- $ -- 0 $ -- $ -- $ --
Issuance of common
stock.................. -- -- 16,325,177 139 -- --
Net loss................. -- -- 0 -- -- --
---------- ------- ---------- ------- ------ -------
BALANCE, DECEMBER 31,
1997..................... -- -- 16,325,177 139 -- --
Issuance of common
stock.................. -- -- 1,677,763 1,376 -- --
Net loss................. -- -- 0 -- -- --
---------- ------- ---------- ------- ------ -------
BALANCE, DECEMBER 31,
1998..................... -- -- 18,002,940 1,515 -- --
Issuance of common
stock.................. -- -- 3,706,693 8,441 -- --
Issuance of Series A
preferred stock........ 11,474,313 25,014 -- (1,657) -- --
Issuance of options and
stock to consultants
and bankers............ -- -- 133,342 4,212 -- --
Issuance of options to
employee at below fair
value.................. -- -- -- 300 -- --
Issuance of warrants in
connection with
development
agreement.............. -- -- -- -- 2,144 (2,144)
Dividends on preferred
stock.................. -- -- -- -- -- --
Beneficial conversion of
preferred stock........ -- 9,409 -- -- -- --
Amortization of deferred
development costs...... -- -- -- -- -- 11
Amortization of deferred
compensation........... -- -- -- -- -- --
Net loss................. -- -- -- -- -- --
---------- ------- ---------- ------- ------ -------
BALANCE, DECEMBER 31,
1999..................... 11,474,313 $34,423 21,842,975 $12,811 $2,144 $(2,133)
========== ======= ========== ======= ====== =======
<CAPTION>
TOTAL
SHAREHOLDERS'
DEFERRED ACCUMULATED EQUITY
COMPENSATION DEFICIT (DEFICIT)
------------ ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
BALANCE, SEPTEMBER 18,
1997..................... $ -- $ 0 $ 0
Issuance of common
stock.................. -- 0 139
Net loss................. -- (114) (114)
----- -------- --------
BALANCE, DECEMBER 31,
1997..................... -- (114) 25
Issuance of common
stock.................. -- 0 1,376
Net loss................. -- (2,339) (2,339)
----- -------- --------
BALANCE, DECEMBER 31,
1998..................... -- (2,453) (938)
Issuance of common
stock.................. -- 0 8,441
Issuance of Series A
preferred stock........ -- 0 23,357
Issuance of options and
stock to consultants
and bankers............ (890) 0 3,322
Issuance of options to
employee at below fair
value.................. (300) 0 --
Issuance of warrants in
connection with
development
agreement.............. -- 0 --
Dividends on preferred
stock.................. -- (150) (150)
Beneficial conversion of
preferred stock........ -- (9,409) --
Amortization of deferred
development costs...... -- 0 11
Amortization of deferred
compensation........... 236 0 236
Net loss................. -- (16,784) (16,784)
----- -------- --------
BALANCE, DECEMBER 31,
1999..................... $(954) $(28,796) $ 17,495
===== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 76
INTERLAND, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (SEPTEMBER 18, 1997)
TO DECEMBER 31, 1997 AND
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
----- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(114) $(2,339) $(16,784)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... -- 115 992
Amortization of deferred compensation.................. -- -- 3,557
Loss on disposal of property and equipment............. -- -- 198
Amortization of deferred development................... -- -- 11
Changes in operating assets and liabilities:
Accounts receivable.................................. -- -- (655)
Prepaid commissions.................................. -- (36) (789)
Other current assets................................. -- -- (730)
Note receivable--related party....................... -- (50) (431)
Other assets......................................... -- -- (225)
Accounts payable and accrued liabilities............. 4 1,347 4,752
Unearned revenue..................................... -- 933 7,542
Other long-term liabilities.......................... -- -- 165
----- ------- --------
Total adjustments................................. 4 2,309 14,387
----- ------- --------
Net cash used in operating activities............. (110) (30) (2,397)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (2) (1,102) (7,745)
Deposit of restricted cash................................ 0 -- (1,007)
----- ------- --------
Net cash provided by investing activities......... (2) (1,102) (8,752)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ 139 1,376 8,441
Net proceeds from issuance of preferred stock............. -- -- 23,357
Borrowings on capital lease obligations................... -- 491 3,628
Payments on capital lease obligations..................... -- (56) (473)
----- ------- --------
Net cash provided by financing activities......... 139 1,811 34,953
----- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 27 679 23,804
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ -- 27 706
----- ------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 27 $ 706 $ 24,510
===== ======= ========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest.................................... $ -- $ 20 $ 178
===== ======= ========
NON CASH DISCLOSURE:
Issuance of stock and options for consultant and employee
compensation........................................... $ -- $ -- $ 4,212
===== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 77
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1999
1. ORGANIZATION AND NATURE OF BUSINESS
NATURE OF BUSINESS
Interland, Inc. (the "Company") commenced operations on September 18, 1997.
The Company provides a broad range of web site and application hosting and other
related web based business solutions specifically to meet the needs of small to
medium-sized businesses. The Company focuses on delivering high-quality,
reliable, and flexible services that are backed by customer support 24 hours a
day, 7 days a week, and 365 days a year. The Company offers its solutions
directly and through third-party dealers that resell the Company's web hosting
services.
HISTORY OF OPERATING LOSSES
The Company has incurred net losses since it commenced operations. As of
December 31, 1999, the Company had an accumulated deficit of $28,796,000. These
losses have occurred, in part, because of the costs incurred by the Company to
develop its products, build a customer support infrastructure, and expand its
market share in an extremely competitive market. The Company does not expect to
generate positive cash flow from its operations for several years. The Company's
success depends on its ability to achieve profitability and on its ability to
raise additional funds. As a result, the Company intends to continue to seek
funding from external sources. The Company plans to continue to increase its
operating expenses in order to fund higher levels of market share, increase its
sales and marketing efforts, broaden its customer support capabilities, and
expand its administrative resources in anticipation of future growth. To the
extent that increases in such expenses precede or are not offset by increased
revenues, the Company's business, results of operations, and financial condition
would be materially adversely affected.
NETWORK INFRASTRUCTURE
The Company must expand and adapt its network infrastructure to meet the
increasing number of users and the amount of information they wish to transport
to meet changing customer requirements. This expansion depends on financial,
operational and management resources as well as telecommunications capacity and
pricing and third party suppliers. Any failure of these could adversely affect
our business.
OTHER RISK FACTORS
The Company faces other risk factors including, but not limited to, the
following: quarterly and annual fluctuations in results of operations and
financial position, inability to manage anticipated growth, dependence on
Internet usage, dependence on key personnel, and potential disruption of
services due to systems failures, security breaches or unknown software defects.
INITIAL PUBLIC OFFERING
The Company is planning an initial public offering (the "Offering") of its
common stock which is targeted for completion in the second quarter of 2000.
There can be no assurance that the Offering will be completed in this time
period or at all.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements.
F-7
<PAGE> 78
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Estimates also affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be the equivalent of cash for the
purpose of balance sheet and statement of cash flows presentation. Cash
equivalents, which consist primarily of money market accounts, are carried at
cost, which approximates market value.
RESTRICTED CASH
At December 31, 1999 the Company held several certificates of deposits
which have maturities ranging from 6 to 12 months. These investments are
restricted to use by certain vendors for insurance, rent, credit card
processing, lease payments and other items. These deposits have been classified
as restricted cash in the accompanying balance sheet. No such deposits were held
as of December 31, 1998.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company maintains cash and cash equivalents with
various major financial institutions. The Company believes that the
concentrations of credit risk with respect to accounts receivable are limited
due to the large number of entities comprising the Company's customer base. As
of December 31, 1999, the Company had no foreign currency assets or liabilities.
PREPAID COMMISSIONS
The Company typically pays commissions to its sales representatives when
cash for the sale is collected; however, the revenue for the service provided is
deferred and recognized ratably over the service period. The Company defers
commissions paid prior to the revenue being earned and amortizes those
commissions over the same period for which revenue is recognized.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the various classes
of property, which is three years for all software, computer and Internet
equipment, including capital leases and seven years for other furniture and
equipment. Leasehold improvements are amortized over the lesser of the useful
life of the asset or the term of the lease. Construction in progress represents
primarily computer equipment and leasehold improvements that have not been
placed in operation as of December 31, 1999. Total depreciation and amortization
expense for the period from inception (September 18, 1997) to December 31, 1997,
and the years ended December 31, 1998 and 1999 was $0, $115,000 and $992,000,
respectively.
Expenditures for maintenance and repairs are charged to expense as
incurred, and the costs of renewals and betterments are capitalized. Cost and
the related accumulated depreciation of assets sold or retired are removed from
the respective accounts. Any resulting gain or loss is reflected in the
statements of operations.
The Company leases certain Internet access and computer equipment under
capital leases. Equipment recorded under capital leases is amortized using the
straight-line method over the lease term. See Note 6 for further discussion.
F-8
<PAGE> 79
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company periodically reviews the cost basis of long-lived assets based
on the undiscounted future cash flow to be generated by those assets to
determine whether any permanent impairment exists. Management believes that the
long-lived assets in the accompanying balance sheets are appropriately valued.
The Company adopted the American Institute of Certified Public Accountants
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use," effective January 1, 1998. The Company
capitalizes certain external costs related to software and implementation
services in connection with its internal-use software systems.
ACCRUED LIABILITIES
Accrued liabilities include the following as of December 31, 1998, and 1999
(in thousands):
<TABLE>
<CAPTION>
1998 1999
---- -------
<S> <C> <C>
Accrued compensation and employee benefits.................. $118 $ 886
Accrued construction in progress............................ -- 1,297
Other accrued liabilities................................... 210 680
---- -------
$328 $ 2,863
==== =======
</TABLE>
During 1999 the Company recorded accrued severance of approximately
$330,000 related to the termination of an officer. Of the total accrual,
$165,000 is included in other long- term liabilities in the accompanying balance
sheet, as it will be paid in November 2001.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The book values of cash and cash equivalents, accounts receivable, accounts
payable, and other financial instruments approximate their fair values,
principally because of the short-term maturities of these instruments.
REVENUE RECOGNITION
The Company realizes revenue from providing shared and dedicated hosting,
application hosting and consulting services. The Company recognizes revenues
when the services are provided. The Company's hosting contracts typically
require up-front payment for service periods ranging from 3 to 24 months. The
Company follows the guidance in Staff Accounting Bulletin No. 101 regarding
revenue recognition. Therefore, fees received from the customer, including
set-up fees for hosting services, are deferred and recognized ratably over the
contract period. Substantially all of the end-user subscribers pay for services
with major credit cards for which the Company receives daily remittances from
the credit card carriers. Deferred revenues represent the liability for advance
billing to customers for services not yet provided. Consulting revenue is
recognized as the services are performed, provided that no significant
obligations remain. The Company generally receives all payments for consulting
services prior to the services being performed; therefore, collection is
considered probable. Total consulting revenue was $235,695 for the year ended
December 31, 1999. No consulting revenue was earned in 1997 or 1998.
The Company provides a 30 day money back guarantee to its customers. The
Company records an allowance for returns on a monthly basis based on historical
experiences. The Company has not experienced significant returns or warranty
claims to date and does not have a significant returns or warranty claims
reserve as of December 31, 1998 or 1999.
F-9
<PAGE> 80
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred. Advertising
expenses included in sales and marketing expense is $1,438,000 and $5,473,000
for 1998 and 1999, respectively.
INCOME TAXES
The Company uses the liability method of accounting for income taxes, as
set forth in SFAS No. 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets or liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to be settled or realized.
BASIC AND DILUTED NET LOSS PER SHARE
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." That statement requires the disclosure of basic
net income (loss) per share and diluted net income (loss) per share. Basic net
income (loss) per share is computed by dividing net income (loss) available to
common shareholders by the weighted-average number of common shares outstanding
during the period and does not include any other potentially dilutive
securities. Diluted net income (loss) per share gives effect to all potentially
dilutive securities. The Company's convertible preferred stock, stock options
and stock warrants are potentially dilutive securities and are not included in
historical diluted net loss per share in any periods presented as they would
reduce the loss per share.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 98, for periods prior to the Company's anticipated initial public offering,
basic net loss per share is computed by using the weighted average number of
shares of common stock outstanding during the period. Diluted net loss per share
is computed using the weighted average number of common stock outstanding during
the period and nominal issuances of common stock and common stock equivalents,
regardless of whether they are antidilutive, as well as the potential dilution
of common stock equivalents, if dilutive. The Company has not issued common
stock or common stock equivalents for considerations that management considers
nominal.
STOCK-BASED COMPENSATION PLAN
The Company accounts for its stock option plan under Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
adopted the disclosure option of SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires that companies which do not choose to
account for stock-based compensation as prescribed by the statement shall
disclose the pro forma effects on earnings and earnings per share as if SFAS No.
123 had been adopted.
SEGMENT REPORTING
The Company has adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," effective January 1, 1998. SFAS No. 131
establishes standards for the way that public business enterprises report
selected information about operating segments in annual and interim financial
statements. It also establishes standards for related disclosures about products
and services, geographical areas and major customers. SFAS No. 131 requires the
use of the "management approach" in disclosing segment information; based
largely on how senior management generally analyzes the business operations. The
Company currently operates in only one segment, and as such, no additional
disclosure is required. Additionally, the Company did not have any operations or
net assets or liabilities in foreign locations for the period from inception
(September 18, 1997) to December 31, 1999. The Company generated revenue
F-10
<PAGE> 81
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of $690,000 from foreign customers for the year ended December 31, 1999. All
sales were denominated in U.S. dollars. No significant revenue was generated
from foreign customers in 1997 or 1998.
3. RELATED-PARTY TRANSACTIONS
During December 1998 and May 1999 the Company loaned two shareholder
officers a total of $50,000 and $400,000, respectively. The notes are full
recourse and are also secured by the common stock of the Company owned by the
officers and bear interest at 10% per annum. Of the aggregate principal of
$450,000, $250,000 is due on demand and $200,000 is due on the earlier of six
months after the Offering or November 19, 2004. The notes and accrued interest
are reflected as notes receivable -- related parties in the accompanying balance
sheets.
On August 18, 1998 the Company sold computer equipment for the total amount
of $50,000 to Geneva Leasing Corporation (which is owned by a stockholder of the
Company). These assets were then leased back to the Company in the form of a
36-month capital lease. No gain or loss was recorded in this transaction. The
lease obligation amounted to $28,000 at December 31, 1999 and a total amount of
$27,000 was paid to the Geneva Leasing Corporation during 1999.
Management believes that the transactions noted above are made on terms no
less favorable than could be obtained from an unaffiliated party on an
arm's-length basis.
4. INCOME TAXES
Deferred tax assets and liabilities as of December 31, 1998 and 1999 are
determined based on the difference between the financial accounting and tax
bases of assets and liabilities. Deferred tax assets and liabilities at the end
of the year are determined using the enacted statutory tax rates expected to
apply to taxable income in the years in which the deferred tax assets or
liabilities are expected to be realized or settled.
The Company has incurred net operating losses ("NOL") since commencing
operations. As of December 31, 1999 the Company has total NOLs of approximately
$19,800,000 available to offset its future income tax liability. The NOL
carryforward begins expiring in 2012. A valuation allowance is provided when it
is determined that some portion or all of the deferred tax assets may not be
realized. Accordingly, since it currently is more likely than not that the net
deferred tax assets resulting from the remaining net operating loss
carryforwards ("NOLs") and other deferred tax items will not be realized, a
valuation allowance has been provided in the accompanying financial statements
as of December 31, 1998 and 1999. The Company established the valuation
allowance for the entire amount of the deferred tax assets attributable to the
NOL carryforwards as well as for the net deferred tax assets created as a result
of temporary differences between book and tax.
F-11
<PAGE> 82
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
If there is a change in ownership of greater than 50% of the outstanding
shares of the Company's capital stock, the Company's ability to utilize its net
operating losses will be subject to limitations imposed by Internal Revenue Code
Section 382. These limitations could significantly affect the Company's
utilization of those net operating loss carryforwards. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1998 and
1999, are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
----- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................... $ 878 $ 7,537
Deferred revenue.......................................... 31 283
Other..................................................... 12 75
----- -------
Net deferred tax assets before valuation allowance.......... 921 7,895
Valuation allowance......................................... (921) (7,895)
----- -------
Net deferred tax assets..................................... $ -- $ --
===== =======
</TABLE>
5. SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 25,000,000 shares of preferred stock,
including 15,000,000 shares which are designated as Series A preferred stock and
947,421 shares which are designated as Series A-1 preferred stock. The remaining
preferred stock has not been designated by the Company.
The Series A and Series A-1 preferred stock are convertible and rank junior
to any other preferred stock that may be issued by the Company, but rank senior
to common stockholders upon liquidation. The Series A preferred stockholders
have the right to receive dividends equal to 9% of the stated value of the
preferred stock. The dividends accrue on a semi-annual basis with the dividend
period ending on the last day of May and November. Dividends are cumulative from
the date the Series A preferred stock is issued and accrue whether or not
declared by the Company. Dividends can be paid in cash, or in the form of Series
A-1 preferred stock or a combination of both at the option of the Company.
Series A-1 preferred stock is to be issued only as a dividend on Series A
preferred stock. The preferred stock is convertible at the then current
conversion price, which is equal to the stated value on the date of issuance.
The conversion price is adjusted from time to time as a result of stock splits,
recapitalizations or if the Company issues stock at prices below the stated
value of the preferred stock. Upon a qualified initial public offering, all of
the outstanding Series A and Series A-1 preferred stock automatically convert to
common stock at the then current conversion price.
On December 2, 1999 and December 24, 1999, the Company issued 9,174,313 and
2,300,000 shares, respectively, of Series A convertible preferred stock for
$2.18 per share for proceeds of $25,014,000. The convertible preferred stock was
issued to third party investors. The conversion price of the outstanding shares
as of December 31, 1999 was $2.18 per share. The Company accrued dividends of
$150,000 at December 31, 1999 through a direct charge to accumulated deficit.
Prior to these transactions, the Company sold common stock at $3.00 per share to
third party investors. As a result of the sale of the convertible preferred
stock at conversion prices below the prices sold to common shareholders, the
Company recorded a preferred stock dividend of $9,409,000 related to this
beneficial conversion feature in accordance with Emerging Issues Task Force
Issue 98-5 "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios." This dividend is
reflected as an increase in accumulated deficit and is reflected as an
adjustment to arrive at net income applicable to common shareholders in the
accompanying statement of operations.
F-12
<PAGE> 83
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the issuance of Series A preferred stock, the Company
incurred $1,656,978 in offering expenses that were recorded as a reduction of
the no par value common stock such that the preferred stock would be recorded at
its stated value of $2.18 per share.
COMMON STOCK
In March 1999 the Company amended its articles of incorporation and bylaws
to increase the number of authorized shares to 100,000,000. The accompanying
financial statements retroactively reflect this amendment in authorized shares.
During 1997 the Company issued 16,325,177 shares of common stock to two
founders for $139,000 or $0.01 per share, the deemed fair value on the date the
Company commenced operations.
Throughout 1998 the Company sold 1,677,763 shares of common stock to
third-party investors, the majority of which were unrelated to the Company, for
a total of $1,376,000 at prices ranging from $0.44 to $1.50 per share.
During 1999 the Company sold 3,706,693 shares of common stock for net
proceeds of $8,797,000. The common stock was sold to third-party investors and
consultants at prices ranging from $0.50 to $3.00 per share. Of the total shares
sold, 420,000 shares were sold to consultants at prices less than fair market
value. The Company recognized non cash compensation expense of $516,000 related
to these sales of common stock. The compensation expense is included in noncash
general and administrative compensation expense in the accompanying statements
of operations. During the third quarter of 1999 the Company issued 133,342
shares of common stock valued at $400,000 for costs related to sale of the above
mentioned common stock and paid cash expenses of $256,000. The payment for stock
issuance costs is reflected as a reduction of the proceeds from the issuance of
common stock in the accompanying balance sheets.
On July 1, 1999 the Company issued options to purchase 100,000 shares of
common stock to an employee at an exercise price of $0.01 per share. The fair
market value on the date of grant was estimated to be $3.00 per share. The
Company recorded deferred compensation of $300,000 related to this grant. The
deferred compensation will be amortized over the vesting period of the option,
which is three years from July 1, 1999. The Company amortized $50,000 of this
deferred compensation in 1999. The compensation expense is included in noncash
general and administrative compensation expense in the accompanying statements
of operations.
At various dates during 1999 the Company issued options to purchase
1,700,000 shares of common stock to consultants at exercise prices ranging from
$0.01 to $3.00 per share. The Company recognized non cash compensation expense
of $3,695,000 related to the issuance of these options. The options were valued
using the Black Scholes pricing model. As of December 31, 1999 the Company has
deferred compensation of $704,000 related to these option issuances. The
deferred compensation will be amortized over the remaining service period with a
consultant.
WARRANTS
On December 24, 1999 the Company issued warrants to purchase 506,000 shares
of common stock at an exercise price of $5.80 per share to Microsoft Corporation
("Microsoft"). This warrant was issued in connection with entering into a five
year Development, License, and Co-marketing Agreement (the "Agreement") with
Microsoft that expires December 23, 2004. The warrant can be exercised by paying
the cash exercise price or by surrendering common shares owned by Microsoft
equal to the exercise price. The Agreement grants to Microsoft a non-exclusive
perpetual license to proprietary installation tools for third-party hosted
applications on Windows NT or Windows 2000. Microsoft has the sole right to
terminate the Agreement if the Company fails to deliver the tools on a timely
basis or if the Company fails to correct any errors in the tools on a timely
basis and Microsoft will provide technical consulting and
F-13
<PAGE> 84
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
writing services during the development of the tools. Additionally, in
consideration of the obligations of Microsoft, the Company agreed to pay
Microsoft 5% of the total gross revenues that the Company receives from third
parties in consideration of its licensing and other exploitation of the tools
for the five years following acceptance of the tools by Microsoft. The Company
recorded the value of the warrants, calculated using the Black-Scholes pricing
model, of approximately $2,144,000 as deferred development costs and will
amortize this amount to the cost of revenues over the five-year term of the
Agreement. The Company will periodically evaluate the recoverability of this
deferred charge over the term of the Agreement.
In connection with this agreement, Microsoft also agreed to invest an
additional $7,500,000 in common stock by dividing $7,500,000 by a number equal
to the lesser of the midpoint of the expected Offering range in the Company's
first filing with the Securities and Exchange Commission and the actual price to
the public in such offering. If the Offering is not completed within 120 days of
the date of the first filing with the Securities and Exchange Commission, the
number of shares purchased will be determined to be the midpoint of the Offering
range on the first filing. Microsoft will also receive an additional warrant at
the date of this second investment to purchase up to that number of common stock
equal to 75% of the number of additional shares purchased by Microsoft in the
second investment. The warrants will have an exercise price equal to the
purchase price per share paid by Microsoft for the additional shares. The value
of the warrants and the difference, if any, between the midpoint of the expected
Offering range and the Offering price will be recorded as additional deferred
development costs similar to that discussed above which will be amortized over
the remaining term of the five-year Agreement.
On January 28, 2000 the Company issued warrants to purchase up to 349,000
shares of common stock of the Company at an exercise price of $9.00 per share.
These warrants were issued in connection with the entering into a web hosting
agreement. This agreement requires the Company to provide hosting services at
wholesale prices, to provide customers and technical support and to provide
other services. Upon signing the web hosting agreement, 100,000 of the warrants
vest immediately. The remaining 249,000 will vest at the end of each quarter of
2000 and at December 31, 2001 based on the number of new customers provided
through the web hosting agreement; therefore, the total remaining warrants may
never vest if the new customer targets are not met. In January 2000 the Company
recorded expense of approximately $650,000 related to the 100,000 warrants that
vested upon the signing of the agreement. The Company will record additional
expense in the future based on the number of warrants that vest based on
performance targets as valued using the Black-Scholes pricing model at the time
of vesting.
STOCK OPTIONS
During July 1999 the board of directors approved the Stock Incentive Plan
(the "Plan"). As of December 31, 1999, 4,500,000 shares of common stock are
reserved for the grant of qualified and nonqualified stock options and other
incentive awards to employees of the Company. Subsequent to December 31, 1999,
the total number of authorized shares under the Plan was increased to 7,000,000.
As of December 31, 1999 the Company has 1,725,500 options available for issuance
under the Plan. The Plan provides for the grant of options to eligible employees
and the board of directors determines the specific terms of each option grant,
including vesting period and exercise price. The options generally vest over a
three-year period. Additionally, the Company granted options to purchase
1,700,000 of common stock to certain consultants in 1999. These options had
exercise prices ranging from $0.01 to $3.00 per share and were 100% vested on
the date of issuance. The Company recorded expense associated with the issuance
of these options as discussed above.
In 1999 the Company granted options under the Plan to purchase 2,815,000
shares of common stock to employees at exercise prices ranging from $0.01 to
$5.80 per share, of which 870,000 vest ratably over a three-year period. The
remaining 1,945,000 options vest over a three year period beginning July 1,
2000.
F-14
<PAGE> 85
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
However, if the Company completes an initial public offering before July 1,
2000, the vesting accelerates to be 1/3 on the initial public offering date and
1/3 one year from the initial public offering date and 1/3 two years from the
initial public offering date.
The following table summarizes the issuance of options during 1999:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER RANGE OF AVERAGE
OF EXERCISE PRICE PER
OPTIONS PRICES SHARE
--------- ----------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1998..................... -- $ --
Granted............................................ 4,515,000 $0.01-$5.80 2.38
Forfeited.......................................... (40,500) $3.00-$5.80 3.48
---------
Outstanding at December 31, 1999..................... 4,474,500 $0.01-$5.80 2.37
=========
Vested and exercisable at December 31, 1999.......... --
=========
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
In accordance with SFAS No. 123 the Company has computed, for pro forma
disclosure purposes, the estimated fair value of all options for shares of the
Company's common stock granted to employees during the year ended December 31,
1999 using the Black-Scholes option pricing model and based on the following
assumptions:
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Risk-free interest rate..................................... 5.85%-6.59%
Expected dividend yield..................................... 0%
Expected forfeiture rate.................................... 5%
Expected volatility......................................... 88%
</TABLE>
No options were granted for the period from commencement of operations
(September 18, 1997) to December 31, 1997 or for the year ended December 31,
1998. The total fair value of the options granted to employees during the year
ended December 31, 1999 was computed as $5,660,131, which would be amortized
over the vesting period of the options. If the Company had accounted for these
options in accordance with SFAS No. 123, the Company's reported pro forma net
loss attributable to common shareholders and net income (loss) per share
attributable to common shareholders for the year ended December 31, 1999 would
have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Net loss:
As reported............................................... $ 16,784
Loss applicable to common shareholders.................... (26,343)
Loss applicable to common shareholders pro forma for SFAS
No. 123................................................ 26,829
Net loss per share:
Loss applicable to common shareholders as reported........ (1.33)
Loss applicable to common shareholders pro forma for SFAS
No. 123................................................ (1.35)
</TABLE>
F-15
<PAGE> 86
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the exercise price range, weighted average
exercise price, and remaining contractual lives by year of grant for the number
of options outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE WEIGHTED REMAINING
NUMBER PRICE AVERAGE CONTRACTUAL
YEAR OF GRANT OF SHARES RANGE PRICE LIFE (YEARS)
- ------------- --------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Options issued to employees at fair value:
1999.................................. 2,674,500 $0.01-$5.80 $3.41 9.65
Options issued to employees at less than
fair value:
1999.................................. 100,000 $0.01 $0.01 9.51
Options issued to consultants:
1999.................................. 1,700,000 $0.01-$3.00 $0.89 2.47
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
The Company leases certain buildings and equipment under capital and
operating leases expiring at various dates through 2009. Some of the leases
contain bargain purchase options. The following details operating and capital
lease obligations as of December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES AND
OTHER FUTURE
CAPITAL MINIMUM
LEASES COMMITMENTS
------- ------------
<S> <C> <C>
2000........................................................ $1,519 $ 4,728
2001........................................................ 1,459 5,168
2002........................................................ 1,093 4,068
2003........................................................ 118 1,932
2004 and thereafter......................................... 20 9,595
------ -------
Total............................................. $4,209 $25,491
====== =======
</TABLE>
The total amount of assets under capital lease as of December 31, 1998 and
1999 was $495,000 and $4,119,000, respectively, and the total obligation related
to those capital leases was $436,000 and $3,591,000, respectively. Operating
rent expense was $36,000 for the period from commencement of operations
(September 18, 1997) to December 31, 1997 and $115,000 and $516,000 for the
years ended December 31, 1998 and 1999, respectively.
EQUIPMENT COMMITMENTS
The Company is party to a financing agreement with a vendor that allows for
the purchase of equipment under capital leases. The financing agreement provides
for the financing to occur in specified quarterly increments of $1,250,000 for
up to $5,000,000 over the 12 month period beginning with the fourth quarter of
1999. As of December 31, 1999 the Company had borrowed approximately $1,200,000
under this financing agreement. The financing bears interest at 11.3% and has a
term of three years.
As of December 31, 1999, the Company had commitments of approximately
$2,700,000 in capital expenditures outstanding for expanded network and
facilities.
F-16
<PAGE> 87
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COMMITMENTS
As of December 31, 1999, the Company is party to advertising commitments of
$2,500,000 in 2000 and $250,000 in 2001.
7. SUBSEQUENT EVENTS
OPTIONS
In January, February and March 2000 the Company granted options to purchase
1,231,500 shares of common stock at exercise prices ranging from $5.80 to $9.00
per share. The Company plans to record deferred compensation expense of
approximately $3,500,000 on the options that were granted with exercise price
below the estimated fair value of $9.00 per share on the date of grant. This
expense will be amortized over the vesting period of the options.
PRO FORMA STOCKHOLDER'S EQUITY AND LOSS PER SHARE (UNAUDITED)
Simultaneous with the Company's initial public offering and pursuant to the
contractual agreements with the preferred stockholders, all shares of the
Company's Series A and Series A-1 preferred stock will be converted into shares
of common stock. Pro forma stockholder's (deficit) equity at December 31, 1999,
after giving effect to the conversion of the Series A and Series A-1 preferred
stock, would be approximately $17,500,000 and will be unchanged as a result of
the conversion. Had the conversion of the Series A and Series A-1 preferred
stock occurred at the time of the sale of the preferred stock, net loss per
share would have been $(0.81) for the year ended December 31, 1999.
INTERLAND B.V.
On February 7, 2000 the Company organized Interland B.V. in Amsterdam as a
wholly-owned subsidiary of the Company. Interland B.V. will serve as the
Company's headquarters for its European operations.
STOCK SPLIT
The Company's board of directors is actively considering the approval of a
for stock split on the Company's common stock which will be affected in the
form of a stock dividend. All share and per share data in the accompanying
financial statements will be adjusted to reflect the split.
EMPLOYEE BENEFIT PLAN
On January 1, 2000 the Company adopted a 401(k) Plan, a defined
contribution plan covering substantially all employees of the Company. Under the
plan's deferred compensation arrangement, eligible employees who elect to
participate in the plan may contribute between 1% and 15% of eligible
compensation, as defined, to the plan. The Company, at its discretion, may elect
to provide for either a matching contribution or a discretionary profit-sharing
contribution or both.
EMPLOYEE STOCK PURCHASE PLAN
After the Offering, the Company intends to adopt an Employee Stock Purchase
Plan under which qualified employees will have the right to purchase common
stock on a quarterly basis through payroll deductions. The price to be paid for
each share of common stock under the plan is 85% of the fair market value at the
beginning or the end of each quarter, whichever is lower. Total payroll
deductions may not exceed 10% of the employee's annual compensation and may not
exceed $25,000 per year. Up to 50,000 shares of common stock have been reserved
under the plan.
F-17
<PAGE> 88
INTERLAND, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SALE OF PREFERRED STOCK AND WARRANTS (UNAUDITED)
On March 15, 2000, the Company entered into a stock purchase agreement with
Network Solutions. In connection with this financing transaction, the Company
issued 689,655 shares of Series A preferred stock to Network Solutions, at a
purchase price of $5.80 per share. The Company also issued a warrant to Network
Solutions to purchase 344,827 shares of common stock at an exercise price of
$5.80 per share. The number of shares subject to the warrant may be adjusted to
prevent dilution and each warrant will expire five years after its issuance. In
addition, under the stock purchase agreement, on the day following the effective
date of the Offering, in exchange for an additional $6,000,000 in cash from
Network Solutions, the Company will issue a number of shares of common stock to
Network Solutions equal to $6,000,000 divided by the lesser of the midpoint of
the expected range of offering prices in the Company's first filing of a
registration statement that contains a range or the actual price to the public
of common stock sold in the offering. In connection with this additional
issuance, the Company will also issue an additional warrant to purchase a number
of shares of common stock equal to 75% of the number of shares sold to Network
Solutions at an exercise price equal to the price paid at that closing. In
conjunction with this investment, the Company entered into a 4 year premier
program agreement with Network Solutions. The Company will record deferred
expense of approximately $2.5 million for the value of the warrant issued on
March 15, 2000 and deferred expense of approximately $2.2 million for the
difference between the purchase price of $5.80 per share and the fair value of
the Company's common stock on that date of $9.00 per share. The Company will
record additional deferred expense for the value of the warrants to be granted
upon the closing of the Offering and for the difference, if any, between the
midpoint of the expected offering range and the offering price. This deferred
expense will be amortized over the remaining 4 year term of the premier program
agreement entered into with Network Solutions.
F-18
<PAGE> 89
- ------------------------------------------------------
- ------------------------------------------------------
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. NEITHER INTERLAND, INC. NOR ANY UNDERWRITER HAS AUTHORIZED ANYONE TO
PROVIDE PROSPECTIVE INVESTORS WITH DIFFERENT OR ADDITIONAL INFORMATION. THIS
PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE SUCH OFFER OR SALE IS NOT PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF
THESE SECURITIES.
---------------------------------
TABLE OF CONTENTS
---------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 1
Risk Factors....................... 6
Forward-Looking Statements......... 17
Use of Proceeds.................... 18
Dividend Policy.................... 18
Capitalization..................... 19
Dilution........................... 20
Selected Financial Data............ 21
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 23
Business........................... 30
Management......................... 48
Principal Shareholders............. 56
Certain Transactions............... 58
Description of Capital Stock....... 61
Shares Eligible for Future Sale.... 65
Underwriting....................... 66
Legal Matters...................... 68
Experts............................ 68
Where You Can Find More
Information...................... 68
Index to Financial Statements...... F-1
</TABLE>
---------------------
Until , 2000, (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
(Interland Logo)
SHARES
COMMON STOCK
--------------------
PROSPECTUS
--------------------
BEAR, STEARNS & CO. INC.
THOMAS WEISEL PARTNERS LLC
PAINEWEBBER INCORPORATED
, 2000
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 90
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below is an estimate of the approximate amount of the fees
and expenses (other than underwriting commissions and discounts) payable by
Interland, Inc. in connection with this offering.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee ................................... $ 30,360
National Association of Securities Dealers Inc. Registration Fee ...................... 12,000
Nasdaq National Market Listing Fees ................................................... *
Blue Sky Fees and Expenses ............................................................ *
Printing and Engraving Expenses ....................................................... *
Legal Fees and Expenses ............................................................... *
Accounting Fees and Expenses .......................................................... *
Transfer Agent Fees and Expenses ...................................................... *
Miscellaneous ......................................................................... *
----------
Total ............................................................................ $ *
==========
</TABLE>
*To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our bylaws provide for indemnification of each of our directors and
officers, and our Amended and Restated Articles of Incorporation eliminate, to
the extent permitted by the Georgia Business Corporation Code, the personal
liability of our directors to us and to our shareholders for monetary damages
for certain breaches of fiduciary duty and the duty of care. The
indemnification provided by our bylaws may be available for liabilities arising
in connection with this offering. Insofar as indemnification for liabilities
under the Securities Act of 1933, as amended, may be permitted to directors,
officers or controlling persons pursuant to our bylaws, we have been informed
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.
Our bylaws provide for indemnification of our directors and officers with
respect to any liability and reasonable expense incurred by such person in
connection with any civil or criminal action, suit or proceeding to which such
person was (or is made or threatened to be made) a party or is otherwise
involved, by reason of the fact that such person is or was one of our directors
or officers, and such person acted in a manner he believed to be in good faith
and not opposed to our best interests, and had no reasonable cause to believe
that his conduct was unlawful. Our bylaws obligate us to indemnify each of our
directors and officers to the extent that they are successful in the defense of
any action, suit or proceeding. In addition, our bylaws may obligate us, under
certain circumstances, to advance reasonable expenses incurred by each director
or officer in the defense of any civil or criminal action, suit or proceeding
for which indemnification may be sought. However, we will not indemnify any
director or officer to the extent that they are adjudged liable to us, or
liable for the receipt of improper personal benefit.
We plan to enter into indemnification agreements with each of our directors
and executive officers. The form of indemnification agreement provides that we
will indemnify our directors and officers for expenses incurred because of their
status as a director or officer, to the fullest extent permitted by Georgia law,
our articles of incorporation and our bylaws.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since September 18, 1997, we have issued and sold the following securities
(as adjusted for a 419.2835-for-one stock split effective April 21, 1999.
(1) On September 18, 1997, we issued 209,642 shares of our common stock to
Kenneth Gavranovic, our President and Chief Executive Officer at an
aggregate offering price of $1,250.
(2) On October 7, 1997, we issued 8,176,028 shares of our common stock to
Kenneth Gavranovic, our President and Chief Executive Officer, at an
aggregate offering price of $48,750 and 8,385,670 shares of our common
stock to Waldemar Fernandez at an aggregate offering price of $50,000.
(3) On November 11, 1998, we sold 84,695 shares of our common stock at an
aggregate offering price of $50,000 to an individual in a privately
negotiated transaction. On April 21, 1999 we sold an additional 84,695
shares of our common stock at an aggregate offering price of $50,000,
and we issued
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<PAGE> 91
130,610 shares of our common stock to this same individual pursuant to
and in consideration for previously granted anti-dilution rights and
the subsequent termination of these anti-dilution rights.
(4) Between November, 1998 and June, 1999, we sold 3,028,660 shares of
our common stock at an aggregate offering price of $4,838,311 to 70
individuals, six corporations and one partnership in privately
negotiated transactions.
(5) Between June 1, 1999 and December 1, 1999, we granted options to
purchase 1,200,000 shares of our common stock to four individuals in
exchange for services they rendered to us. On January 28, 2000 one of
these individuals exercised an option to purchase 150,000 shares of
common stock for an aggregate purchase price of $1,500. On February
10, 2000 a second individual exercised an option to purchase 150,000
shares of common stock for an aggregate purchase price of $1,500.
(6) On September 9, 1999, we issued 33,342 shares of our common stock to
the Santa Fe Capital Group of New Mexico, Inc. in exchange for
services provided.
(7) During September 1999 and October 1999, we sold 1,666,666 shares of
our common stock at an aggregate offering price of approximately
$5,000,000 to 52 individuals, three corporations, one limited
liability company, one partnership, and one family partnership in
privately negotiated transactions.
(8) On October 15, 1999, we granted options to purchase up to 500,000
shares of our common stock at an exercise price of $3.00 per share to
Southard Advisors, LLC.
(9) On December 2, 1999, we sold 9,174,313 shares of our Series A
Convertible Participating Preferred Stock at an aggregate offering
price of approximately $20.0 million to six investors in a privately
negotiated transaction. The distribution of shares was as follows:
3,566,141 shares to Crest Communications Partners L.P. for an
approximate purchase price of $7,774,187; 103,584 shares to Crest
Entrepreneurs Fund L.P. for an approximate purchase price of
$225,813; 1,513,514 shares to Boulder Ventures III, L.P. for an
approximate purchase price of 3,299,460; 91,991 shares to Boulder
Ventures III (Annex), L.P. for an approximate purchase price of
$200,540; 2,293,578 shares to BancBoston Ventures, Inc. for an
approximate purchase price of $5,000,000; and 1,605,505 shares to
Private Equity Co-Invest Ltd. for an approximate purchase price of
$3,500,000. Gregg Mockenhaupt, one of our directors, is a member of
Crest Partners II, LLC, the general partner of Crest Communications
Partners L.P. and Crest Entrepreneurs Fund L.P. Andrew E. Jones, one
of our directors, is a general partner of Boulder Ventures Limited,
the general partner of Boulder Ventures III, L.P. and Boulder
Ventures III (Annex), L.P.
(10) On December 24, 1999, we sold 2,300,000 shares of our Series A
Convertible Participating Preferred Stock at an aggregate offering
price of approximately $5.0 million to Microsoft Corporation. In
connection with the stock purchase, we also issued a warrant to
Microsoft for the purchase of 506,000 shares of our common stock at
an exercise price of $5.80 per share.
(11) On January 27, 2000, we issued a warrant to ServiceCo, LLC, d/b/a
Road Runner, for the purchase of 349,000 shares of our common stock
at an exercise price of $9.00 per share.
(12) On March 15, 2000, we sold 689,655 shares of our Series A Convertible
Participating Preferred Stock at an aggregate offering price of $4.0
million to Network Solutions, Inc. In connection with the stock
purchase, we also issued a warrant to Network Solutions for the
purchase of 344,827 shares of our common stock at an exercise price of
$5.80 per share.
(13) At the time of this offering, in exchange for $7.5 million in cash, we
will issue a number of shares of common stock to Microsoft equal to
$7.5 million divided by the lesser of the midpoint of the expected
range of offering prices reflected in this prospectus or the actual
price to the public of common stock sold in this offering. At the time
of this offering, we will also issue a warrant to Microsoft to
purchase a number of shares of common stock equal to 75% of the number
of shares sold to Microsoft at the time of this offering, at an
exercise price equal to the price paid at the closing of that sale.
(14) At the time of this offering, in exchange for $6.0 million in cash, we
will issue a number of shares of common stock to Network Solutions
equal to $6.0 million divided by the lesser of the midpoint of the
expected range of offering prices reflected in this prospectus or the
actual price to the public of common stock sold in this offering. At
the time of this offering, we will also issue a warrant to Network
Solutions to purchase a number of shares of common stock equal to 75%
of the number of shares sold to Network Solutions at the time of this
offering, at an exercise price equal to the price paid at the closing
of that sale.
(15) Since September, 1997 we have granted to officers, directors and
employees options to purchase an aggregate of 3,638,000 shares of our
common stock at a weighted average exercise price of $6.73.
(16) In March 2000, we issued 15,523 shares of common stock to our legal
counsel in return for services provided at a deemed price of $9.00 per
share.
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<PAGE> 92
The sales of the securities listed above were exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, as transactions by an issuer not involving
a public offering or, with respect to issuances to employees, directors and
consultants, Rule 701 promulgated under Section 3(b) of the Securities Act
written compensatory benefit plans and contracts relating to compensation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. Exhibits
EXHIBIT DESCRIPTION OF EXHIBIT
NUMBER
*1.1 - Form of Underwriting Agreement
3.1(a) - Amended and Restated Articles of Incorporation of the
Company dated October 5, 1999
3.1(b) - Articles of Amendment of the Company dated December 2, 1999
3.1(c) - Articles of Amendment of the Company dated December 23, 1999
*3.1(d) - Articles of Amendment of the Company dated March __, 2000
3.2 - Bylaws of the Company, as amended
*4.1 - Form of Certificate for Common Stock
*5.1 - Opinion of Kilpatrick Stockton, LLP, as to the legality of
the securities being registered
*10.1 - Stock Purchase Agreement among the Company, Crest
Communications Partners L.P., Crest Entrepreneurs Fund L.P.,
Boulder Ventures III, L.P. and other investors dated
December 2, 1999
10.2 - Subscription Agreement dated December 24, 1999 between the
Company and Microsoft Corporation
*10.3 - Subscription Agreement dated March , 2000 between the
Company and Network Solutions, Inc.
*10.4(a) - Stockholders' Agreement among the Company, Crest
Communications Partners L.P., Crest Entrepreneurs Fund L.P.,
Boulder Ventures III, L.P. and other investors dated
December 2, 1999
*10.4(b) - Amendment to Stockholders' Agreement dated December 24,
1999
*10.4(c) - Amendment to Stockholders' Agreement dated March , 1999
*10.5(a) - Registration Rights Agreement among the Company, Crest
Communications Partners, L.P., Crest Entrepreneurs Fund L.P.,
Boulder Ventures III, L.P. and other investors dated
December 2, 1999
*10.5(b) - Amendment to Registration Rights Agreement dated December 24,
1999
*10.5(c) - Amendment to Registration Rights Agreement dated March ,
2000
*10.6 - Employment Agreement dated December 2, 1999 between the
Company and Ken Gavranovic
10.7 - Employment Agreement dated February 14, 2000 between the
Company and H. Christopher Covington
10.8 - Employment Agreement dated February 16, 2000 between the
Company and David N. Gill
10.9 - Employment Agreement dated February 24, 2000 between the
Company and Rahim Shah
10.10 - Form of Indemnification Agreement for Officers and Directors
of the Company
10.11(a) - Interland, Inc. Stock Incentive Plan
10.11(b) - First Amendment to Interland, Inc. Stock Incentive Plan
10.11(c) - Second Amendment to Interland, Inc. Stock Incentive Plan
*10.12 - Interland, Inc. Employee Stock Purchase Plan
*10.13 - Interland, Inc. Shareholder Rights Plan
*10.14 - Separation Agreement and General Release with Waldemar
Fernandez dated November 19, 1999
*10.15 - Promissory Note of Ken Gavranovic in favor of the Company
dated December 10, 1998
*10.16 - Promissory Note of Waldemar Fernandez in favor of the Company
dated December 15, 1998
*10.17 - Promissory Note of Ken Gavranovic in favor of the Company
dated May 14, 1999
*10.18 - Promissory Note of Waldemar Fernandez in favor of the Company
dated May 19, 1999
*10.19 - Stock Pledge Agreement between the Company and Ken Gavranovic
dated May 14, 1999
*10.20 - Stock Pledge Agreement between the Company and Waldemar
Fernandez dated May 19, 1999
*10.21 - Agreement of Lease between the Company and 34 Peachtree
Associates, L.P. dated November 19, 1997
*10.22 - Lease Agreement between the Company and 101 Marietta Street
Associates dated February , 1999, as amended
*10.23 - Lease Agreement between the Company and 101 Marietta Street
Associates dated September 29, 1999, as amended
*23.1 - Consent of Kilpatrick Stockton LLP (will be included in the
opinion filed as Exhibit No. 5 to this Registration
Statement)
23.2 - Consent of Arthur Andersen LLP
24.1 - Powers of Attorney of certain officers and directors of the
Company (included on the signature pages of this
Registration Statement)
27.1 - Financial Data Schedule (for SEC use only)
* To be filed by amendment.
b. Financial Statement Schedules
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of Interland pursuant to the provisions of our Articles of Incorporation and
Bylaws or otherwise, Interland 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 us of expenses incurred or paid by a director, officer or
controlling person of Interland 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, Interland will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
II-3
<PAGE> 93
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 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 Interland 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 purposes 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.
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<PAGE> 94
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Interland
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, Georgia, on
March 15, 2000.
INTERLAND, INC.
By: /s/ Ken Gavranovic
---------------------------------------------------
Kenneth Gavranovic, President and Chief Executive
Officer
POWER OF ATTORNEY
Each person whose signature appears below in so signing also makes,
constitutes and appoints Kenneth Gavranovic and David N. Gill each of them
acting alone, his true and lawful attorney-in-fact, with full power of
substitution, for him in any and all capacities to execute and cause to be
filed with the Securities and Exchange Commission any and all amendments and
post-effective amendments to this registration statement, and any registration
statement for the same offering covered by this registration statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act,
and all post-effective amendments thereto together with exhibits to any such
registration statements or amendments and other documents in connection
therewith, and hereby ratifies and confirms all that said attorney-in-fact or
said attorney-in-fact's substitute or substitutes may do or cause to be done by
virtue hereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on March 15, 2000, by the following
persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Position
- --------- --------
<S> <C>
/s/ Ken Gavranovic
- --------------------------------- President and Chief Executive Officer and Director
Kenneth Gavranovic (Principal Executive Officer)
/s/ David N. Gill
- --------------------------------- Executive Vice President, Chief Financial Officer and
David N. Gill Director
(Principal Financial and Accounting Officer
/s/ Clyde Heintzelman
- --------------------------------- Director
Clyde Heintzelman
/s/ Andrew E. Jones
- --------------------------------- Director
Andrew E. Jones
/s/ Gregg A. Mockenhaupt
- --------------------------------- Director
Gregg A. Mockenhaupt
/s/ Rahim Shah
- --------------------------------- Director
Rahim Shah
/s/ William E. Whitmer
- --------------------------------- Director
William E. Whitmer
</TABLE>
II-5
<PAGE> 1
EXHIBIT 3.1(a)
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF INTERLAND, INC.
ARTICLE I.
The name of the Corporation is:
INTERLAND, INC.
ARTICLE II.
The Corporation shall have authority to issue not more than
100,000,000 shares of common stock, of no par value (the "Common Stock") and
10,000,000 shares of preferred stock, of no par value (the "Preferred Stock").
ARTICLE III.
Holders of the Common Stock are entitled to the entire voting
power, all distributions declared and all assets of the Corporation upon
dissolution, subject to the rights and preferences, if any, of the holders of
the Preferred Stock to such voting power, dividends and assets upon dissolution
pursuant to applicable law and the resolution or resolutions of the Board of
Directors providing for the issue of one or more series of Preferred Stock.
ARTICLE IV.
The Board of Directors is hereby expressly authorized to
issue, at any time and from time to time, shares of Preferred Stock in one or
more series. The number of shares within any such series shall be designated by
the Board of Directors in one or more resolutions, and the shares of each
series so designated shall have such preferences with respect to the Common
Stock and other series of Preferred Stock, and such other rights, restrictions
or limitations with respect to voting, dividends, conversion, exchange,
redemption and any other matters, as may be set forth in one or more
resolutions adopted by the Board of Directors. If and to the extent required by
law, the Board of Directors must file Articles of Amendment setting forth any
designation, preferences, rights, restrictions or limitations of other series
of Preferred Stock with the Georgia Secretary of State prior to the issuance of
any shares of such series.
<PAGE> 2
The authority of the Board of Directors with respect to the
establishment of each series of Preferred Stock shall include, without limiting
the generality of the foregoing, determination of the following matters which
may vary between series:
(a) The distinctive designation of that series and the
number of shares constituting that series, which number may be increased
(except where otherwise provided by the Board of Directors in creating such
series) or decreased (but not below the number of shares of such series then
outstanding) from time to time;
(b) The dividend rate on the shares of that series,
whether dividends shall be cumulative, and, if so, from which date or dates,
and the relative rights of priority, if any, of payments of dividends on shares
of that series;
(c) Whether that series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the terms of such
voting rights;
(d) Whether that series shall have conversion privileges,
and, if so, the terms and conditions of such conversion, including provisions
for adjustment of the conversion rate in such events as the Board of Directors
shall determine;
(e) Whether the shares of that series shall be
redeemable, and, if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary under different
conditions;
(f) Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the terms and
amount of such sinking fund;
(g) The rights of the shares of that series in the event
of voluntary or involuntary liquidation, dissolution or winding-up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series; and
(h) Any other relative preferences, rights, restrictions
or limitations of that series, including but not limited to any obligations of
the Corporation to repurchase shares of that series upon specified events.
ARTICLE V.
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the Corporation,
the Board of Directors, committees of the
2
<PAGE> 3
Board of Directors and individual directors, in addition to considering the
effects of any action on the Corporation or its shareholders, may consider the
interests of the employees, customers, suppliers, and creditors of the
Corporation and its subsidiaries, the communities in which offices or other
establishments of the Corporation and its subsidiaries are located, and all
other factors the directors consider pertinent.
ARTICLE VI.
No director of the Corporation shall be personally liable to
the Corporation or its shareholders for monetary damages for breach of his duty
of care or other duty as a director, provided that this provision shall
eliminate or limit the liability of a director only to the extent permitted
from time to time by the Georgia Business Corporation Code (the "Code") or any
successor law or laws. If at any time the Code shall have been amended to
authorize the further elimination or limitation of the liability of a director,
then the liability of each director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Code, as so amended, without
further action by the shareholders, unless the provisions of the Code, as
amended, require further action by the shareholders. Any repeal or modification
of the foregoing provisions of this Article VI shall not adversely affect the
elimination or limitation of liability or alleged liability pursuant hereto of
any director of the Corporation for or with respect to any alleged act or
omission of the director occurring prior to such repeal or modification.
ARTICLE VII.
Any action or actions required or permitted to be taken at a
meeting of the shareholders of the Corporation may be taken without a meeting
by those persons who would be entitled to vote at a meeting shares having
voting power to cast not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all
shareholders entitled to vote were present and voted, provided that such action
is evidenced by one or more written consents describing the action taken which
are signed by the shareholders entitled to take such action and delivered to
the Corporation for filing with the corporate records; provided that this
Article VII shall automatically be terminated and of no further force nor
effect at such time as a registration statement covering shares of Common Stock
of the Corporation is declared effective by the Securities and Exchange
Commission.
IN WITNESS WHEREOF, the Corporation has caused these Amended
and Restated Articles of Incorporation to be executed by its duly authorized
officer on the September 8, 1999.
INTERLAND, INC.
By: /s/ Kenneth Gavranovic
----------------------------------
Kenneth Gavranovic, President
3
<PAGE> 1
EXHIBIT 3.1(b)
ARTICLES OF AMENDMENT
OF
INTERLAND, INC.
1.
The name of the corporation is Interland, Inc. (hereinafter
referred to as the "Corporation").
2.
The Articles of Incorporation of the Corporation are amended
by adding at the end of Article IV the powers, rights and preferences, and the
qualifications, limitations and restrictions thereof, of Series A Convertible
Participating Preferred Stock and Series A-1 Convertible Participating
Preferred Stock as set forth in Exhibit A attached hereto.
3.
The amendment was duly adopted by unanimous written consent
of the Board of Directors dated as of December 1, 1999. Pursuant to
O.C.G.A. ss.14-2-1003 and Article IV of the Amended and Restated Articles of
Incorporation of the corporation, shareholder consent was not required.
IN WITNESS WHEREOF, the Corporation has caused these Articles
of Amendment to be executed by its duly authorized officer, this 2nd day of
December 1999.
INTERLAND, INC.
By: /s/ Kenneth Gavranovic
---------------------------------------
Kenneth Gavranovic, President
<PAGE> 2
EXHIBIT A
SERIES A AND SERIES A-1 CONVERTIBLE PARTICIPATING PREFERRED STOCK
The following sections set forth the powers, rights and
preferences, and the qualifications, limitations and restrictions thereof, of
the Corporation's Series A Convertible Participating Preferred Stock and the
Series A-1 Convertible Participating Preferred Stock.
SECTION 1. DESIGNATION AND AMOUNT.
1.1. Number of Shares. The designation of one of the series
of Preferred Stock, no par value per share, provided for herein shall be
"Series A Convertible Participating Preferred Stock" (hereinafter referred to
as the "Series A Preferred"), and the number of authorized shares constituting
Series A Preferred is 9,174,313. The shares of Series A Preferred shall only be
issued in connection with the consummation of the transactions contemplated by
the Stock Purchase Agreement dated as of December 2, 1999, by and among the
Corporation and the Investors, as defined therein (the "Purchase Agreement").
The designation of the other series of Preferred Stock, no par value per share,
provided for herein shall be "Series A-1 Convertible Participating Preferred
Stock" (hereinafter referred to as the "Series A-1 Preferred"), and the number
of authorized shares constituting Series A-1 Preferred is 825,687. The shares
of Series A-1 Preferred shall only be issued as dividends on the Series A
Preferred pursuant to Section 2.2 hereof. The Series A-1 Preferred shall have
all of the same powers, preferences, rights, qualifications, limitations and
restrictions as the Series A Preferred and shall otherwise be identical and
pari passu to the Series A Preferred except as specifically provided in Section
5.1(b) hereof. Unless expressly provided otherwise herein, the term "Series A
Preferred" shall refer to both the Series A Preferred and the Series A-1
Preferred.
1.2. Restrictions on Reissuance. All shares of Series A
Preferred redeemed, purchased or otherwise acquired by the Corporation shall be
retired and canceled and shall be restored to the status of authorized, but
unissued shares of Preferred Stock, without designation as to series, and may
thereafter be issued, but not as shares of Series A Preferred.
1.3. Stated Value Per Share. The Stated Value Per Share of
the Series A Preferred shall be $2.18.
1.4. Rank. The Series A Preferred shall, with respect to
rights upon liquidation, winding up or dissolution, and redemption rights, rank
(a) junior to any other series of Preferred Stock duly established by the Board
of Directors of the Corporation, the terms of which shall specifically provide
that such series shall rank prior to the Series A Preferred, whether now
existing or hereafter created (the
<PAGE> 3
"Senior Preferred Stock") and (b) prior to any other class or series of
Preferred Stock the terms of which shall specifically provide that such series
shall rank junior to the Series A Preferred and prior to any other series of
capital stock of the Corporation, including all classes of the Common Stock, no
par value per share, of the Corporation, whether now existing or hereafter
created (the "Common Stock"; all of such classes or series of capital stock of
the Corporation to which the Series A Preferred ranks prior, including without
limitation the Common Stock, and including, without limitation, junior
securities convertible into or exchangeable for other junior securities or
phantom stock representing junior securities, are collectively referred to
herein as "Junior Securities").
SECTION 2. DIVIDENDS.
2.1. General Obligation.
Subject to any prior preferences and other rights of any Senior Preferred
Stock and to the provisions of this SECTION 2.1, the record holders of the
Series A Preferred shall be entitled to receive when, as and if declared by the
Corporation's Board of Directors and to the extent permitted under the Georgia
Business Corporation Code, as amended (the "Act"), cumulative preferential
dividends on the shares of the Series A Preferred outstanding, at a compounded
annual rate per share of nine percent (9%) of the Stated Value Per Share of the
Series A Preferred. Dividends on the Series A Preferred shall accrue on a
semi-annual basis with the dividend periods ending on the last day of each of
May and November, with the first dividend period ending on May 31, 2000.
Dividends on the Series A Preferred shall be cumulative from the first date on
which shares of Series A Preferred are issued (the "Original Issue Date"),
whether or not declared and whether or not in any dividend period there shall
have been net profits or net assets of the Corporation legally available for the
payment of those dividends. After the holders of the Series A Preferred have
received their dividend preference as set forth above, the holders of the Series
A Preferred shall be entitled to receive, out of funds legally available
therefor, dividends at the same rate as dividends (other than dividends payable
in additional shares of Common Stock) are paid with respect to the Common Stock
(treating each share of Series A Preferred as being equal to the number of
shares of Common Stock (including fractions of a share) into which each share of
Series A Preferred is then convertible).
2.2. Payment of Dividends.
Any dividend on the Series A Preferred accrued and payable as provided in
this SECTION 2 shall be paid at, the option of the Corporation, (i) in cash,
(ii) by issuing a number of shares (or partial shares) of the Series A-1
Preferred for each such share (or partial share) of Series A Preferred then
outstanding equal to the dividend then payable on each such share (or partial
<PAGE> 4
share) of Series A Preferred for the dividend period then ended (or such
shorter period for which dividends are so being paid) (expressed as a dollar
amount) divided by the Stated Value Per Share, or (iii) a combination thereof.
To the extent declared by the Board of Directors of the Corporation, dividends
accrued for each semi-annual period ending on the last day of the next
preceding May and November, respectively, shall be paid on the fifth day of
June or December, respectively (or if any such day is not a business day, the
next business day following such day) in each year (each such date being
referred to as a "Dividend Payment Date")). Dividends shall be paid to the
holders of record of Series A Preferred as of the last day of the month
immediately preceding the Dividend Payment Date. Any dividends not paid on a
Dividend Payment Date thereafter shall accumulate and shall be considered
"accrued but unpaid" for all purposes hereunder until paid. The amount of
dividends accruing for any period shorter or longer than a full semi-annual
dividend period shall be determined on the basis of twelve 30-day months and a
360-day year, and the actual number of days elapsed in the period for which a
dividend is payable. Dividends paid on the shares of Series A Preferred in an
amount less than the total amount of such dividends at the time accrued on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. Dividends for any past semi-annual dividend
period that are accrued but unpaid may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to the holders of
record on the record date for such dividend payment.
2.3. Dividends or Distributions on Junior Securities.
The Corporation shall not declare and pay any dividends on
Junior Securities unless all accrued and unpaid dividends on the Series A
Preferred have been paid in full. The Corporation shall not repurchase, redeem
or make any distribution with respect to any Junior Securities unless all
accrued and unpaid dividends on the Series A Preferred have been paid in full.
SECTION 3. LIQUIDATION.
In the event of any dissolution, liquidation or winding up of
the Corporation, whether voluntary or involuntary (a "Liquidation"), the
holders of shares of Series A Preferred shall be entitled to receive for each
share of Series A Preferred the greater of (a) the Stated Value Per Share plus
any accrued but unpaid dividends on the Series A Preferred out of the assets of
the Corporation legally available for distribution to stockholders (whether
representing capital or surplus), before any payment or distribution shall be
made on the Common Stock or any other Junior Securities, but after distribution
of such assets among, or payment thereof over to, creditors of the Corporation
and to holders of the Senior Preferred Stock (the "Series A Preferred
Liquidation Distribution") or (b) the amount that each holder of Series A
Preferred would receive out of the remaining assets of the
<PAGE> 5
Corporation available for distribution to stockholders (treating each share of
Series A Preferred as being equal to the number of shares of Common Stock
(including fractions of a share) into which each share of Series A Preferred is
then convertible) and Junior Securities in accordance with the respective
rights of such holders. If the assets distributable to holders of the Series A
Preferred upon such dissolution, liquidation or winding up shall be
insufficient to pay cash in an amount equal to the amount of the Series A
Preferred Liquidation Distribution to the holders of shares of Series A
Preferred then such assets or the proceeds thereof shall be distributed among
the holders of the Series A Preferred ratably in proportion to the respective
amounts to which they otherwise would be entitled. Upon the election of a
majority of the shares of the Series A Preferred (including fractional shares)
then outstanding, in the aggregate and given in writing or by vote at a
meeting, and consenting or voting separately as a single class, (i) the sale,
conveyance, exchange or transfer of all or substantially all of the property or
assets of the Corporation, (ii) the consolidation or merger of the Corporation
with any other corporation in which the Corporation's stockholders prior to the
consolidation or merger own less than a majority of the voting securities of
the surviving corporation or (iii) any capital reorganization or
reclassification (any such event a "Reorganization Event") will be deemed to be
a Liquidation, provided that (x) the holders of Series A Preferred, consenting
or voting separately as a class, have not previously approved the
Reorganization Event, (y) the holders of Series A Preferred, voting separately
as a class, do not have the right to approve the Reorganization Event pursuant
to Section 4(a) below or (z) the Corporation has not exercised its right,
pursuant to Section 4, to convert all of the Series A Preferred into Common
Stock in connection with such a Reorganization Event.
SECTION 4. VOTING RIGHTS; PROTECTIVE PROVISIONS.
The holders of the Series A Preferred shall be entitled to
notice of all stockholder meetings in accordance with the Corporation's bylaws,
and except as otherwise required by law or these Articles, the holders of the
Series A Preferred shall vote on all matters submitted to the stockholders for
a vote together with the holders of the Common Stock as a single voting group,
and each share of Series A Preferred (including fractional shares) shall be
entitled to the number of votes equal to the number of votes which could be
cast in such vote by the number of shares of Common Stock that would be
issuable upon conversion of such share of Series A Preferred on the record date
for determining eligibility to participate in the action being taken. In
addition to any other rights provided by law, the consent of a majority of the
shares of the Series A Preferred (including fractional shares), which consent
will not in any event be unreasonably withheld, on an as if converted basis
then outstanding, in the aggregate and given in writing or by vote at a
meeting, and consenting or voting separately as a single class on an
as-if-converted basis, shall be required for the Corporation to:
<PAGE> 6
(a) authorize or effect a Reorganization
Event or Liquidation, except for a Reorganization Event or Liquidation in which
the consideration per share of Series A Preferred (including shares Outstanding
on an As-Converted Basis (as defined below) if appropriate) is equal to or
greater than (i) three times the Stated Value Per Share if the transaction
takes place before December 2, 2002 or (ii) four times the Stated Value Per
Share if the transaction takes place on or after December 2, 2002 provided that
the consideration consists of (i) cash, (ii) securities listed on an
established national securities exchange or automated quotation system and
registered under the Act or (iii) a combination thereof;
(b) authorize the issuance of unsecured debt in
an amount greater than $20 million;
(c) authorize the issuance of any equity
securities that are senior to or pari passu with the Series A Preferred;
(d) materially alter the rights, preferences
or privileges of the Series A Preferred; or
(e) increase or decrease the number of
authorized shares of Series A Preferred.
In the event that the holders of the Series A
Preferred do not approve any of the matters set forth above, the Corporation
shall have the right to convert all of the outstanding shares of Series A
Preferred into Common Stock at a conversion ratio (which represents the number
of shares of Common Stock into which each share of Series A Preferred is
convertible) determined by dividing (A) the greater of (i) three times the
Stated Value Per Share or (ii) the current market value of a share of Common
Stock as determined by a third-party unaffiliated investment bank of national
repute selected jointly by the Corporation and the holders of a majority of the
Series A Preferred by (B) the Conversion Price then in effect. The Corporation
must exercise its right to cause a conversion pursuant to this SECTION 4 within
sixty (60) days of the date upon which the Corporation receives final written
notification that the holders of Series A Preferred have not consented to any
of the matters set forth above and the conversion of the Series A Preferred
pursuant to this SECTION 4 shall be effected within thirty (30) days of such
election by the Corporation.
SECTION 5. OPTIONAL CONVERSION.
5.1. General.
(a) Series A Preferred. At any time and from
time to time after the issuance thereof, any holder of Series A Preferred may
convert any share
<PAGE> 7
of Series A Preferred held by such holder into a number of shares of Common
Stock determined by dividing the Stated Value Per Share of the Series A
Preferred by the Conversion Price then in effect. The initial Conversion Price
for the Series A Preferred shall be $2.18. The Conversion Price from time to
time in effect is subject to adjustment as hereinafter provided.
(b) Series A-1 Preferred. Each share of Series
A-1 Preferred shall convert into the same number of shares of Common Stock as
each share of Series A Preferred and the provisions of this Section 5 shall
apply to the Series A-1 Preferred, except as specifically provided in this
Section 5.1(b). In the event that the Corporation has completed a "Qualified
Equity Infusion" (as defined below) after the issuance of the shares of Series
A Preferred, any holder of Series A-1 Preferred may convert any shares of
Series A-1 Preferred held by such holder into a number of shares of Common
Stock determined by dividing the Stated Value Per Share by the price per share
of Common Stock paid (or the value accorded each share of Common Stock if the
security purchased is other than Common Stock) in the Corporation's most recent
"Qualified Equity Infusion" (as defined below). For purposes of this SECTION
5.1(B), Qualified Equity Infusion shall mean the most recent (i) equity
investment of $5 million or more made by a "Strategic Investor" (as defined
below) or (ii) equity investment of $10 million or more by a non-Strategic
Investor. For purposes of this SECTION 5.1(B), "Strategic Investor" shall mean
an investor in the Corporation's securities which (i) is engaged in the same or
a related business as the Corporation, (ii) in the opinion of a majority of the
Board of Directors, is making the investment primarily for strategic business
reasons rather than as a passive investment and (iii) has a public market
capitalization (based on the fair market value of its outstanding
publicly-traded securities) of at least $2 billion. For purposes of this
SECTION 5.1(B), an "equity investment" shall include an investment in any
shares of capital stock of the Corporation or any security which is convertible
into, exchangeable for, or exercisable for any shares of capital stock of the
Corporation.
5.2. Conversion Procedure
(a) Any holder of shares of Series A Preferred
desiring to convert any portion thereof into Common Stock shall surrender each
certificate representing one or more shares of the Series A Preferred to be
converted, duly endorsed in favor of the Corporation or in blank and
accompanied by proper instruments of transfer, at the principal business office
of the Corporation (or such other place as may be designated by the
Corporation), and shall give written notice to the Corporation at that office
of its election to convert the same, setting forth therein the name or names
(with the address or addresses) in which the shares of Common Stock are to be
issued. Conversion shall be effective upon receipt by the Corporation of the
notice and the share certificate or certificates contemplated by the preceding
sentence. In case of any Liquidation of the Corporation, such right of
<PAGE> 8
conversion shall cease and terminate at the close of business on the business
day fixed for payment of the amount distributable to the holders of the Series
A Preferred pursuant to SECTION 3.
(b) As soon as possible after a conversion has
been effected (but in any event within five business days), the Corporation
shall deliver to the converting holder:
(i) a certificate or certificates
representing the number of shares of Common Stock issuable by reason of such
conversion in such name or names and such denomination or denominations as the
converting holder has specified; and
(ii) a certificate representing any
shares of Series A Preferred which were represented by the certificate or
certificates delivered to the Corporation in connection with such conversion
but which were not converted.
(c) The issuance of certificates for shares
of Common Stock upon conversion of Series A Preferred shall be made without
charge to the holders of such Series A Preferred for any issuance tax in
respect thereof or other cost incurred by the Corporation in connection with
such conversion and the related issuance of shares of Common Stock.
(d) The Corporation shall not close its books
against the transfer of Series A Preferred or of Common Stock issued or
issuable upon conversion of Series A Preferred in any manner which interferes
with the timely conversion of Series A Preferred. The Corporation shall assist
and cooperate (but the Corporation shall not be required to expend substantial
efforts or funds in excess of $5,000 in the aggregate) with any holder of
Series A Preferred required to make any governmental filings or obtain any
governmental approval prior to or in connection with any conversion of shares
of Series A Preferred hereunder (including, without limitation, making any
filings required to be made by the Corporation).
(e) 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 issuance upon the conversion of the Series A
Preferred, not less than the number of shares of Common Stock issuable upon the
conversion of all outstanding Series A Preferred that may then be exercised.
All shares of Common Stock which are so issuable shall, when issued, be duly
authorized and validly issued, fully paid and nonassessable and free from all
taxes, liens and charges. The Corporation shall take all such actions as may be
necessary to ensure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which
<PAGE> 9
shares of Common Stock may be listed (except for official notice of issuance
which shall be immediately delivered by the Corporation upon each such
issuance).
5.3. Subdivision or Combination of Common Stock.
If the Corporation at any time subdivides (by any stock
split, stock dividend, recapitalization or otherwise) the outstanding shares of
one or more classes of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately decreased to account for such subdivision, and if the
Corporation at any time combines (by reverse stock split or otherwise) the
outstanding shares of one or more classes of Common Stock into a smaller number
of shares, the Conversion Price in effect immediately prior to such combination
shall be proportionately increased.
5.4. Reorganization, Reclassification, Consolidation, Merger
or Sale.
In connection with any Reorganization Event, the holders
of Series A Preferred shall thereafter have the right to acquire and receive, in
lieu of (or in addition to, as the case may be) the shares of Common Stock
immediately theretofore acquirable and receivable upon the conversion of such
holder's Series A Preferred, such shares of stock, securities, cash or other
assets (or, if not practicably attainable, the reasonable equivalent thereof) as
such holder would have received in connection with such Reorganization Event if
such holder had converted its Series A Preferred immediately prior to such
Reorganization Event. The Corporation shall make appropriate provisions to
ensure that the requirements of the previous sentence are effected. The
Corporation will not effect any such Reorganization Event unless prior to the
consummation thereof, the successor corporation (if other than the Corporation)
resulting from such Reorganization Event assumes, by written instrument, the
obligation to deliver each such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to acquire.
5.5. Adjustment of Price Upon Issuance of Common Stock.
If and whenever the Corporation shall issue or sell, or
is, in accordance with subparagraphs 5.5(a) through 5.5(g), deemed to have
issued or sold, any shares of Common Stock or other equity securities of the
Corporation or any Options (as defined below) or Convertible Securities (as
defined below) for a price per share less than the applicable Conversion Price
for the Series A Preferred immediately prior to the time of such issue or sale
(except for (A) shares issued in connection with the conversion of
Series A Preferred or (B) the issuance of options, warrants or other common
stock equivalents or shares issued upon the exercise of options, warrants or
other common stock equivalents to directors, officers or employees of the
Corporation which are approved by the Compensation Committee of the
Corporation's Board of Directors) (a "Dilutive Financing"), the Conversion Price
shall be reduced by multiplying the Conversion Price in effect immediately
before
<PAGE> 10
the issuance or sale by a fraction, the numerator of which is the number of
shares of Common Stock that are Outstanding on an As-Converted Basis (as
defined below) immediately before the Dilutive Financing plus the number of
shares of Common Stock that could be purchased at the Conversion Price
immediately before the time of the Dilutive Financing for the aggregate
consideration paid or payable upon the sale or issuance of Common Stock or
other securities in the Dilutive Financing, and the denominator of which is the
number of shares of Common Stock that are Outstanding on an As-Converted Basis
immediately before the Dilutive Financing plus the number of shares that are
acquired or to be acquired upon the sale or issuance of the Common Stock and
other securities in the Dilutive Financing. For purposes of this SECTION 5.5,
"Outstanding on an As-Converted Basis" immediately before the Dilutive
Financing means the sum of (i) all Common Stock issued and outstanding
immediately before the Dilutive Financing plus (ii) all Common Stock that would
be issued if all Series A Preferred, Options and other Convertible Securities
were converted or exercised, as applicable, hereunder immediately before the
Dilutive Financing.
For purposes of this SECTION 5.5., the following subparagraphs
(a) to (g) shall also be applicable:
(a) Issuance of Rights or Options. In case at
any time the Corporation shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any warrants or other rights to subscribe
for or to purchase, or any options for the purchase of, Common Stock or any
stock or security convertible into or exchangeable for Common Stock (such
warrants, rights or options being called "Options" and such convertible or
exchangeable stock or securities being called "Convertible Securities") whether
or not such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by dividing
(i) the total amount, if any, received or receivable by the Corporation as
consideration for the granting of such Options, plus the minimum aggregate
amount of additional consideration payable to the Corporation upon the exercise
of all such Options, plus, in the case of such Options which relate to
Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of all such
Options or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the applicable
Conversion Price for the Series A Preferred immediately prior to the time of
the granting of such Options, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such
<PAGE> 11
Convertible Securities issuable upon the exercise of such Options shall be
deemed to have been issued for such price per share as of the date of granting
of such Options or the issuance of such Convertible Securities and thereafter
shall be deemed to be outstanding.
(b) Issuance of Convertible Securities. In
case the Corporation shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible Securities,
whether or not the rights to exchange or convert any such Convertible
Securities are immediately exercisable, and the price per share for which
Common Stock is issuable upon such conversion or exchange (determined by
dividing (i) the total amount received or receivable by the Corporation as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Corporation upon the conversion or exchange thereof, by (ii) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of
all such Convertible Securities) shall be less than the applicable Conversion
Price for the Series A Preferred immediately prior to the time of such issue of
sale, then the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be deemed to
have been issued for such price per share as of the date of the issue or sale
of such Convertible Securities and thereafter shall be deemed to be
outstanding, provided that except as otherwise provided in subparagraph (c), no
adjustment of any Conversion Price shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible Securities and if
any such issue or sale of such Convertible Securities is made upon exercise of
any Options to purchase any such Convertible Securities for which adjustments
of any Conversion Price have been or are to be made pursuant to other
provisions of this SECTION 5.5., no further adjustment of such Conversion Price
shall be made by reason of such issue or sale.
(c) Change in Option Price or Conversion
Rate; Expiration of Options or Convertible Securities. Upon the happening of
any of the following events, namely, if the purchase price provided for in any
Option referred to in subparagraph (a), the additional consideration, if any,
payable upon the conversion or exchange of any Convertible Securities referred
to in subparagraph (a) or (b), or the rate at which Convertible Securities
referred to in subparagraph (a) or (b) are convertible into or exchangeable for
Common Stock shall change at any time (including, but not limited to, changes
under or by reason of provisions designed to protect against dilution), the
applicable Conversion Price for the Series A Preferred at the time of such
event shall forthwith be readjusted to the Conversion Price which would have
been in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or conversion rate, as the case may be, at the time initially granted, issued
or sold, but only if as a result of such adjustment the Conversion Price then
<PAGE> 12
in effect hereunder is thereby reduced; and on the expiration or termination of
such Option or Convertible Securities, the Conversion Price then in effect
hereunder shall forthwith be increased to the Conversion Price which would have
been in effect at the time of such expiration or termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to such
expiration or termination, never been issued; provided, that any consideration
which was actually received by the Corporation in connection with the issuance
or sale of such Options or Convertible Securities shall be included in the
readjustment computation even though such Options or Convertible Securities
shall have expired or terminated.
(d) Stock Dividends. In case the Corporation
shall declare a dividend or make any other distribution upon any stock of the
Corporation payable in Common Stock (except for dividends or distributions upon
the Common Stock), Options or Convertible Securities (except for dividends or
distributions on the Series A Preferred), the Common Stock, Options or
Convertible Securities, as the case may be, issuable in payment of such
dividend or distribution shall be deemed to have been issued or sold at
consideration equal to $.01 per share.
(e) Consideration for Stock. In case any
shares of Common Stock, Options or Convertible Securities shall be issued or
sold for cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor, without deduction therefrom of any
amounts paid or receivable for accrued interest or accrued dividends and any
expenses incurred or any underwriting commissions or concessions paid or
allowed by the Corporation in connection therewith. In case any shares of
Common Stock, Options or Convertible Securities shall be issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Corporation shall be deemed to be the fair value of such
consideration as determined in good faith by the Board of Directors of the
Corporation, without deduction of any amounts paid or receivable for accrued
interest or accrued dividends and any expenses incurred or any underwriting
commissions or concessions paid or allowed by the Corporation in connection
therewith. In case any Options shall be issued in connection with the issue and
sale of other securities of the Corporation, together comprising one integral
transaction in which no specific consideration is allocated to such Options by
the parties thereto, such Options shall be deemed to have been issued for such
consideration as determined in good faith by the Board of Directors of the
Corporation.
(f) Record Date. In case the Corporation
shall take a record of the holders of its Common Stock for the purpose of
entitling them (i) to receive a dividend or other distribution payable in
Common Stock, Options or Convertible Securities or (ii) to subscribe for or
purchase Common Stock, Options or Convertible Securities, then such record date
shall be deemed to be the date of the issue or sale
<PAGE> 13
of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be.
(g) Treasury Shares. The disposition of any
shares of Common Stock owned or held by or for the account of the Corporation
shall be considered an issue or sale of Common Stock for the purpose of this
SECTION 5.5., but while held as Treasury Shares shall not be included in the
number of shares of Common Stock outstanding.
5.6. Notices.
(a) Immediately upon any adjustment of the
Conversion Price, the Corporation shall give written notice thereof to all
holders of Series A Preferred, setting forth in reasonable detail and
certifying the calculation of such adjustment.
(b) The Corporation shall give written notice to
all holders of Series A Preferred at least 20 days prior to the date on which
the Corporation closes its books or fixes a record date (i) with respect to any
dividend or distribution upon Common Stock, (ii) with respect to any pro rata
subscription offer to holders of Common Stock or (iii) for determining rights
to vote with respect to any Liquidation or Reorganization Event.
5.7 Certain Events.
If any event occurs of the type contemplated by the
provisions of this Section 5 but not expressly provided for by such provisions,
upon approval by a Disinterested Majority (as defined below), then the
Corporation's board of directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of the Series A
Preferred; provided, however, that no such adjustment will increase the
Conversion Price as otherwise determined pursuant to this Section 5 or decrease
the number of shares of Common Stock issuable upon conversion of each share of
Series A Preferred. For purposes hereof, "Disinterested Majority" shall mean a
majority of the Board of Directors, whether or not a quorum, excluding those
directors who have a direct or indirect interest in the transaction and those
directors who shall have been elected or designated by the holders of the
Series A Preferred.
<PAGE> 14
SECTION 6. MANDATORY CONVERSION.
Each share of Series A Preferred shall automatically be
converted into shares of Common Stock at the then effective Conversion Price (i)
immediately prior to the closing of an underwritten initial public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Common Stock for the account of
the Corporation to the public resulting in the gross proceeds to the Corporation
of not less than $30 million and at a price per share at least equal to the
"Threshold Price" (as defined below) (a "Qualified IPO") or (ii) following a
non-Qualified IPO once the average of the closing sale price of the Common Stock
for sixty (60) consecutive trading days as reported on the national securities
exchange or automated quotation system on which the Corporation's Common Stock
is then listed exceeds the "Threshold Price" (as defined below). For purposes
hereof, "Threshold Price" means either (a) three times the Stated Value Per
Share if the initial public offering takes place prior to December 2, 2002 or
(b) four times the Stated Value Per Share if the initial public offering takes
place on or after December 2, 2002. Each share of Series A-1 Preferred shall be
converted as set forth in SECTION 5.1(b) upon the satisfaction of either of the
above conditions.
SECTION 7. REGISTRATION OF TRANSFER.
The Corporation shall keep at its principal office a register
for the registration of issuance and transfers of Series A Preferred. Upon the
surrender of any certificate representing Series A Preferred at such place, the
Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
shares of Series A Preferred represented by the surrendered certificate. Each
such new certificate shall be registered in such name and shall represent such
number of shares of Series A Preferred as is requested by the holder of the
surrendered certificate and shall be substantially identical in form to the
surrendered certificate, and dividends shall accrue on the Series A Preferred
represented by such new certificate from the date to which dividends have been
fully paid on such Series A Preferred represented by the surrendered
certificate.
SECTION 8. REPLACEMENT.
Upon receipt of evidence reasonably satisfactory to the
Corporation (an affidavit of the registered holder shall be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing shares of Series A Preferred, and in the case of any such loss,
theft or destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor, its own agreement shall be satisfactory), or, in the
case of any such mutilation upon surrender of such certificate, the Corporation
shall (at its expense) execute and deliver in lieu of such
<PAGE> 15
certificate a new certificate of like kind representing the number of shares of
Series A Preferred represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate, and dividends shall accrue on the Series A Preferred represented
by such new certificate from the date to which dividends have been fully paid
on the shares of Series A Preferred represented by such lost, stolen, destroyed
or mutilated certificate.
SECTION 9. NOTICES.
Except as otherwise expressly provided hereunder, all notices
referred to herein shall be in writing and shall be delivered by registered or
certified mail, return receipt requested and postage prepaid, or by reputable
overnight courier service, charges prepaid, and shall be deemed to have been
given when so mailed or sent (a) to the Corporation, at its principal executive
offices and (b) to any stockholder, at such holder's address as it appears in
the stock records of the Corporation (unless otherwise indicated by any such
holder).
SECTION 10. AMENDMENT AND WAIVER.
No amendment, modification or waiver shall be binding or
effective with respect to any provision hereof without the prior affirmative
vote or written consent of the holders of a majority of the shares of Series A
Preferred outstanding at the time such action is taken.
<PAGE> 1
EXHIBIT 3.1(c)
ARTICLES OF AMENDMENT
OF
INTERLAND, INC.
1.
The name of the corporation is Interland, Inc. (hereinafter
referred to as the "Corporation").
2.
Article II of the Amended and Restated Articles of
Incorporation of the Corporation are hereby deleted and restated in their
entirety as follows:
"ARTICLE II.
The Corporation shall have authority to issue not more than
100,000,000 shares of Common Stock, of no par value (the "Common Stock"), and
25,000,000 shares of preferred stock, of no par value (the "Preferred Stock")."
3.
The powers, rights and preferences, and the qualifications,
limitations and restrictions thereof, of Series A Convertible Participating
Preferred Stock and Series A-1 Convertible Participating Preferred Stock, as
set forth at the end of Article IV of the Amended and Restated Articles of
Incorporation of the Corporation, are hereby amended to (i) increase the
aggregate number of authorized shares constituting Series A Preferred to
15,000,000 and (ii) increase the aggregate number of authorized shares
constituting Series A-1 Preferred to 2,100,000.
4.
The amendment was duly adopted by unanimous written consent
of the Board of Directors dated as of December 23, 1999 and was duly approved
by the Corporation's shareholders in accordance with the provisions of Code
Section 14-2-1003 of the Georgia Business Corporations Code.
<PAGE> 2
IN WITNESS WHEREOF, the Corporation has caused these Articles
of Amendment to be executed by its duly authorized officer, this 23rd day of
December, 1999.
INTERLAND, INC.
By: /s/ Kenneth Gavranovic
--------------------------------------------
Kenneth Gavranovic, Chief Executive Officer
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
INTERLAND, INC.
ARTICLE I
OFFICES
Section 1. Registered Office. The corporation shall maintain
at all times a registered office in the State of Georgia and a registered agent
at that office.
Section 2. Other Offices. The corporation may also have
offices at such other places both within and without the State of Georgia as the
business of the corporation may require.
ARTICLE II
SHAREHOLDERS MEETINGS
Section 1. Annual Meetings.
1.1. Date, time and purpose of meeting. The annual meeting of
the shareholders of the corporation shall be held at 10:00 a.m. on the last
business day of the fifth month following the close of each fiscal year or at
such other time and date prior thereto and following the close of the fiscal
year as shall be determined by the board of directors, for the purpose of
electing directors and transacting such other business as may properly be
brought before the meeting.
1.2. Failure to hold meeting. The failure to hold an annual
meeting at the time stated in or fixed in accordance with these bylaws shall not
affect the validity of any corporate action.
Section 2. Special Meetings.
2.1. Call of special meetings. The chairman of the board of
directors, if any, or the president may call a special meeting of the
shareholders at any time. The president or the secretary must call a special
meeting:
(1) when so directed by the board of directors;
(2) at the request in writing of shareholders owning at
least 25% of the outstanding shares of the
corporation entitled to vote thereat provided that
such request shall state the purposes for which the
meeting is to be called.
<PAGE> 2
2.2. Business conducted. Except as otherwise provided in
these bylaws, only business within the purpose or purposes described in the
notice of the meeting may be conducted at a special meeting.
Section 3. Place of Meetings. Meetings of the shareholders of
the corporation shall be held at the principal office of the corporation or at
any other place within or without the United States as may be specified in the
notice of the meeting.
Section 4. Notice of Meetings.
4.1. Notice requirements. Notice of every meeting of
shareholders, stating the place, date and time of the meeting, shall be given to
each shareholder of record entitled to vote at such meeting not less than 10 nor
more than 60 days before the date of the meeting.
4.2. Notice by mail. Notice may be given in any manner
permitted by law. Any written notice deposited in the United States mail with
prepaid first class postage thereon addressed to the shareholder at his address
as it appears on the corporation's record of shareholders shall be deemed
delivered when so deposited.
4.3. Waiver by attendance. A shareholder's attendance, in
person or by proxy, at a meeting of shareholders shall constitute:
(1) a waiver of notice of the meeting and of all
objections to lack of notice or defective notice of
the meeting, unless the shareholder at the beginning
of the meeting objects to holding the meeting or
transacting business at the meeting; and
(2) a waiver of objection to consideration of a
particular matter at the meeting that is not within
the purpose or purposes described in the meeting
notice, unless the shareholder objects to considering
the matter when it is presented.
4.4. Other waivers of notice. Notice of a meeting of
shareholders need not be given to any shareholder who signs a waiver of notice,
in person or by proxy, either before or after the meeting. Neither the business
transacted nor the purpose of the meeting need be specified in the waiver,
except that any waiver of the notice of a meeting at which the shareholders
consider an amendment of the articles of incorporation, a plan of merger or
share exchange, or a sale or other disposition of assets, or any other action
which would entitle the shareholder to dissent and obtain payment for his shares
shall not be effective unless:
(1) prior to the execution of the waiver, the shareholder
shall have been furnished the same material that
would have been required to be sent to the
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shareholder in a notice of the meeting, including
notice of any applicable dissenters' rights; or
(2) the waiver expressly waives the right to receive the
material required to be furnished.
Section 5. Quorum.
5.1. Required number. At all meetings of the shareholders a
majority of the shares outstanding and entitled to vote thereat, present in
person or by proxy, shall constitute a quorum for the transaction of all
business, except as otherwise provided by law, by the articles of incorporation,
or by these bylaws.
5.2. Adjournment. If a quorum is not present at any meeting of
the shareholders, a majority of the shares present and entitled to vote thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting before adjournment of the date, time, and place for
the adjourned meeting, until a quorum shall be present. At such adjourned
meeting at which a quorum shall be present, any business may be transacted which
might have been transacted at the original meeting. If, after the meeting is
adjourned, a new record date is fixed for the adjourned meeting, a notice of the
adjourned meeting shall be given to each shareholder of record entitled to vote
at the meeting.
5.3. When shares present. Once a share is represented for any
purpose at a meeting other than solely to object to holding the meeting or
transacting business at the meeting, it is present for quorum purposes for the
remainder of the meeting and for any adjournment of that meeting unless a new
record date is set for the adjourned meeting.
Section 6. Order of Business. At the annual meeting of
shareholders the order of business shall be as follows:
1. Calling of meeting to order.
2. Proof of notice of meeting.
3. Reading of minutes of last previous annual
meeting.
4. Reports of officers.
5. Reports of committees.
6. Election of directors.
7. Miscellaneous business.
Section 7. Voting.
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7.1. Number of votes per share. Unless the articles of
incorporation or applicable law otherwise provide, each outstanding share,
regardless of class, shall be entitled to one vote on each matter voted on at a
meeting of shareholders.
7.2. Votes required. If a quorum exists, action on a matter is
approved if the votes cast favoring the action exceed the votes cast opposing
the action, unless the articles of incorporation, these bylaws, or applicable
law require a different vote.
7.3. Voting for Directors. Directors shall be elected by a
plurality of the votes cast by the shares entitled to vote in the election at a
meeting at which a quorum is present. Shareholders do not have a right to
cumulate their votes for directors.
7.4. Proxies. A shareholder may vote his shares in person or
by proxy. A shareholder may appoint a proxy to vote or otherwise act for him by
signing an appointment form. An appointment is valid for 11 months unless a
shorter or longer period is expressly provided in the appointment form.
Section 8. Action Without Meeting.
8.1. Generally. Action required or permitted to be taken at a
meeting of shareholders may be taken without a meeting if the action is
evidenced by one or more written consents describing the action taken and
executed by:
(1) all of the shareholders entitled to vote on the
action; or
(2) if so provided in the articles of incorporation,
persons who would be entitled to vote, at a meeting,
shares having voting power to cast not less than the
minimum number of votes that would be necessary to
authorize or take the action at a meeting at which
all shareholders entitled to vote were present and
voted.
8.2. Requirements for consent. A written consent is valid only
if:
(1) the consenting shareholder was furnished the same
material that would have been required to be sent to
shareholders in a notice of a meeting at which the
proposed action would have been submitted to the
shareholders for action, including notice of any
applicable dissenters' rights; or
(2) it contains an express waiver of the right to receive
the material otherwise required to be furnished.
Section 9. List of Shareholders.
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9.1. Maintenance of list. The corporation shall keep or cause
to be kept a record of its shareholders, giving their names and addresses and
the number, class and series, if any, of shares held by each. After a record
date for a meeting of shareholders is fixed, the corporation shall prepare an
alphabetical list of the names of all its shareholders who are entitled to
notice of the meeting. The list shall show the address of and number of shares
held by each shareholder, and shall comply as to form in all other respects with
applicable law.
9.2. Inspection by shareholders. The list of shareholders
shall be made available for inspection by any shareholder, his agent, or his
attorney at the time and place of a meeting of shareholders.
9.3. Validity of action. Refusal or failure to prepare or make
available the list of shareholders shall not affect the validity of action taken
at a meeting of shareholders.
ARTICLE III
DIRECTORS
Section 1. Powers. Except as otherwise provided by any legal
agreement among shareholders, the property, affairs and business of the
corporation shall be managed and directed by its board of directors, which may
exercise all powers of the corporation and do all lawful acts and things which
are not by law, by any legal agreement among shareholders, by the articles of
incorporation or by these bylaws directed or required to be exercised or done by
the shareholders.
Section 2. Number, Election and Term.
2.1. Number of directors. The number of directors which shall
constitute the whole Board of Directors shall be eight (8). The number of
directors may be increased or decreased from time to time by amendment to these
bylaws or by election by the shareholders of a different number of directors
when electing the entire Board of Directors.
2.2. Qualifications. Directors shall be natural persons who
are 18 years of age or older, but need not be residents of the State of Georgia
nor shareholders of the corporation.
2.3. Term of office. The terms of the directors shall expire
at the annual meeting of shareholders following their election, or at their
earlier resignation, removal from office, or death. A decrease in the number of
directors by amendment of these bylaws shall not shorten an incumbent director's
term. A director whose term has expired shall remain in office until his
successor is elected and qualified, or until there is a decrease in the number
of directors. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office. A director elected by the board of
directors to fill a vacancy created by reason of an increase in the
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number of directors shall serve until the next election of directors by the
shareholders and until the election and qualification of his successor.
Section 3. Vacancies. Except as otherwise provided in the
articles of incorporation, these bylaws, or applicable law, a vacancy on the
board of directors, including a vacancy resulting from an increase in the number
of directors, may be filled by the shareholders, the board of directors, or the
affirmative vote of a majority of all the directors remaining in office, if the
directors remaining in office constitute fewer than a quorum of the board.
Section 4. Meetings and Notice.
4.1. Place of meetings. The board of directors may hold
regular or special meetings either within or without the State of Georgia.
4.2. Notice of meetings. Regular meetings of the board of
directors may be held without notice at such date, time, and place as shall from
time to time be determined by the board. Special meetings of the board of
directors may be called by the chairman of the board, if any, or the president,
or by any two directors, on at least one day's oral, telegraphic, or written
notice of the date, time, and place of the meeting. The notice of a meeting need
not state the purpose of the meeting.
4.3. Waiver of notice. Notice of a meeting of the board of
directors need not be given to any director who signs a waiver of notice either
before or after the meeting. Attendance of a director at a meeting shall
constitute a waiver of notice of such meeting unless the director at the
beginning of the meeting or promptly upon his arrival objects to holding the
meeting or transacting business at the meeting and does not thereafter vote for
or assent to action taken at the meeting.
Section 5. Quorum. Except as otherwise provided by law, the
articles of incorporation, or these bylaws, a majority of directors shall
constitute a quorum for the transaction of business. If a quorum is present when
a vote is taken, the affirmative vote of a majority of directors present is the
act of the board of directors. If a quorum shall not be present, or shall no
longer be present, at any meeting of the board, the directors present thereat
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
Section 6. Conference Telephone Meeting. Unless the articles
of incorporation or these bylaws provide otherwise, directors may participate in
a meeting of the board by means of conference telephone or similar
communications equipment whereby all persons participating in the meeting can
hear each other. Participation in the meeting shall constitute presence in
person.
Section 7. Action Without Meeting. Action required or
permitted to be taken at a meeting of the board of directors may be taken
without a meeting if the action is evidenced by one
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or more written consents describing the action taken and signed by each
director. Action by consent has the effect of a meeting vote and may be
described as such in any document.
Section 8. Committees.
8.1. Creation. The board of directors from time to time may
create one or more committees and appoint one or more directors to serve on them
at the pleasure of the board.
8.2. Authority. To the extent specified by the board of
directors, the articles of incorporation or these bylaws, each committee may
exercise the authority of the board of directors, except that, unless otherwise
permitted by law, a committee may not:
(1) approve or propose to shareholders action that is
required to be approved by shareholders;
(2) fill vacancies on the board of directors or on any of
its committees;
(3) amend the articles of incorporation;
(4) adopt, amend, or repeal these bylaws; or
(5) approve a plan of merger not requiring shareholder
approval.
8.3. Meetings, notice, quorum and voting. Sections 4 through 7
of this Article shall also apply to committees and their members, unless
otherwise provided by the articles of incorporation, these bylaws, or applicable
law.
Section 9. Removal of Directors.
9.1. Removal right. The shareholders may remove any director,
with or without cause, by a majority of the votes entitled to be cast for the
election of directors.
9.2. Meeting required. A director may be removed only at a
meeting called for the purpose of removing him and the meeting notice must state
that the purpose, or one of the purposes, of the meeting is removal of the
director.
9.3. Replacement. A vacancy resulting from the removal of a
director by the shareholders may be filled by the shareholders at the same
meeting at which the director was removed or any subsequent meeting of the
shareholders; or, if (but only if) the shareholders do not fill such a vacancy
within sixty (60) days after the removal, by majority vote of the remaining
directors.
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Section 10. Compensation of Directors. Directors shall be
entitled to such reasonable compensation for their services as directors or
members of any committee of the board as shall be fixed from time to time by
resolution adopted by the board, and shall also be entitled to reimbursement for
any reasonable expenses incurred in attending any meeting of the board or any
such committee.
ARTICLE IV
OFFICERS
Section 1. Number. The officers of the corporation shall be
chosen by the board of directors and shall be a president, a secretary and a
treasurer (the "principal officers"). The board of directors may also choose a
chairman of the board and may choose one or more vice-presidents (any of whom
may have such distinguishing designations or titles as the board may determine),
assistant secretaries and assistant treasurers, and such other officers as the
board shall from time to time deem necessary. Any number of offices may be held
by the same person.
Section 2. Compensation. The salaries of all officers and
agents of the corporation shall be fixed by the board of directors or by a
committee or officer appointed by the board or by the president.
Section 3. Term of Office. Unless otherwise provided by the
board of directors, the principal officers shall be chosen annually by the board
at the first meeting of the board following the annual meeting of shareholders
of the corporation, or as soon thereafter as is conveniently possible. Other
officers may be chosen from time to time. Each officer shall serve until his
successor shall have been chosen and qualified, or until his death, resignation
or removal, and any failure to choose officers of the corporation annually shall
not affect the validity of any action taken by or the authority of an officer
previously duly chosen and qualified and not theretofore resigned or removed by
the board of directors.
Section 4. Removal. Any officer may be removed from office at
any time, with or without cause, by the board of directors whenever in its
judgment the best interest of the corporation will be served thereby.
Section 5. Vacancies. Any vacancy in an office resulting from
any cause may be filled by the board of directors.
Section 6. Powers and Duties. Except as hereinafter provided
and subject to the control of the board of directors, the officers of the
corporation shall each have such powers and duties as generally pertain to their
respective offices, as well as such powers and duties as from time to time may
be conferred by the board of directors.
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(1) President. The president shall be the chief executive
officer of the corporation, shall preside at all meetings of the shareholders
and (unless the board shall have created an office of chairman of the board) the
board of directors, shall have general and active management of the business of
the corporation and shall see that all orders and resolutions of the board of
directors are carried into effect. He may execute bonds, mortgages and other
contracts requiring a seal, under the seal of the corporation, except where
required by law to be otherwise signed and executed and except where the signing
and execution thereof shall be expressly delegated by the board of directors to
some other officer or agent of the corporation.
(2) Vice-President. In the absence of the president or in the
event of his inability or refusal to act, the vice-president (or in the event
there is more than one vice-president, the vice-presidents in the ranking
established by the board of directors, or in the absence of any ranking, then in
the order of their election) shall perform the duties of the president, and when
so acting, shall have all the powers of and be subject to all the restrictions
upon the president. The vice-presidents shall perform such other duties and have
such other powers as the board of directors or the president may from time to
time prescribe.
(3) Secretary. The secretary shall attend all meetings of the
board of directors and all meetings of the shareholders, shall have
responsibility for the preparation of minutes of all meetings of the board of
directors and of the shareholders and shall keep, or cause to be kept, as
permanent records of the corporation, in a book or books for that purpose, all
minutes of such meetings, all executed consents evidencing corporate actions
taken without a meeting, records of all actions taken by a committee of the
board of directors in place of the board, and waivers of notice of all meetings
of the board and its committees. He shall have responsibility for authenticating
records of the corporation. He shall give, or cause to be given, notice of all
meetings of the shareholders and special meetings of the board of directors, and
shall perform such other duties as may be prescribed by the board of directors
or president, under whose supervision he shall be. He shall have charge of the
corporate seal of the corporation and shall be authorized to use the seal of the
corporation on all documents which are authorized to be executed on behalf of
the corporation under its seal.
(4) Assistant Secretary. The assistant secretary or if there
is more than one, any assistant secretary, shall, in the absence of the
secretary or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the secretary and shall perform such other duties and
have such other powers as the board of directors, the president, or the
secretary may from time to time prescribe.
(5) Treasurer. The treasurer shall have the legal custody of
the corporate funds and securities and shall keep or cause to be kept full and
accurate accounts of receipts and disbursements and other appropriate accounting
records in books belonging to the corporation and shall deposit all funds and
other valuable effects in the name and to the credit of the corporation in such
depositories as may be designated by the board of directors. He shall render to
the president
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and the board of directors, at its regular meetings, or when the president or
board of directors so requires, an account of all his transactions as treasurer
and of the financial condition of the corporation. If required by the board of
directors, he shall give the corporation a bond in such sum, or such conditions,
and with such surety or sureties as shall be satisfactory to the board of
directors for the faithful performance of the duties of his office.
(6) Assistant Treasurer. The assistant treasurer, or if there
is more than one, any assistant treasurer, shall, in the absence of the
treasurer or in the event of his inability or refusal to act, perform the duties
and exercise the powers of the treasurer and shall perform such other duties and
have such other powers as the board of directors, the president, or the
treasurer may from time to time prescribe.
Section 7. Securities of Corporation. Any security issued by
any other corporation or entity and owned or controlled by the corporation may
be voted, and all rights and powers incident to the ownership of such
securities, including without limitation execution of any consent of
shareholders or other consents in respect thereof, may be exercised on behalf of
the corporation by the president, who may in his discretion delegate any of the
foregoing powers, by executing proxies or otherwise. The board of directors may
from time to time confer like powers on any person or persons.
Section 8. Checks and Drafts. All checks, drafts, and similar
items drawn on the corporation's bank account shall be signed by such officer or
officers or agent or agents as the board of directors shall from time to time
determine.
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ARTICLE V
SHARES
Section 1. Form and Content of Certificate.
1.1. Form. Every holder of fully-paid shares in the
corporation shall be entitled to have a certificate in such form as the board of
directors may from time to time prescribe in accordance with applicable law.
1.2. Required signatures. Except as otherwise provided by the
board of directors from time to time, each share certificate shall be signed by
any two officers of the corporation, who may, but shall not be required to, seal
the certificate with the seal of the corporation or a facsimile thereof. If a
person who signed a share certificate in any capacity, either manually or in
facsimile, no longer holds office when the certificate is issued, the
certificate is nevertheless valid.
Section 2. Lost Certificates. The board of directors may
direct that a new share certificate be issued in place of any certificate
theretofore issued by the corporation and alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate to be lost, stolen or destroyed. When authorizing such issue of
a new certificate, the board of directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate, or his legal representative, to advertise the
same in such manner as it shall require and/or to give the corporation a bond in
such sum and on such conditions as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate alleged
to have been lost, stolen or destroyed, and/or satisfy any other reasonable
requirements imposed by the board of directors.
Section 3. Transfers. (1) Transfers of shares of the
corporation shall be made only on the books of the corporation by the registered
holder thereof, or by his duly authorized attorney, or with a transfer agent or
registrar appointed as provided in Section 5 of this Article, and on surrender
of the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon.
(2) The corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and for all other purposes, and
shall not be bound to recognize any equitable or other claim to or interest in
such share or shares on the part of any other person, whether or not it shall
have express or other notice thereof, except as otherwise provided by law.
(3) Shares of the corporation may be transferred by delivery
of the certificates therefor, accompanied either by an assignment in writing on
the back of the certificates or by
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separate written power of attorney to sell, assign and transfer the same, signed
by the record holder thereof, or by his duly authorized attorney-in-fact, and
accompanied by such evidence that all such signatures are genuine as the
corporation may, at its option, request, but no transfer shall affect the right
of the corporation to pay any dividend upon the stock to the holder of record as
the holder in fact thereof for all purposes, and no transfer shall be valid,
except between the parties thereto, until such transfer shall have been made
upon the books of the corporation as herein provided.
(4) The board may, from time to time, make such additional
rules and regulations as it may deem expedient, not inconsistent with these
bylaws or the articles of incorporation, concerning the issue, transfer and
registration of certificates for shares of the corporation, and nothing
contained herein shall limit or waive any rights of the corporation with respect
to such matters under applicable law or any subscription or other agreement.
Section 4. Record Date.
4.1. Fixing of record date. For the purpose of determining the
shareholders entitled to notice of a meeting of shareholders, to demand a
special meeting, to vote, or to take any other action, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of shares, or for the purpose of any other lawful action, the board of directors
may fix, in advance, a record date, which shall not be more than 70 days before
any meeting or action requiring a determination of shareholders.
4.2. No record date fixed. If no record date is fixed by the
board of directors for the determination of shareholders entitled to notice of
and to vote at any meeting of shareholders, the record date shall be at the
close of business on the day before the day on which the first notice thereof is
given, or, if notice is waived, at the close of business on the day before the
day on which the meeting is held. If no record date is fixed by the board for
determining shareholders entitled to express consent to corporate action in
writing without a meeting when no prior action by the board of directors is
required by law, the record date shall be the first date on which a signed
written consent to such action shall have been delivered to the corporation in
any manner permitted by law on behalf of all shareholders. If no record date is
fixed for other purposes, the record date shall be at the close of business on
the day on which the board of directors adopts the resolution or otherwise takes
formal action relating thereto.
4.3. Adjournment of meeting. A determination of the
shareholders entitled to notice of or to vote at a meeting of shareholders shall
be effective for any adjournment of the meeting unless the board of directors
fixes a new record date. The board of directors must fix a new record date if
the meeting is adjourned to a date more than 120 days after the date fixed for
the original meeting.
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Section 5. Transfer Agent and Registrar. The board of
directors may appoint such transfer agents and/or registrars as it shall
determine, and may require all certificates of stock to bear the signature or
signatures of any of them.
ARTICLE VI
GENERAL PROVISIONS
Section 1. Distributions and Share Dividends. Distributions
upon the shares of the corporation, subject to the provisions, if any, of the
articles of incorporation, or any lawful agreement among shareholders, may be
declared by the board of directors at any regular or special meetings, pursuant
to law. Distributions may be paid in cash or in property, subject to the
provisions of the articles of incorporation. Before payment of any distribution,
there may be set aside out of any funds of the corporation available for
dividends such sum or sums as the directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing distributions, or for repairing or maintaining any property of the
corporation, or for such other purpose as the directors shall think conducive to
the interest of the corporation, and the directors may modify or abolish any
such reserve in the manner in which it was created.
Section 2. Fiscal Year. The fiscal year of the corporation
shall be fixed, and shall be subject to change, by the board of directors.
Section 3. Seal. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal" and "Georgia". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise. In the
event it is inconvenient to use such a seal at any time, the signature or name
of the corporation followed by or used in conjunction with the word "Seal" or
the words "Corporate Seal" or words of similar import shall be deemed the seal
of the corporation.
Section 4. Annual Statements.
4.1. Required statements. Not later than four months after the
close of each fiscal year, and in any case prior to the next annual meeting of
shareholders, the corporation shall prepare the following financial statements:
(1) a balance sheet showing in reasonable detail the
financial condition of the corporation as of the
close of its fiscal year; and
(2) a profit and loss statement showing the results of
its operations during its fiscal year.
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4.2. Principles used; other information. If financial
statements are prepared by the corporation on the basis of generally accepted
accounting principles, the annual financial statements must also be prepared,
and must disclose that they are so prepared, on that basis. If otherwise
prepared, they must so disclose and must be prepared on the same basis as other
reports or statements prepared by the corporation for the use of others. If the
statements are reported upon by a public accountant, his report must accompany
them. If not, the statements shall be accompanied by a statement of the
president or the person responsible for the corporation's accounting records:
(1) stating his reasonable belief whether the statements
were prepared on the basis of generally accepted
accounting principles and, if not, describing the
basis of preparation; and
(2) describing any respects in which the statements were
not prepared on a basis of accounting consistent with
the statements prepared for the preceding year.
4.3. Requests for financial statements. Upon written request,
the corporation promptly shall mail to any shareholder of record a copy of the
most recent annual balance sheet and profit and loss statement. If prepared for
other purposes, the corporation shall also furnish upon written request a
statement of changes in shareholders' equity for the fiscal year.
ARTICLE VII
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 1. Authority to Indemnify. Every person who is or was
an officer or director of this corporation may in accordance with Section 3
hereof be indemnified for any liability and expense that may be incurred by him
in connection with or resulting from any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal, or in connection with any appeal
relating thereto, in which he may have become involved, as a party, prospective
party or otherwise, by reason of his being an officer or director of this
corporation, if he acted in a manner he believed in good faith to be in or not
opposed to the best interest of the corporation and, in the case of any criminal
proceeding, he had no reasonable cause to believe his conduct was unlawful. As
used in this Article, the terms "expense" and "liability" shall include
attorneys fees and reasonable expenses incurred with respect to a proceeding and
the obligation to pay a judgment, settlement, penalty, and fine including an
excise tax assessed with respect to an employee benefit plan.
Notwithstanding the foregoing, the corporation shall not
indemnify an officer or director in connection with a proceeding by or in the
right of the corporation in which the officer or director was adjudged liable to
the corporation or in connection with any other proceeding in which he was
adjudged liable on the basis that personal benefit was improperly received by
him. In addition, indemnification permitted pursuant to this section in
connection with a proceeding by or
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in the right of the corporation is limited to reasonable expenses incurred in
connection with the proceeding.
Section 2. Mandatory Indemnification. Every officer or
director, to the extent that he has been successful, on the merits or otherwise,
in defense of any proceeding to which he was a party, or in defense of any
claim, issue or matter therein, because he is or was an officer or director, of
this corporation, shall be indemnified by the corporation against reasonable
expenses incurred by him in connection therewith.
Section 3. Determination and Authorization of Indemnification.
Except as provided in Section 2 above, any indemnification under Section 1 above
shall not be made unless a determination has been made in the specific case that
indemnification of the officer or director is permissible under the
circumstances because he has met the standard of conduct set forth in Section 1
above. The determination shall be made: (a) by the board of directors by
majority vote of a quorum consisting of directors not at the time parties to the
proceeding; (b) if such a quorum cannot be obtained, then by majority vote of a
committee duly designated by the board of directors (in which designation
directors who are parties may participate), consisting solely of two or more
directors not at the time parties to the proceeding; (c) by special legal
counsel (i) selected by the board of directors or its committee in the manner
prescribed above or (ii) if a quorum of the board of directors cannot be
obtained and a committee cannot be designated, then selected by majority vote of
the full board of directors (in which selection directors who are parties may
participate); or (d) by the shareholders, but the shares owned by or voted under
the control of directors who are at the time parties to the proceeding may not
be voted on the determination.
Once it has been determined that indemnification of the
officer or director is permissible, an authorization of indemnification or an
obligation to indemnify and an evaluation as to reasonableness of expenses shall
be made in the same manner as the determination that indemnification is
permissible, except that if determination is made by special legal counsel,
authorization of indemnification and evaluation as to reasonableness of expenses
shall be determined in the manner prescribed in item (c) above.
Section 4. Advance for Expenses. Expenses incurred with
respect to any claim, action, suit or proceeding of the character described in
Section 1 to this Article VII may be advanced by the corporation prior to the
time of the disposition thereof upon the receipt of written affirmation from the
director of his good faith belief that he has met the standard of conduct set
forth in Section 1 above and the officer, director, employee or agent furnishes
the corporation a written undertaking executed personally or on his behalf to
repay any advances if it is ultimately determined that he is not entitled to
indemnification under Section 1 of this Article.
ARTICLE VIII
AMENDMENTS
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<PAGE> 16
Except as provided below, the board of directors or
shareholders may amend or repeal the corporation's bylaws or adopt new bylaws.
The board of directors may amend or repeal the corporation's bylaws or adopt new
bylaws unless the shareholders in amending or repealing a particular Bylaw
provide expressly that the board of directors may not amend or repeal that
Bylaw. A Bylaw limiting the authority of the board of directors or establishing
staggered terms for directors may only be adopted, amended or repealed by the
shareholders. A Bylaw which sets a supermajority quorum or voting requirement
for the shareholders may only be adopted by the shareholders and may not be
adopted, amended or repealed by the board of directors, except as provided in
Georgia Business Corporation Code Section 14-2-1113 or Section 14-2-1133.
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<PAGE> 1
EXHIBIT 10.2
SUBSCRIPTION AGREEMENT
BETWEEN
INTERLAND, INC.
AND
MICROSOFT CORPORATION
DATED DECEMBER 24, 1999
<PAGE> 2
SUBSCRIPTION AGREEMENT
THIS AGREEMENT (this "Agreement") is entered into as of December 24,
1999 by and between Interland, Inc., a Georgia corporation (the "Company") and
Microsoft Corporation, a Washington corporation ("Investor").
WHEREAS, the Company desires to issue and sell to the
Investor, and the Investor desires to subscribe for and acquire from the
Company, a substantial equity interest in the Company, upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants and agreements hereinafter set forth, the parties hereto agree
as follows:
DEFINITIONS
For all purposes of this Agreement, certain capitalized terms
specified in Exhibit A shall have the meanings set forth in that Exhibit A,
except as otherwise expressly provided.
SALE AND PURCHASE OF SHARES
2.1. SALE AND PURCHASE OF SHARES
On the basis of the representations, warranties and
agreements contained herein, and subject to the terms and conditions hereof,
the Company agrees to issue and sell to the Investor, and the Investor is
subscribing for and agrees to purchase from the Company, an aggregate of
2,300,000 shares of Series A Convertible Participating Preferred Stock, no par
value per share ("Series A Stock"), having the rights, preferences and other
terms set forth on Exhibit B hereto, at a price per share of Series A Stock of
$2.18 for an aggregate purchase price of $5,014,000. In addition, the Company
hereby agrees to issue to Investor a warrant to purchase 506,000 shares of
Common Stock (the "Warrant"), in form and substance of Exhibit C hereto, with
an exercise price of $5.80 per share.
2.2 CLOSING
<PAGE> 3
The closing of the sale and purchase of the shares of Series A Stock
and the issuance of the Warrant shall take place simulanteously with the
Company's receipt by wire transfer of immediately available funds in the amount
of $5,014,000 from the Investor, as payment in full for the share of Series A
Stock subscribed for and being purchase by the Investor hereunder (the
"Closing"). At the Closing, the Company shall issue and deliver to the Investor
(i) a stock certificate or certificates in definitive form, registered in the
Investor's name, representing the Series A Stock, and (ii) the Warrant
registered in the Investor's name.
2.3. SALE AND PURCHASE OF ADDITIONAL SHARES
At the Second Closing (as defined below), and on the terms and subject
to the conditions set forth in this Agreement, the Company shall issue, sell
and deliver to the Investor, and the Investor hereby subscribes for and shall
purchase and accept from the Company, the number of shares (the "Additional
Shares") of Common Stock of the Company equal to the number obtained by
dividing (A) $7,500,000 by (B) a number equal to the lesser of (i) the midpoint
of the expected range of offering prices reflected on the Company's first
filing with the Securities and Exchange Commission of a registration statement
covering the sale of its Common Stock and (ii) the actual price to the public
in such offering, and rounding the number obtained thereby to the nearest whole
number. In addition, the Company shall issue an additional warrant to the
Investor (the "Additional Warrant") at the Second Closing, in form and
substance of Exhibit C hereto, to purchase up to that number of shares of
Common Stock equal to 75% of the number of Additional Shares purchased by the
Investor at the Second Closing with an exercise price per share equal to the
purchase price per share paid by the Investor at the Second Closing to purchase
the Additional Shares.
2.4. PURCHASE PRICE AND PAYMENT FOR ADDITIONAL SHARES.
In consideration of the sale of the Additional Shares to the Investor,
the Investor shall pay to the Company at the Second Closing the aggregate
purchase price of $7,500,000.00 (the "Purchase Price"). The Purchase Price
shall be paid in cash by wire transfer of immediately available federal funds
to an account designated in writing by the Company.
2.5. SECOND CLOSING.
The closing of the transactions contemplated in Section 2.3 and
Section 2.4 hereof (the "Second Closing") shall take place at the offices of
Kilpatrick Stockton LLP, 1100 Peachtree Street NE, Suite 2800, Atlanta,
Georgia, at 10:00 a.m., Atlanta time, on the day after the Company's
registration statement is declared effective and the offering made pursuant
thereto is priced. The date on which the Second Closing takes place is herein
referred to as the "Second Closing Date". At
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<PAGE> 4
the Second Closing (i) the Company shall deliver to the Investor the executed
stock certificate representing the Additional Shares duly issued in the name of
the Investor and the Additional Warrant, and (ii) the Investor shall deliver
the Purchase Price to Company.
REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
The Investor hereby represents and warrants to the Company as
follows:
3.1. ORGANIZATION AND STANDING
The Investor is duly organized, validly existing and in good
standing under the laws of the state or jurisdiction of its formation and has
the full and unrestricted power and authority to enter into this Agreement and
to carry out the transactions contemplated hereby.
3.2. AUTHORIZATION
The execution, delivery and performance by the Investor of
this Agreement and all other Documents contemplated hereby, the fulfillment of
and the compliance with the respective terms and provisions hereof and thereof,
and the consummation by the Investor of the transactions contemplated hereby
and thereby have been duly authorized, and will not: (a) conflict with, or
violate any term or provision of the Investor's certificate or articles of
incorporation, its bylaws or other governing documents or (b) conflict with, or
result in any breach of, or constitute a default under, any Agreement to which
the Investor is a party or by which such Investor is bound. No other action is
necessary for the Investor to enter into this Agreement and all other Documents
contemplated hereby and to consummate the transactions contemplated hereby and
thereby.
3.3. BINDING OBLIGATION
Each Document to be executed by the Investor pursuant hereto,
when executed and delivered in accordance with the provisions hereof, shall be
a valid and binding obligation of the Investor, enforceable in accordance with
its terms, shall be in full force and effect and shall constitute a legal,
valid and binding obligation of, and shall be legally enforceable against, the
Investor, and, to the Investor's Knowledge, the other parties thereto (except
as enforceability may be limited or affected by bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other similar laws and
equitable principles now or hereafter in effect and affecting the rights and
remedies of creditors generally).
-3-
<PAGE> 5
3.4. NO REGISTRATION UNDER THE SECURITIES ACT
The Investor understands that the Series A Stock, the
Warrant, the Additional Shares, and the Additional Warrant to be purchased by
it at the Closing or the Second Closing pursuant to the terms of this
Agreement, and the Common Stock of the Company into which the Series A Stock,
the Warrant and the Additional Warrant are convertible, have not and will not
be registered under the Securities Act or any state securities laws and will be
issued in reliance upon exemptions contained in the Securities Act or
interpretations thereof and in the applicable state securities laws, and cannot
be offered for sale, sold or otherwise transferred unless the Series A Stock
being acquired hereunder or the Common Stock of the Company into which the
Series A Stock, the Warrant and the Additional Warrant are convertible
subsequently are so registered or qualify for exemption from registration under
the Securities Act.
3.5. ACQUISITION FOR INVESTMENT
The Series A Stock, the Warrant, the Additional Shares and
the Additional Warrant, and the Common Stock issuable upon conversion of the
Series A Stock, the Warrant and the Additional Warrant, respectively, are being
acquired under this Agreement by the Investor in good faith solely for its own
account, for investment and not with a view toward distribution within the
meaning of the Securities Act. The Series A Stock, the Warrant, the Additional
Shares and the Additional Warrant will not be offered for sale, sold or
otherwise transferred by the Investor without either registration or exemption
from registration under the Securities Act and any applicable state securities
laws (and the delivery of investment representation letters and legal opinions
reasonably satisfactory to the Company, as reasonably requested by the
Company).
3.6. EVALUATION OF MERITS AND RISKS OF INVESTMENT
The Investor has knowledge and experience in financial and
business matters such that it is capable of evaluating the merits and risks of
its investment in the Series A Stock, the Warrant, the Additional Shares and
the Additional Warrant being acquired hereunder. The Investor is an "accredited
investor" within the meaning of Rule 501(a) under the Securities Act. The
Investor understands and is able to bear any economic risks associated with
such investment (including, without limitation, the necessity of holding the
Series A Stock, the Warrant, the Additional Shares, and the Additional Warrant
for an indefinite period of time, inasmuch as the Series A Stock, the Warrant,
the Additional Shares, and the Additional Warrant have not been registered
under the Securities Act or any state securities laws).
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<PAGE> 6
3.7. ADDITIONAL INFORMATION
The Investor acknowledges that it has been afforded the
opportunity to ask questions and receive answers concerning the Company and to
obtain additional information that it has requested to verify the accuracy of
the information contained herein. Notwithstanding the foregoing, nothing
contained herein shall operate to modify or limit in any respect the
representations and warranties of the Company or to relieve it from any
obligations to the Investor for breach thereof or the making of misleading
statements of material fact or the omission of material facts in connection
with the transactions contemplated herein.
3.8. STOCK CERTIFICATE LEGEND
Each Investor acknowledges and agrees that each certificate
representing the Series A Stock, the Warrant, the Additional Shares and the
Additional Warrant and the Common Stock issuable upon conversion thereof shall
bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
SURVIVAL OF REPRESENTATIONS
4.1. SURVIVAL OF REPRESENTATIONS
All representations, warranties, covenants, and other
Agreements made by any party to this Agreement herein or pursuant hereto shall
also be deemed made on and as of the Closing Date as though such
representations, warranties, covenants, indemnities and other Agreements were
made on and as of such date, and all the representations, warranties,
covenants, indemnities and other Agreements shall survive the Closing Date for
a period of two years.
-5-
<PAGE> 7
MISCELLANEOUS
5.1. ADDITIONAL ACTIONS AND DOCUMENTS
After Closing, each of the parties hereto hereby agrees to
take or cause to be taken such further actions, to execute, deliver and file or
cause to be executed, delivered and filed such further Documents, and will
obtain such consents, as may be necessary or as may be reasonably requested in
order to fully effectuate the purposes, terms and conditions of this Agreement.
5.2. NO BROKERS
Each of the parties hereto represents and warrants to the
other parties (and to each of them) that such party has not engaged any broker,
finder or agent in connection with the transactions contemplated by this
Agreement and has not incurred (and will not incur) any unpaid liability to any
broker, finder or agent for any brokerage fees, finders' fees or commissions,
with respect to the transactions contemplated by this Agreement. Each party
agrees to indemnify, defend and hold harmless each of the other parties from
and against any and all claims asserted against such parties for any such fees
or commissions by any persons purporting to act or to have acted for or on
behalf of the indemnifying party.
5.3. JURY WAIVER
THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN AN ACTION OR
PROCEEDING TO ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AGREEMENT OR ANY OF THE
TRANSACTIONS OR AGREEMENTS CONTEMPLATED HEREBY.
5.4. PUBLICITY
Neither the Investor nor the Company shall issue any press release or
make any public disclosure regarding the transaction contemplated hereby unless
such press release or public disclosure is approved by those parties expressly
mentioned by name in the press release in advance. Notwithstanding the
foregoing, each of the parties hereto may, in documents required to be filed by
it with the SEC or other regulatory bodies, make such statements with respect
to the transactions contemplated hereby as each may be advised by counsel as
legally necessary or advisable and may make such disclosure as it is advised by
its counsel as required by law.
-6-
<PAGE> 8
5.5. EXPENSES
Subject to the provisions of this SECTION 5.5, each party
hereto shall pay its own expenses incident to this Agreement and the
transactions contemplated hereunder, including all legal and accounting fees
and disbursements.
5.6. ASSIGNMENT
The Investor shall have the right to assign its rights and
obligations under this Agreement, in whole or in part, to any Affiliate of
Investor or to designate any of its Affiliates (to the extent permitted by Law)
to receive directly the shares of Series A Stock to be purchased hereunder or
to exercise any of the rights of the Investor, or to perform its obligations,
provided that such assignee shall have been deemed to have made the
representations and warranties contained in Article 3 hereof. The Company shall
not assign its rights and obligations under this Agreement, in whole or in
part, whether by operation of law or otherwise, without the prior written
consent of the Investor, and any such assignment contrary to the terms hereof
shall be null and void and of no force and effect. In no event shall the
assignment by the Company or the Investor of its rights or obligations under
this Agreement, whether before or after the Closing, release the Company or the
Investor from their respective liabilities and obligations hereunder.
5.7. ENTIRE AGREEMENT; AMENDMENT
This Agreement, including the other Documents referred to
herein or Furnished pursuant hereto, constitutes the entire Agreement among the
parties hereto with respect to the transactions contemplated herein, and it
supersedes all prior oral or written Agreements, commitments or understandings
with respect to the matters provided for herein. No amendment or modification
of this Agreement shall be valid or binding unless set forth in writing and
duly executed and delivered by the Company and the Investor.
5.8. WAIVER
No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this Agreement or under any
other Documents Furnished in connection with or pursuant to this Agreement
shall impair any such right, power or privilege or be construed as a waiver of
any default or any acquiescence therein. No single or partial exercise of any
such right, power or privilege shall preclude the further exercise of such
right, power or privilege, or the exercise of any other right, power or
privilege. No waiver shall be valid against any party hereto unless made in
writing and signed by the party against whom enforcement of such waiver is
sought and then only to the extent expressly specified therein.
-7-
<PAGE> 9
5.9. SEVERABILITY
If any part of any provision of this Agreement or any other
agreement or document given pursuant to or in connection with this Agreement
shall be invalid or unenforceable in any respect, such part shall be
ineffective to the extent of such invalidity or unenforceability only, without
in any way affecting the remaining parts of such provision or the remaining
provisions of this Agreement.
5.10. GOVERNING LAW
This Agreement, the rights and obligations of the parties hereto, and any
claims or disputes relating thereto, shall be governed by and construed in
accordance with the laws of the State of Georgia (excluding the choice of law
rules thereof).
5.11. NOTICES
All notices, demands, requests, or other communications which
may be or are required to be given, served, or sent by any party to any other
party pursuant to this Agreement shall be in writing and shall be hand
delivered, sent by overnight courier or mailed by first-class, registered or
certified mail, return receipt requested, postage prepaid, or transmitted by
telecopy addressed as follows:
(i) If to Investor:
Microsoft Corporation
One Microsoft Way
Redmond, Washington 98052
Telecopy No.: (___) ___-____
Attention: ________________
(ii) If to the Company:
Interland, Inc.
101 Marietta Street, Suite 200
Atlanta, GA 30303
Telecopy No.: (404) 720-3707
Attention: Ken Gavranovic
with a copy (which shall not constitute notice) to:
Kilpatrick Stockton LLP
1100 Peachtree Street, Suite 2800
Atlanta, GA 30309-4530
Telecopy No.: (404) 815-6555
Attention: David A. Stockton
-8-
<PAGE> 10
Each party may designate by notice in writing a new address to which any
notice, demand, request or communication may thereafter be so given, served or
sent. Each notice, demand, request, or communication which shall be hand
delivered, sent, mailed or telecopied in the manner described above, shall be
deemed sufficiently given, served, sent, received or delivered for all purposes
at such time as it is delivered to the addressee (with the return receipt, the
delivery receipt, or (with respect to a telecopy) the answerback or
confirmation being deemed conclusive, but not exclusive, evidence of such
delivery) or at such time as delivery is refused by the addressee upon
presentation.
5.12. HEADINGS
Section headings contained in this Agreement are inserted for
convenience of reference only, shall not be deemed to be a part of this
Agreement for any purpose, and shall not in any way define or affect the
meaning, construction or scope of any of the provisions hereof.
5.13. EXECUTION IN COUNTERPARTS
To facilitate execution, this Agreement may be executed in as
many counterparts as may be required. It shall not be necessary that the
signatures of, or on behalf of, each party, or that the signatures of all
persons required to bind any party, appear on each counterpart; but it shall be
sufficient that the signature of, or on behalf of, each party, or that the
signatures of the persons required to bind any party, appear on one or more of
the counterparts. All counterparts shall collectively constitute a single
agreement. It shall not be necessary in making proof of this Agreement to
produce or account for more than a number of counterparts containing the
respective signatures of, or on behalf of, all of the parties hereto.
5.14. LIMITATION ON BENEFITS
The covenants, undertakings and agreements set forth in this
Agreement shall be solely for the benefit of, and shall be enforceable only by,
the parties hereto and their respective successors, heirs, executors,
administrators, legal representatives and permitted assigns (including
specifically, without limitation, any third party transferees acquiring shares
of Series A Stock purchased by the Investor pursuant hereto).
5.15. BINDING EFFECT
Subject to any provisions hereof restricting assignment, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors, heirs, executors, administrators, legal
representatives and assigns.
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<PAGE> 11
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement,
or have caused this Agreement to be duly executed on their behalf, as of the
day and year first hereinabove set forth.
THE COMPANY:
INTERLAND, INC.
By: /s/ Ken Gavranovic
-----------------------------------------
Name: Ken Gavranovic
Title: President and Chief Executive Officer
THE INVESTOR
MICROSOFT CORPORATION
By: /s/ John Connors
-----------------------------------------
Name: John Connors
---------------------------------------
Its: Senior Vice President, Chief
----------------------------------------
Financial Officer
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<PAGE> 12
EXHIBIT A
TO SUBSCRIPTION AGREEMENT
DATED AS OF DECEMBER , 1999
DEFINITIONS
"ADDITIONAL SHARES" means the shares of Common Stock acquired
by the Investor at the Second Closing.
"ADDITIONAL WARRANT" means the warrant issued to the Investor
at the Second Closing.
"AFFILIATE" means: (a) with respect to a person, any member
of such person's family; (b) with respect to an entity, any officer, director,
stockholder, partner or investor of or in such entity or of or in any Affiliate
of such entity; and (c) with respect to a person or entity, any person or
entity which directly or indirectly, through one or more intermediaries,
Controls, is Controlled by, or is under common Control with such person or
entity.
"AGREEMENT" means any concurrence of understanding and
intention between two or more persons (or entities) with respect to their
relative rights and/or obligations or with respect to a thing done or to be
done (whether or not conditional, executory, express, implied, in writing or
meeting the requirements of contract), including, without limitation,
contracts, leases, promissory notes, covenants, easements, rights of way,
covenants, commitments, arrangements and understandings.
"CLAIMS" means all demands, claims, actions or causes of
action, assessments, losses, damages (including, without limitation, diminution
in value), liabilities, costs and expenses, including, without limitation,
interest, penalties and reasonable attorneys' fees and disbursements.
"CLOSING" means the Closing of the sale of shares of Series A
Stock and the Warrant to the Investor under this Agreement.
"COMMON STOCK" means the Company's Common Stock, no par value
per share.
"COMPANY" means Interland, Inc., a Georgia corporation.
"CONTROL" means possession, directly or indirectly, of power
to direct or cause the direction of management or policies (whether through
ownership of voting securities, by Agreement or otherwise).
<PAGE> 13
"DOCUMENTS" means any paper or other material (including,
without limitation, computer storage media) on which is recorded (by letters,
numbers or other marks) information that may be evidentially used, including,
without limitation, legal opinions, mortgages, indentures, notes, instruments,
leases, Agreements, insurance policies, reports, studies, Financial Statements
(including, without limitation, the notes thereto), other written financial
information, schedules, certificates, charts, maps, plans, photographs,
letters, memoranda and all similar materials.
"EXHIBIT" means an exhibit attached to the Agreement.
"FURNISHED" means supplied, delivered or provided in any way,
including through attorneys, employees or officers.
"INVESTOR" means Microsoft Corporation, a Washington
corporation.
"KNOWLEDGE" means to the actual knowledge of the party making
the representation, and, in the case of the Company, "Knowledge" shall mean the
actual Knowledge of the officers and directors of the Company.
"LAWS" means all foreign, federal, state and local statutes,
laws, ordinances, regulations, rules, resolutions, orders, determinations,
writs, injunctions, awards (including, without limitation, awards of any
arbitrator), judgments and decrees applicable to the specified persons or
entities and to the businesses and Assets thereof (including, without
limitation, Laws relating to securities registration and regulation; the sale,
leasing, ownership or management of real property; employment practices, terms
and conditions, and wages and hours; building standards, land use and zoning;
safety, health and fire prevention; and environmental protection, including
Environmental Laws).
"PERSON" means any individual, partnership, joint venture,
corporation, trust, unincorporated organization or entity, government or
department or agency of a government.
"SECOND CLOSING" means the closing of the sale of the
Additional Shares and the Additional Warrant to the Investor under this
Agreement.
"SECTION" means a Section (or a subsection) of this
Agreement.
"SECURITIES ACT" means the Securities Act of 1933, as
amended, and all Laws promulgated pursuant thereto or in connection therewith.
"SERIES A STOCK" means the Company's Series A Convertible
Participating Preferred Stock, no par value per share.
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<PAGE> 14
"SHARES" means the Series A Stock being purchased by the
Investor pursuant to the terms of this Agreement.
"SUBSIDIARY" means a corporation or other entity of which at
least 50% of the outstanding securities or other interests having rights to
vote or otherwise exercise Control are held, directly or indirectly, by the
Company.
"WARRANT" means the warrant to purchase shares of Common
Stock issued to the Investor at the Closing.
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<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of February 14, 2000, by and
between INTERLAND, INC., a Georgia corporation (the "Company"), headquartered in
Atlanta, Georgia, and H. CHRISTOPHER COVINGTON ("Executive"), an individual
residing in Atlanta, Georgia.
WHEREAS, the Company desires to employ Executive and to establish
certain terms and conditions of his employment by entering into an employment
agreement with Executive as hereinafter provided;
WHEREAS, Executive desires to accept such employment with the Company
on the terms and conditions provided herein; and
WHEREAS, in the course of his employment, Executive will gain knowledge
of the business, affairs, finances, management, marketing programs and
philosophy, suppliers, distributors, customers, clients and methods of operation
of the Company and the Company would suffer irreparable harm if Executive were
to use such knowledge, information and business acumen in competition with the
Company or other than in the proper performance of his duties hereunder.
THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, the parties hereby agree as follows:
1. Employment and Term. (a) Subject to the terms and conditions of this
Agreement, the Company hereby employs Executive, and Executive hereby accepts
employment, as Senior Vice President, General Counsel and Secretary of the
Company and shall have such responsibilities, duties and authority as may from
time to time be assigned to Executive by the Chief Executive Officer and the
Board of Directors. Executive hereby agrees that during the Term of this
Agreement he will devote substantially all his working time, attention and
energies to the diligent performance of his duties as Senior Vice President,
General Counsel and Secretary of the Company, provided that the Executive may
also serve on boards of directors or trustees of
<PAGE> 2
other companies and organizations, as long as such service does not materially
interfere with the performance of his duties hereunder. Nothing herein shall
preclude the Board, in its sole discretion, from changing Executive's title and
duties if the Board has concluded in its reasonable judgment that such change is
in the Company's best interests, subject to the terms of Section 12(g) of this
Agreement.
(b) Unless earlier terminated as provided in Section 3, Executive's
employment under this Agreement shall be for a term of 3 year(s), commencing on
February 14, 2000 and ending on February 14, 2003. Executive's employment with
the Company shall end with the termination of this Agreement unless the Company
gives Executive written notice not less than thirty (30) days before the
expiration of this Agreement that the Company desires to continue Executive's
employment. If such notice is given, upon the expiration of this Agreement,
Executive shall continue to be employed by the Company as an "at will" employee
on the same basis as other Company employees who are "at will" and do not have
employment agreements.
(c) Executive warrants that Executive is not under any obligation,
contractual or otherwise, limiting or affecting Executive's ability or right to
perform freely services for Company.
2. Compensation and Benefits. As compensation for his services during
the Term of this Agreement, Executive shall be paid and receive the amounts and
benefits set forth below:
(a) An initial base salary ("Initial Base Salary") of $200,000.00,
subject to withholding of all applicable taxes, expressed as an annual amount
but payable in equal installments shall be paid to Executive. Executive's
Initial Base Salary shall be reviewed for adjustments at such time as the Board
conducts salary reviews for its executive management generally, but not less
frequently than annually. Executive's salary shall be payable in accordance with
the Company's regular payroll practices in effect from time to time for
executive management of the Company.
(b) Executive shall participate in the Company's bonus incentive
compensation program, as long as it is available to executive officers of the
Company, and, based on Executive's performance, may be entitled to a bonus of up
to 15% of Executive's Base Salary.
2
<PAGE> 3
(c) In connection with commencement of employment, the Company will
grant to Executive options for 200,000 shares of Company Common Stock, as
granted by the Board and under the terms and conditions set forth in a separate
stock option agreement.
(d) Executive shall be entitled to participate in the Company's stock
option plan, at the discretion of the Board, and the amount and terms of any
stock option grant shall be set forth in a separate agreement.
(e) Executive shall participate in, or receive benefits under, any then
current "employee benefit plan" (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended) or employee benefit
arrangement made available by the Company to its executives generally, including
plans (to the extent offered) providing 401(k) benefits, health care, life
insurance, disability and similar benefits. Without limiting the foregoing,
Executive shall be entitled to two (2) weeks of vacation per year, in accordance
with the Company's vacation pay policy.
3. Benefits Upon Termination.
(a) If Executive's employment is terminated either by the Company
(other than for Cause) or by the Executive for Good Reason or if Executive
becomes Disabled, Executive shall be entitled to the payments and benefits in
(b) and (c) below. If Executive dies prior to his termination of employment, his
designated beneficiary or beneficiaries will be entitled to the payments in (d)
below. Payments and benefits under subsections (b) and (c) are subject to
Executive's execution of a separation agreement acceptable to the Company which
will include a complete release of any and all claims relating to his
employment. If Executive's employment is terminated by the Company for Cause or
by the Executive voluntarily (other than for Good Reason), this Agreement shall
end as of the Termination Date of Executive's employment and Executive will be
entitled to no further payments or benefits (except as otherwise required by
law). The Term of this Agreement automatically ends as of the Termination Date.
The provisions of Sections 4-11 survive any termination of this Agreement or
termination of employment, other than by reason of Executive's death.
(b) Subject to and in accordance with the provisions of Section 3(a),
Executive shall continue to receive Executive's Base Salary as then in effect
(subject to withholding of all
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applicable taxes) for the period commencing as of the Termination Date and
continuing until the later of (1) end of the Term of this Agreement set forth in
Paragraph 1(b) or (2) one year. Payment shall be made in the same manner as it
was being paid as of the Termination Date; provided that if Executive terminates
employment for Good Reason due to a reduction in Executive's Base Salary,
Executive's Base Salary shall be paid at the rate in effect immediately before
such reduction for purposes of this subsection. During any period that he is
paid hereunder, Executive shall be on call to consult with the Company with
respect to the Company's Business at reasonable times and places and upon
reasonable notice. Reasonable out of pocket business expenses incurred in
connection with such consulting shall be reimbursed. Any amounts Executive has
due and owing to the Company may offset any amounts paid under this Agreement.
(c) If Executive properly elects COBRA coverage for group health
benefits upon his Termination Date and timely pays the premiums charged, if any,
under the Company's group health plan to active employees for the coverage
elected, Company shall pay the balance of Executive's COBRA premium during the
period payments are made under Section 3(b) above but not beyond the COBRA
continuation period. Thereafter, Executive will be charged the normal COBRA
premium for any remaining period of COBRA coverage. Group term life insurance
benefits, if any, shall be continued at the same level and in the same manner as
for active employees during the period payments are made under Section 3(b)
above. Any additional coverages Executive had at termination, including
dependent coverage, will also be continued for the period during which payments
are made under Section 3(b) on the same terms as before termination and to the
extent permitted by the applicable policies or contracts. Any costs Executive
was paying for such coverages at the time of termination shall be paid by
Executive through deduction from the amounts payable under Section 3(b) or, if
such withholding cannot be done, by separate check payable to the Company each
month in advance. If Executive qualifies (or would qualify) for the Company's
long term disability plan, the effective date of long term disability plan
coverage shall be treated as a Date of Termination for purposes of this Section
3.
(d) If the Executive dies prior to termination of employment under
Section 3(a) above, his designated beneficiary or beneficiaries will be entitled
to receive amounts (subject to
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applicable taxes) equal to Executive's Base Salary as in effect at the date of
death for a period from the date of death to the later of (1) the end of the
Term of this Agreement set forth in Paragraph 1(b) or (2) one year. Amounts
shall be paid in installments in the same manner as the Executive was being paid
as of his date of death. Members of Executive's family shall be entitled to
continuation of benefits in accordance with Company policies.
4. Confidential Information. During the term of employment and
continuing subsequent to any termination or expiration of this Employment
Agreement, Executive shall maintain Confidential Information as secret and
confidential unless Executive is required to disclose Confidential Information
pursuant to the terms of a valid and effective order issued by a court of
competent jurisdiction or a governmental authority. Executive shall use
Confidential Information solely for the purpose of carrying out those duties
assigned him as an employee of Company and not for any other purpose. The
disclosure of Confidential Information to Executive shall not be construed as
granting to Executive any license under any copyright, trade secret or any right
of ownership or right to use the information whatsoever. All physical items,
including electronic media, containing Confidential Information, including,
without limitation, any business plan, Company know-how, collection methods and
procedures, advertising techniques, marketing plans and methods, sales
techniques, documentation, contracts, reports, letters, notes, any computer
media, client lists, and all other information and materials of Company's
business and operations, shall remain the exclusive and confidential property of
Company and shall be returned, along with any copies or notes of Executive made
thereof or therefrom, to Company when Executive ceases his employment with
Company.
5. Non-Disparagement. Executive shall not at any time make false,
misleading or disparaging statements about the Company, including its products,
services, management, employees, and customers.
6. Non-Solicitation of Customers. Executive hereby covenants and agrees
that at no time during Executive's employment with Company and for a period of
one year immediately following termination of Executive's employment with
Company, whether voluntary or
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involuntary, shall Executive act in any way, directly or indirectly, with the
purpose or effect of soliciting, diverting or taking away any strategic partner,
business, customer, client or supplier of Company that Executive contacted,
directly or indirectly, or that anyone directly or indirectly supervised by
Executive contacted, directly or indirectly, during Executive's employment with
Company.
7. Non-Solicitation of Employees. Executive hereby covenants and agrees
that at no time during Executive's employment with Company and for a period of
one year immediately following termination of Executive's employment with
Company, whether voluntary or involuntary, will Executive act in any way with
the purpose or effect of soliciting, recruiting, or encouraging, directly or
indirectly, any Person who is or was at any time during the one year period
prior to the Termination Date to leave the employ of Company, its divisions or
its subsidiaries.
8. Limitations on Post-Termination Competition. Executive hereby
covenants and agrees that at no time during Executive's employment with Company
and for a period of one year immediately following termination of Executive's
employment with Company, whether voluntary or involuntary, Executive shall not
perform Services within the Territory for any Person providing or offering goods
or services identical to or reasonably substitutable for Company's Business.
Executive acknowledges that (i) this covenant has unique, substantial, and
immeasurable value to Company, (ii) this covenant is reasonably limited in scope
and geography to protect Company's legitimate business interests, including its
property, confidential information and relationships, good will, economic
advantage, and customer relationships; (iii) the agreements, covenants and
undertakings of Executive set forth in this Agreement will not preclude
Executive from becoming gainfully employed following termination of employment
with Company; and (iv) the services Executive intends and is expected to provide
are special and unique.
9. Works. Executive acknowledges that Executive's work on and
contributions to documents, programs, methodologies, protocols, and other
expressions in any tangible medium (collectively, "Works") are within the scope
of Executive's employment and part of Executive's
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duties, responsibilities or assignment. Executive's work on and contributions to
the Works will be rendered and made by Executive for, at the instigation of, and
under the overall direction of, Company, and all such work and contributions,
together with the Works, are and at all times shall be regarded, as "work made
for hire" as that term is used in the United States Copyright Laws. Without
limiting this acknowledgment, Executive assigns, grants, and delivers
exclusively to Company all rights, titles, and interests in and to any such
Works, and all copies and versions, including all copyrights and renewals.
Executive will execute and deliver to Company, its successors and assigns, any
assignments and documents Company requests for the purpose of establishing,
evidencing, and enforcing or defending its complete, exclusive, perpetual, and
worldwide ownership of all rights, titles, and interests of every kind and
nature, including all copyrights, in and to the Works, and Executive constitutes
and appoints Company as its agent to execute and deliver any assignments or
documents Executive fails or refuses to execute and deliver, this power and
agency being coupled with an interest and being irrevocable.
10. Inventions and Ideas. Executive shall disclose promptly to Company,
and only to Company, any invention or idea of Executive (developed alone or with
others) conceived or made during Executive's employment by Company or within six
months of the Termination Date. Executive assigns to Company any such invention
or idea in any way connected with Executive's employment or related to Company's
business, research or development, or demonstrably anticipated research or
development, and will cooperate with Company and sign all papers deemed
necessary by Company to enable it to obtain, maintain, protect and defend
patents covering such inventions and ideas and to confirm Company's exclusive
ownership of all rights in such inventions, ideas and patents, and irrevocably
appoints Company as its agent to execute and deliver any assignments or
documents Executive fails or refuses to execute and deliver promptly, this power
and agency being coupled with an interest and being irrevocable. This
constitutes the Company's written notification that this assignment does not
apply to an invention for which no equipment, supplies, facility or trade secret
information of the Company was used and which was developed entirely on
Executive's own time, unless (a) the invention relates (i) directly to the
business of the Company, or (ii) to the Company's actual or demonstrably
anticipated research or development, or (b) the invention results from any work
performed by Executive for the Company.
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11. Relief for Breach. Because any breach or threatened breach of
Sections 4 through 10 of this Agreement by Executive would result in continuing
material and irreparable harm to Company, and because it would be difficult or
impossible to establish the full monetary value of such damage, Company shall be
entitled to injunctive relief in the event of Executive's breach or threatened
breach of this Agreement. Injunctive relief is in addition to any other
available remedy, including termination of this Agreement and damages. In the
event of any threatened breach by Executive, Company may suspend any payment due
to Executive under Paragraph 3 and if Executive has breached this Agreement, any
remaining amounts to be paid under Paragraph 3 shall be forfeited. In the event
of any breach or threatened breach by either Executive or the Company which
results in court-ordered relief, the breaching party shall reimburse the
non-breaching party for its reasonable attorneys' fees and other expenses
incurred to obtain such relief.
12. Definitions. For purposes of this Agreement, the following
definitions shall apply:
(a) "Board" or "Board of Directors" - means the Board of Directors of
the Company.
(b) "Business" - means Company's business of hosting, designing and
developing Web sites and supporting resellers of Web hosting services and hosts
of large Web sites through co-location and dedicated server programs.
(c) "Cause" - means the termination of Executive by the Company for one
or more of the following reasons:
(1) If, in its good faith judgment, the Board
determines that Executive has committed an act or acts which constitute
a felony (other than traffic-related offenses);
(2) If, in its good faith judgment, the Board
determines that the Executive has violated laws or Company policies
which result in material injury to the Company;
(3) If the Executive commits an act or acts of
dishonesty or fraud resulting or intended to result directly or
indirectly in significant gain or personal
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enrichment to the Executive at the expense of the Company or to the
significant detriment of the Company;
(4) Upon the willful and continued failure by the
Executive substantially to perform his duties with the Company (other
than any such failure resulting from incapacity due to mental or
physical illness constituting a Disability, as defined herein); or
(5) If, in its good faith judgment, the Board
determines that the Executive has violated or threatened to violate the
provisions of Paragraphs 4 to 10 above or any other material breach of
this Agreement.
Executive shall not be deemed to have been involuntarily terminated for Cause
unless and until there shall have been delivered to him a copy of a resolution
duly adopted by the Board, finding that, in the good faith opinion of the Board,
Executive engaged or threatened to engage in conduct set forth above and
specifying the particulars thereof in detail. For purposes of subsections (2),
(3), (4) and (5), the Board must also deliver to Executive a demand in writing
for performance or cure, which demand specifically identifies the manner in
which the Board believes that Executive's conduct falls within such subsection
and details the Board's requirements for Executive to "cure" such conduct, if
appropriate. Involuntary termination occurs when Executive fails to "cure"
within the time period given by the Board and in accordance with the terms
provided by the Board. For purposes of this Agreement, no act or failure to act
by Executive shall be deemed to be "willful" unless done or omitted to be done
by Executive not in good faith and without reasonable belief that Executive's
action or omission was in the best interests of the Company.
(d) "Confidential Information" - means information, without regard to
form, relating to Company's customers, operation, finances, and business that
derives economic value, actual or potential, from not being generally known to
other Persons, including, but not limited to, technical or nontechnical data,
formulas, patterns, compilations (including compilations of customer
information), programs, models, concepts, designs (including without limitation,
designs for Company's remote development and consulting center) devices,
methods, techniques, processes, financial data or lists of actual or potential
customers (including identifying information about customers), whether or not in
writing. Confidential Information includes
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<PAGE> 10
information disclosed to Company by third parties that Company is obligated to
maintain as confidential. Confidential Information subject to this Agreement may
include information that is not a trade secret under applicable law, but
information not constituting a trade secret only shall be treated as
Confidential Information under this Agreement for a three year period after the
Termination Date.
(e) "Customers" - means strategic partners or customers of Company's
Business (1) that Executive contacted directly, or supervised directly or
indirectly through others contacting on behalf of Company, during the one year
period preceding the Termination Date; or (2) about whom Executive possessed
Confidential Information during the one year period preceding the Termination
Date.
(f) "Disability" - means the meaning ascribed to such term or its
variations, such as "Disabled", in the Company's long-term disability plan
covering the Executive, or in the absence of such plan, a meaning consistent
with Section 22(e)(3) of the Code.
(g) "Good Reason" means that one or more of the following has occurred
and, after giving the Company written notice of the occurrence and of
Executive's intention to resign from employment and the Company not curing the
event within 30 days of such written notice:
(i) a material diminution of position, duties,
responsibilities, authority or title or the
assignment of duties materially inconsistent with
Executive's position;
(ii) a reduction in Executive's Base Salary (annualized
rate);
(iii) relocation of Executive's work location outside the
Territory;
(iv) a material breach of this Agreement by the Company;
or
(v) the failure of a successor to the Company to assume
in writing this Agreement upon becoming a successor
or assignee of the Company.
Notwithstanding the foregoing, Executive's written consent to the
occurrence of any matter of Good Reason is a waiver of Executive's rights under
this Agreement to terminate his employment for that Good Reason.
(h) "Person" - means any individual, corporation, bank, partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or other entity.
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(i) "Services" - means the services described on the Annex to this
Agreement which is made a part hereof.
(j) "Termination Date" - means the last day Executive is employed by or
providing services for Company, whether the separation is voluntary or
involuntary, with or without Cause, or with or without advance notice.
(k) "Territory" - means the area within a 50 mile radius of the city
limits of Atlanta, Georgia. Executive acknowledges that Executive will perform
services on behalf of Company in the Territory.
13. Contract Non-Assignable. The parties acknowledge that this
Agreement has been entered into due to, among other things, the special skills
of Executive, and agree that this Agreement may not be assigned or transferred
by Executive, in whole or in part, without the prior written consent of the
Company.
14. Successors; Binding Agreement.
(a) In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to expressly assume and agree to
perform this Agreement, in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled to hereunder if the
Company terminated the Executive's employment without Cause, except that, for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Termination Date.
(b) This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Executive shall die
while any amount would still be payable to Executive hereunder (other than
amounts which, by their terms, terminate upon the death of
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Executive) if Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of
Executive's estate.
15. Other Agents. Nothing in this Agreement is to be interpreted as
limiting the Company from employing other personnel on such terms and conditions
as may be satisfactory to the Company.
16. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or seven days after mailing if mailed, first class,
certified mail, postage prepaid:
To the Company: Interland, Inc.
101 Marietta Street, 2nd Fl.
Atlanta, GA 30303
Attention: President
With a copy to: Kilpatrick Stockton LLP
1100 Peachtree Street, Suite 2800
Atlanta, GA 30309-4530
Attention: David A. Stockton, Esq.
To the Executive: H. Christopher Covington
Interland, Inc.
101 Marietta Street, 2nd Fl.
Atlanta, GA 30303
Any party may change the address to which notices, requests, demands and other
communications shall be delivered or mailed by giving notice thereof to the
other party in the same manner provided herein.
17. Provisions Severable. Rights and restrictions in this Agreement may
be exercised and are applicable only to the extent they do not violate any
applicable laws, and are intended to be limited to the extent necessary so they
will not render this Agreement illegal, invalid, or unenforceable. If any term
shall be held illegal, invalid, or unenforceable by a court of
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competent jurisdiction, the remaining terms shall remain in full force and
effect. This Agreement does not in any way limit Company's rights under the laws
of unfair competition, trade secret, copyright, patent, trademark or any other
applicable law(s), which are in addition to rights under this Agreement. The
existence of a claim by Executive, whether predicated on this Agreement or
otherwise, shall not constitute a defense to Company's enforcement of this
Agreement.
18. Waiver. Failure of either party to insist, in one or more
instances, on performance by the other in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or relinquishment of
any right granted in this Agreement or the future performance of any such term
or condition or of any other term or condition of this Agreement, unless such
waiver is contained in a writing signed by the party making the waiver.
19. Amendments and Modifications. This Agreement may be amended or
modified only by a writing signed by both parties hereto.
20. Entire Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the subject matter hereof and
Executive's employment with the Company. This Agreement supersedes all prior
negotiations, discussions, agreements and undertakings, both written and oral,
among the parties hereto, with respect to Executive's terms and conditions of
employment with the Company. This Agreement may not be enlarged, modified or
altered except in a writing signed by the parties as provided in Section 20
hereof.
21. Governing Law. The validity and effect of this Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Georgia. Each party irrevocably (a) consents to the exclusive jurisdiction
and venue of the courts of Fulton County, State and federal courts in the
Northern District of Georgia, in any action arising under or relating to this
Agreement, and (b) waives any jurisdictional defenses (including personal
jurisdiction and venue) to any such action.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EXECUTIVE:
/s/ H. Christopher Covington
---------------------------------------
H. Christopher Covington
COMPANY:
INTERLAND, INC.
By: /s/ Kenneth Gavranovic
------------------------------------
Kenneth Gavranovic
President & Chief Executive Officer
[ANNEX CONTINUES ON NEXT PAGE]
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ANNEX
TO
NONCOMPETITION PROVISIONS OF SECTION 8
OF EMPLOYMENT AGREEMENT
Name of Employee: H. Christopher Covington
Title: Senior Vice President, General Counsel and Secretary
Description of Services:
Date of Agreement: February 14, 2000
15
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of February 16, 2000, by
and between INTERLAND, INC., a Georgia corporation (the "Company"),
headquartered in Atlanta, Georgia, and DAVID N. GILL ("Executive"), an
individual residing in Marietta, Georgia.
WHEREAS, the Company desires to employ Executive and to establish
certain terms and conditions of his employment by entering into an employment
agreement with Executive as hereinafter provided;
WHEREAS, Executive desires to accept such employment with the Company
on the terms and conditions provided herein; and
WHEREAS, in the course of his employment, Executive will gain
knowledge of the business, affairs, finances, management, marketing programs
and philosophy, suppliers, distributors, customers, clients and methods of
operation of the Company and the Company would suffer irreparable harm if
Executive were to use such knowledge, information and business acumen in
competition with the Company or other than in the proper performance of his
duties hereunder.
THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, the parties hereby agree as follows:
1. Employment and Term. (a) Subject to the terms and conditions of
this Agreement, the Company hereby employs Executive, and Executive hereby
accepts employment, as Executive Vice President and Chief Financial Officer of
the Company and shall have such responsibilities, duties and authority as may
from time to time be assigned to Executive by the Chief Executive Officer and
the Board of Directors. Executive hereby agrees that during the Term of this
Agreement he will devote substantially all his working time, attention and
energies to the diligent performance of his duties as Executive Vice President
and Chief Financial Officer of the Company, provided that the Executive may
also serve on boards of directors or trustees of other companies and
organizations, as long as such service does not materially interfere with the
performance of his duties hereunder; provided, further that for the period from
his date of
<PAGE> 2
employment until March 13, 2000, Executive shall devote such time as is
consistent with his duties as Chief Financial Officer in connection with
the preparation of a Form S-1 Registration Statement for the Company but shall
also be permitted to perform services for his other employer as needed. Nothing
herein shall preclude the Board, in its sole discretion, from changing
Executive's title and duties if the Board has concluded in its reasonable
judgment that such change is in the Company's best interests, subject to the
terms of Section 12(g) of this Agreement.
(b) Unless earlier terminated as provided in Section 3, Executive's
employment under this Agreement shall be for a term of 3 year(s), commencing on
February 16, 2000 and ending on February 16, 2003. Executive's employment with
the Company shall end with the termination of this Agreement unless the Company
gives Executive written notice not less than thirty (30) days before the
expiration of this Agreement that the Company desires to continue Executive's
employment. If such notice is given, upon the expiration of this Agreement,
Executive shall continue to be employed by the Company as an "at will" employee
on the same basis as other Company employees who are "at will" and do not have
employment agreements.
(c) Executive warrants that Executive is not under any obligation,
contractual or otherwise, limiting or affecting Executive's ability or right to
perform freely services for Company.
2. Compensation and Benefits. As compensation for his services during
the Term of this Agreement, Executive shall be paid and receive the amounts and
benefits set forth below:
(a) An initial base salary ("Initial Base Salary") of $250,000.00,
subject to withholding of all applicable taxes, expressed as an annual amount
but payable in equal installments shall be paid to Executive. Executive's
Initial Base Salary shall be reviewed for adjustments at such time as the Board
conducts salary reviews for its executive management generally, but not less
frequently than annually. Executive's salary shall be payable in accordance
with the Company's regular payroll practices in effect from time to time for
executive management of the Company.
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(b) Executive shall participate in the Company's bonus incentive
compensation program, as long as it is available to executive officers of the
Company, and, based on Executive's performance, may be entitled to a bonus of
up to 20% of Executive's Base Salary.
(c) In connection with commencement of employment, the Company will
grant to Executive options for 450,000 shares of Company Common Stock, as
granted by the Board and under the terms and conditions set forth in a separate
stock option agreement. Company will enter into an indemnification agreement
with Executive on the same basis as such agreements are entered into with the
Company's directors.
(d) Executive shall be entitled to participate in the Company's stock
option plan, at the discretion of the Board, and the amount and terms of any
stock option grant shall be set forth in a separate agreement.
(e) Executive shall participate in, or receive benefits under, any
then current "employee benefit plan" (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended) or employee
benefit arrangement made available by the Company to its executives generally,
including plans (to the extent offered) providing 401(k) benefits, health care,
life insurance, disability and similar benefits. Without limiting the
foregoing, Executive shall be entitled to two (2) weeks of vacation per year,
in accordance with the Company's vacation pay policy.
3. Benefits Upon Termination.
(a) If Executive's employment is terminated either by the Company
(other than for Cause) or by the Executive for Good Reason or if Executive
becomes Disabled, Executive shall be entitled to the payments and benefits in
(b) and (c) below. If Executive dies prior to his termination of employment,
his designated beneficiary or beneficiaries will be entitled to the payments in
(d) below. Payments and benefits under subsections (b) and (c) are subject to
Executive's execution of a separation agreement acceptable to the Company which
will include a complete release of any and all claims relating to his
employment. If Executive's employment is terminated by the Company for Cause or
by the Executive voluntarily (other than for Good Reason), this Agreement shall
end as of the Termination Date of Executive's employment and Executive will be
entitled to no further payments or benefits (except as otherwise required by
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law). The Term of this Agreement automatically ends as of the Termination Date.
The provisions of Sections 4-12 survive any termination of this Agreement or
termination of employment, other than by reason of Executive's death.
(b) Subject to and in accordance with the provisions of Section 3(a),
Executive shall continue to receive Executive's Base Salary as then in effect
(subject to withholding of all applicable taxes) for the period commencing as
of the Termination Date and continuing until the later of (1) end of the Term
of this Agreement set forth in Paragraph 1(b) or (2) one year. Payment shall be
made in the same manner as it was being paid as of the Termination Date;
provided that if Executive terminates employment for Good Reason due to a
reduction in Executive's Base Salary, Executive's Base Salary shall be paid at
the rate in effect immediately before such reduction for purposes of this
subsection. During any period that he is paid hereunder, Executive shall be on
call to consult with the Company with respect to the Company's Business at
reasonable times and places and upon reasonable notice. Reasonable out of
pocket business expenses incurred in connection with such consulting shall be
reimbursed. Any amounts Executive has due and owing to the Company may offset
any amounts paid under this Agreement.
(c) If Executive properly elects COBRA coverage for group health
benefits upon his Termination Date and timely pays the premiums charged, if
any, under the Company's group health plan to active employees for the coverage
elected, Company shall pay the balance of Executive's COBRA premium during the
period payments are made under Section 3(b) above but not beyond the COBRA
continuation period. Thereafter, Executive will be charged the normal COBRA
premium for any remaining period of COBRA coverage. Group term life insurance
benefits, if any, shall be continued at the same level and in the same manner
as for active employees during the period payments are made under Section 3(b)
above. Any additional coverages Executive had at termination, including
dependent coverage, will also be continued for the period during which payments
are made under Section 3(b) on the same terms as before termination and to the
extent permitted by the applicable policies or contracts. Any costs Executive
was paying for such coverages at the time of termination shall be paid by
Executive through deduction from the amounts payable under Section 3(b) or, if
such withholding cannot be done, by separate check payable to the Company each
month in advance. If Executive
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qualifies (or would qualify) for the Company's long term disability plan, the
effective date of long term disability plan coverage shall be treated as a Date
of Termination for purposes of this Section 3.
(d) If the Executive dies prior to termination of employment under
Section 3(a) above, his designated beneficiary or beneficiaries will be
entitled to receive amounts (subject to applicable taxes) equal to Executive's
Base Salary as in effect at the date of death for a period from the date of
death to the later of (1) the end of the Term of this Agreement set forth in
Paragraph 1(b) or (2) one year. Amounts shall be paid in installments in the
same manner as the Executive was being paid as of his date of death. Members of
Executive's family shall be entitled to continuation of benefits in accordance
with Company policies.
4. Confidential Information. During the term of employment and
continuing subsequent to any termination or expiration of this Employment
Agreement, Executive shall maintain Confidential Information as secret and
confidential unless Executive is required to disclose Confidential Information
pursuant to the terms of a valid and effective order issued by a court of
competent jurisdiction or a governmental authority. Executive shall use
Confidential Information solely for the purpose of carrying out those duties
assigned him as an employee of Company and not for any other purpose. The
disclosure of Confidential Information to Executive shall not be construed as
granting to Executive any license under any copyright, trade secret or any
right of ownership or right to use the information whatsoever. All physical
items, including electronic media, containing Confidential Information,
including, without limitation, any business plan, Company know-how, collection
methods and procedures, advertising techniques, marketing plans and methods,
sales techniques, documentation, contracts, reports, letters, notes, any
computer media, client lists, and all other information and materials of
Company's business and operations, shall remain the exclusive and confidential
property of Company and shall be returned, along with any copies or notes of
Executive made thereof or therefrom, to Company when Executive ceases his
employment with Company.
5. Non-Disparagement. Executive shall not at any time make false,
misleading or disparaging statements, or statements that could reasonably be
interpreted as such, about the Company, including its products, services,
management, employees, and customers.
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6. Non-Solicitation of Customers. Executive hereby covenants and
agrees that at no time during Executive's employment with Company and for a
period of one year immediately following termination of Executive's employment
with Company, whether voluntary or involuntary, shall Executive act in any way,
directly or indirectly, with the purpose or effect of soliciting, diverting or
taking away any strategic partner, business, customer, client or supplier of
Company that Executive contacted, directly or indirectly, or that anyone
directly or indirectly supervised by Executive contacted, directly or
indirectly, during Executive's employment with Company.
7. Non-Solicitation of Employees. Executive hereby covenants and
agrees that at no time during Executive's employment with Company and for a
period of one year immediately following termination of Executive's employment
with Company, whether voluntary or involuntary, will Executive act in any way
with the purpose or effect of soliciting, recruiting, or encouraging, directly
or indirectly, any Person who is or was at any time during the one year period
prior to the Termination Date to leave the employ of Company, its divisions or
its subsidiaries.
8. Limitations on Post-Termination Competition. Executive hereby
covenants and agrees that at no time during Executive's employment with Company
and for a period of one year immediately following termination of Executive's
employment with Company, whether voluntary or involuntary, Executive shall not
perform Services within the Territory for any Person providing or offering
goods or services identical to or reasonably substitutable for Company's
Business. Executive acknowledges that (i) this covenant has unique,
substantial, and immeasurable value to Company, (ii) this covenant is
reasonably limited in scope and geography to protect Company's legitimate
business interests, including its property, confidential information and
relationships, good will, economic advantage, and customer relationships; (iii)
the agreements, covenants and undertakings of Executive set forth in this
Agreement will not preclude Executive from becoming gainfully employed
following termination of employment with Company; and (iv) the services
Executive intends and is expected to provide are special and unique.
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9. Works. Executive acknowledges that Executive's work on and
contributions to documents, programs, methodologies, protocols, and other
expressions in any tangible medium (collectively, "Works") are within the scope
of Executive's employment and part of Executive's duties, responsibilities or
assignment. Executive's work on and contributions to the Works will be rendered
and made by Executive for, at the instigation of, and under the overall
direction of, Company, and all such work and contributions, together with the
Works, are and at all times shall be regarded, as "work made for hire" as that
term is used in the United States Copyright Laws. Without limiting this
acknowledgment, Executive assigns, grants, and delivers exclusively to Company
all rights, titles, and interests in and to any such Works, and all copies and
versions, including all copyrights and renewals. Executive will execute and
deliver to Company, its successors and assigns, any assignments and documents
Company requests for the purpose of establishing, evidencing, and enforcing or
defending its complete, exclusive, perpetual, and worldwide ownership of all
rights, titles, and interests of every kind and nature, including all
copyrights, in and to the Works, and Executive constitutes and appoints Company
as its agent to execute and deliver any assignments or documents Executive
fails or refuses to execute and deliver, this power and agency being coupled
with an interest and being irrevocable.
10. Inventions and Ideas. Executive shall disclose promptly to
Company, and only to Company, any invention or idea of Executive (developed
alone or with others) conceived or made during Executive's employment by
Company or within six months of the Termination Date. Executive assigns to
Company any such invention or idea in any way connected with Executive's
employment or related to Company's business, research or development, or
demonstrably anticipated research or development, and will cooperate with
Company and sign all papers deemed necessary by Company to enable it to obtain,
maintain, protect and defend patents covering such inventions and ideas and to
confirm Company's exclusive ownership of all rights in such inventions, ideas
and patents, and irrevocably appoints Company as its agent to execute and
deliver any assignments or documents Executive fails or refuses to execute and
deliver promptly, this power and agency being coupled with an interest and
being irrevocable. This constitutes the Company's written notification that
this assignment does not apply to an invention for which no
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equipment,supplies, facility or trade secret information of the Company was
used and which was developed entirely on Executive's own time, unless (a) the
invention relates (i) directly to the business of the Company, or (ii) to the
Company's actual or demonstrably anticipated research or development, or (b)
the invention results from any work performed by Executive for the Company.
11. Relief for Breach. Because any breach or threatened breach of
Sections 4 through 10 of this Agreement by Executive would result in continuing
material and irreparable harm to Company, and because it would be difficult or
impossible to establish the full monetary value of such damage, Company shall
be entitled to injunctive relief in the event of Executive's breach or
threatened breach of this Agreement. Injunctive relief is in addition to any
other available remedy, including termination of this Agreement and damages. In
the event of any threatened breach by Executive, Company may suspend any
payment due to Executive under Paragraph 3 and if Executive has breached this
Agreement, any remaining amounts to be paid under Paragraph 3 shall be
forfeited. In the event of any breach or threatened breach by either Executive
or the Company which results in court-ordered relief, the breaching party shall
reimburse the non-breaching party for its reasonable attorneys' fees and other
expenses incurred to obtain such relief.
12. Definitions. For purposes of this Agreement, the following
definitions shall apply:
(a) "Board" or "Board of Directors" - means the Board of Directors of
the Company.
(b) "Business" - means Company's business of hosting, designing and
developing Web sites and supporting resellers of Web hosting services and hosts
of large Web sites through co-location and dedicated server programs.
(c) "Cause" - means the termination of Executive by the Company for
one or more of the following reasons:
(1) If, in its good faith judgment, the Board determines that
Executive has committed an act or acts which constitute a felony
(other than traffic-related offenses);
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(2) If, in its good faith judgment, the Board determines that
the Executive has violated laws or Company policies which result in
material injury to the Company;
(3) If the Executive commits an act or acts of dishonesty or
fraud resulting or intended to result directly or indirectly in
significant gain or personal enrichment to the Executive at the
expense of the Company or to the significant detriment of the Company;
(4) Upon the willful and continued failure by the Executive
substantially to perform his duties with the Company (other than any
such failure resulting from incapacity due to mental or physical
illness constituting a Disability, as defined herein); or
(5) If, in its good faith judgment, the Board determines that
the Executive has violated or threatened to violate the provisions of
Paragraphs 4 to 10 above or any other material breach of this
Agreement.
Executive shall not be deemed to have been involuntarily terminated for Cause
unless and until there shall have been delivered to him a copy of a resolution
duly adopted by the Board, finding that, in the good faith opinion of the
Board, Executive engaged or threatened to engage in conduct set forth above and
specifying the particulars thereof in detail. For purposes of subsections (2),
(3), (4) and (5), the Board must also deliver to Executive a demand in writing
for performance or cure, which demand specifically identifies the manner in
which the Board believes that Executive's conduct falls within such subsection
and details the Board's requirements for Executive to "cure" such conduct, if
appropriate. Involuntary termination occurs when Executive fails to "cure"
within the time period given by the Board and in accordance with the terms
provided by the Board. For purposes of this Agreement, no act or failure to act
by Executive shall be deemed to be "willful" unless done or omitted to be done
by Executive not in good faith and without reasonable belief that Executive's
action or omission was in the best interests of the Company.
(d) "Confidential Information" - means information, without regard to
form, relating to Company's customers, operation, finances, and business that
derives economic value, actual or potential, from not being generally known to
other Persons, including, but not limited to,
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technical or nontechnical data, formulas, patterns, compilations (including
compilations of customer information), programs, models, concepts, designs
(including without limitation, designs for Company's remote development and
consulting center) devices, methods, techniques, processes, financial data or
lists of actual or potential customers (including identifying information about
customers), whether or not in writing. Confidential Information includes
information disclosed to Company by third parties that Company is obligated to
maintain as confidential. Confidential Information subject to this Agreement
may include information that is not a trade secret under applicable law, but
information not constituting a trade secret only shall be treated as
Confidential Information under this Agreement for a three year period after the
Termination Date.
(e) "Customers" - means strategic partners or customers of Company's
Business (1) that Executive contacted directly, or supervised directly or
indirectly through others contacting on behalf of Company, during the one year
period preceding the Termination Date; or (2) about whom Executive possessed
Confidential Information during the one year period preceding the Termination
Date.
(f) "Disability" - means the meaning ascribed to such term or its
variations, such as "Disabled", in the Company's long-term disability plan
covering the Executive, or in the absence of such plan, a meaning consistent
with Section 22(e)(3) of the Code.
(g) "Good Reason" means that one or more of the following has occurred
and, after giving the Company written notice of the occurrence and of
Executive's intention to resign from employment and the Company not curing the
event within 30 days of such written notice:
(i) a material diminution of position, duties, responsibilities,
authority or title or the assignment of duties materially
inconsistent with Executive's position;
(ii) a reduction in Executive's Base Salary (annualized rate);
(iii) relocation of Executive's work location outside the Territory;
(iv) a material breach of this Agreement by the Company; or
(v) the failure of a successor to the Company to assume in writing
this Agreement upon becoming a successor or assignee of the
Company.
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Notwithstanding the foregoing, Executive's written consent to the
occurrence of any matter of Good Reason is a waiver of Executive's rights under
this Agreement to terminate his employment for that Good Reason.
(h) "Person" - means any individual, corporation, bank, partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or other entity.
(i) "Services" - means the services described on the Annex to this
Agreement which is made a part hereof.
(j) "Termination Date" - means the last day Executive is employed by or
providing services for Company, whether the separation is voluntary or
involuntary, with or without Cause, or with or without advance notice.
(k) "Territory" - means the area within a 50 mile radius of the city
limits of Atlanta, Georgia. Executive acknowledges that Executive will perform
services on behalf of Company in the Territory.
13. Change in Control Payments
(a) Anything in this Agreement to the contrary notwithstanding, in the
event it shall be determined (as hereafter provided) that any payment or
distribution to or for the Executive, whether paid or payable or distributed or
distributable pursuant to the terms of this Agreement or pursuant to or by
reason of any other agreement, policy, plan, program or arrangement (including,
without limitation, any employment agreement, stock plan or salary continuation
agreement), or similar right (a "Payment"), would be subject to the excise tax
imposed by Section 4999 of the Code (or any successor provisions thereto), or
any interest or penalties with respect to such excise tax (such excise tax,
together with any such interest and penalties, are hereafter collectively
referred to as the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment or payments (a "Gross-Up Payment") from the
Company. The total amount of the Gross-Up Payment shall be an amount such that,
after payment by (or on behalf of) the Executive of any Excise Tax and all
federal, state and other taxes (including any interest or penalties imposed with
respect to such taxes) imposed upon the Gross-Up Payment, the remaining amount
of the Gross-Up Payment is equal to the Excise Tax imposed upon the Payments but
in no event shall the Gross-Up Payment, plus any amounts withheld for taxes on
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account of such payments, exceed one million dollars ($1,000,000). For purposes
of clarity, the amount of the Gross-Up Payment shall be that amount necessary to
pay the Excise Tax in full and all taxes assessed upon the Gross-Up Payment.
(b) An initial determination as to whether a Gross-Up Payment is
required pursuant to this Section 13 and the amount of such Gross-Up Payment
shall be made by an accounting firm selected by the Company and reasonably
acceptable to the Executive which is then designated as one of the five largest
accounting firms in the United States (the "Accounting Firm"). The Accounting
Firm shall provide its determination (the "Determination"), together with
detailed supporting calculations and documentation to the Company and the
Executive as promptly as practicable after such calculation is requested by the
Company or by the Executive, and if the Accounting Firm determines that no
Excise Tax is payable by the Executive with respect to a Payment or Payments, it
shall furnish the Executive with an opinion reasonably acceptable to the
Executive that no Excise Tax will be imposed with respect to any such Payment or
Payments. Within fifteen (15) days of the delivery of the Determination to the
Executive, the Executive shall have the right to dispute the Determination (the
"Dispute"). The Gross-Up Payment, if any, as determined pursuant to this Section
13 shall be paid by the Company to the Executive within fifteen (15) days of the
receipt of the Accounting Firm's Determination. The existence of the Dispute
shall not in any way affect the right of the Executive to receive the Gross-Up
Payment in accordance with the Determination. If there is no Dispute, the
Determination shall be binding, final and conclusive upon the Company and the
Executive subject to the application of subsection (c) below.
(c) As a result of the uncertainty in the application of Sections 4999
and 280G of the Code, it is possible that a Gross-Up Payment (or a portion
thereof) will be paid which should not have been paid (an "Excess Payment") or a
Gross-Up Payment (or a portion thereof) which should have been paid will not
have been paid (an "Underpayment"). An Underpayment shall be deemed to have
occurred upon the earliest to occur of the following events: (1) upon notice
(formal or informal) to the Executive from any governmental taxing authority
that the tax liability of the Executive (whether in respect of the then current
taxable year of the Executive or in respect of any prior taxable year of the
Executive) may be increased by reason of the imposition of the Excise Tax on a
Payment or Payments with respect to which the Company has
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failed to make a sufficient Gross-Up Payment, (2) upon a determination by a
court, (3) by reason of a determination by the Company (which shall include the
position taken by the Company, or its consolidated group, on its federal income
tax return), or (4) upon the resolution to the satisfaction of the Executive of
the Dispute. If any Underpayment occurs, the Executive shall promptly notify the
Company and the Company shall pay to the Executive within fifteen (15) days of
the date the Underpayment is deemed to have occurred under (1), (2), (3) or (4)
above, but in no event less than five days prior to the date on which the
applicable government taxing authority has requested payment, an additional
Gross-Up Payment equal to the amount of the Underpayment plus any interest and
penalties imposed on the Underpayment, provided that such additional Gross-Up
Payment when added to any prior Gross-Up Payment does not exceed the $1 million
cap in section (a).
An Excess Payment shall be deemed to have occurred upon a "Final
Determination" (as hereinafter defined) that the Excise Tax shall not be imposed
upon a Payment or Payments (or portion of a Payment) with respect to which the
Executive had previously received a Gross-Up Payment. A Final Determination
shall be deemed to have occurred when the Executive has received from the
applicable government taxing authority a refund of taxes or other reduction in
his tax liability by reason of the Excess Payment and upon either (1) the date a
determination is made by, or an agreement is entered into with, the applicable
governmental taxable authority which finally and conclusively binds the
Executive and such taxing authority, or in the event that a claim is brought
before a court of competent jurisdiction, the date upon which a final
determination has been made by such court and either all appeals have been taken
and finally resolved or the time for all appeals has expired, or (2) the statute
of limitations with respect to the Executive's applicable tax return has
expired. If an Excess Payment is determined to have been made, the amount of the
Excess Payment shall be treated as a loan by the Company to the Executive and
the Executive shall pay to the Company within 15 days following demand (but not
less than 30 days after the determination of such Excess Payment) the amount of
the Excess Payment plus interest at an annual rate equal to the rate provided
for in Section 1274(b)(2)(B) of the Code from the date the Gross-Up Payment (to
which the Excess Payment relates) was paid to the Executive until the date of
repayment to the Company.
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(d) Notwithstanding anything contained in this Agreement to the
contrary, in the event that, according to the Determination, an Excise Tax will
be imposed on any Payment or Payments, the Company shall pay to the applicable
government taxing authorities as Excise Tax withholding, the amount of any
Excise Tax that the Company has actually withheld from the Payment or Payments;
provided that the Company's payment of withheld Excise Tax shall not change the
Company's obligation to pay the Gross-Up Payment required under this Section 13.
(e) In addition to the provisions otherwise provided in this Section
13, to the extent permitted by law, Executive may in his sole discretion elect
to reduce any payments he may be eligible to receive under this Agreement to
prevent the imposition of excise taxes on Executive under Section 4999 of the
Code.
14. Contract Non-Assignable. The parties acknowledge that this
Agreement has been entered into due to, among other things, the special skills
of Executive, and agree that this Agreement may not be assigned or transferred
by Executive, in whole or in part, without the prior written consent of the
Company.
15. Successors; Binding Agreement.
(a) In addition to any obligations imposed by law upon any successor
to the Company, the Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement, in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Company terminated the Executive's employment without Cause,
except that, for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Termination Date.
(b) This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees,
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devisees and legatees. If Executive shall die while any amount would still be
payable to Executive hereunder (other than amounts which, by their terms,
terminate upon the death of Executive) if Executive had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the executors, personal representatives or
administrators of Executive's estate.
16. Other Agents. Nothing in this Agreement is to be interpreted as
limiting the Company from employing other personnel on such terms and
conditions as may be satisfactory to the Company.
17. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or seven days after mailing if mailed, first
class, certified mail, postage prepaid:
To the Company: Interland, Inc.
101 Marietta Street, 2nd Fl.
Atlanta, GA 30303
Attention: President
With a copy to: Kilpatrick Stockton LLP
1100 Peachtree Street, Suite 2800
Atlanta, GA 30309-4530
Attention: David A. Stockton, Esq.
To the Executive: David N. Gill
Interland, Inc.
101 Marietta Street, 2nd Fl.
Atlanta, GA 30303
Any party may change the address to which notices, requests, demands and other
communications shall be delivered or mailed by giving notice thereof to the
other party in the same manner provided herein.
18. Provisions Severable. Rights and restrictions in this Agreement
may be exercised and are applicable only to the extent they do not violate any
applicable laws, and are intended to be limited to the extent necessary so they
will not render this Agreement illegal, invalid, or
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unenforceable. If any term shall be held illegal, invalid, or unenforceable by a
court of competent jurisdiction, the remaining terms shall remain in full force
and effect. This Agreement does not in any way limit Company's rights under the
laws of unfair competition, trade secret, copyright, patent, trademark or any
other applicable law(s), which are in addition to rights under this Agreement.
The existence of a claim by Executive, whether predicated on this Agreement or
otherwise, shall not constitute a defense to Company's enforcement of this
Agreement.
19. Waiver. Failure of either party to insist, in one or more
instances, on performance by the other in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or relinquishment of
any right granted in this Agreement or the future performance of any such term
or condition or of any other term or condition of this Agreement, unless such
waiver is contained in a writing signed by the party making the waiver.
20. Amendments and Modifications. This Agreement may be amended or
modified only by a writing signed by both parties hereto.
21. Entire Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the subject matter hereof and
Executive's employment with the Company. This Agreement supersedes all prior
negotiations, discussions, agreements and undertakings, both written and oral,
among the parties hereto, with respect to Executive's terms and conditions of
employment with the Company. This Agreement may not be enlarged, modified or
altered except in a writing signed by the parties as provided in Section 20
hereof.
22. Governing Law. The validity and effect of this Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Georgia. Each party irrevocably (a) consents to the exclusive jurisdiction
and venue of the courts of Fulton County, State and federal courts in the
Northern District of Georgia, in any action arising under or relating to this
Agreement, and (b) waives any jurisdictional defenses (including personal
jurisdiction and venue) to any such action.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EXECUTIVE:
/s/ David N. Gill
--------------------------------------
David N. Gill
COMPANY:
INTERLAND, INC.
By: /s/ Kenneth Gavranovic
-----------------------------------
Kenneth Gavranovic
President & Chief Executive Officer
[ANNEX CONTINUES ON NEXT PAGE]
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ANNEX
TO
NONCOMPETITION PROVISIONS OF SECTION 8
OF EMPLOYMENT AGREEMENT
Name of Employee: David N. Gill
Title: Executive Vice President and Chief Financial Officer
Description of Services: financial management and accounting services as chief
financial officer
Date of Agreement: February 16, 2000
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EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made and entered into as of February 24, 2000, by and
between INTERLAND, INC., a Georgia corporation (the "Company"), headquartered in
Atlanta, Georgia, and RAHIM SHAH ("Executive"), an individual residing in
Atlanta, Georgia.
WHEREAS, the Company desires to continue to employ Executive and to
establish certain terms and conditions of his employment by entering into an
employment agreement with Executive as hereinafter provided;
WHEREAS, Executive desires to continue such employment with the Company
on the terms and conditions provided herein; and
WHEREAS, in the course of his employment, Executive will gain knowledge
of the business, affairs, finances, management, marketing programs and
philosophy, suppliers, distributors, customers, clients and methods of operation
of the Company and the Company would suffer irreparable harm if Executive were
to use such knowledge, information and business acumen in competition with the
Company or other than in the proper performance of his duties hereunder.
THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein, the parties hereby agree as follows:
1. Employment and Term. (a) Subject to the terms and conditions of this
Agreement, the Company hereby employs Executive, and Executive hereby accepts
employment, as Executive Vice President of the Company and shall have such
responsibilities, duties and authority as may from time to time be assigned to
Executive by the Chief Executive Officer and the Board of Directors. Executive
hereby agrees that during the Term of this Agreement he will devote
substantially all his working time, attention and energies to the diligent
performance of his duties as Executive Vice President of the Company, provided
that the Executive may also serve on boards of directors or trustees of other
companies and organizations, as long as such service does not materially
interfere with the performance of his duties hereunder. Nothing herein
<PAGE> 2
shall preclude the Board, in its sole discretion, from changing Executive's
title and duties if the Board has concluded in its reasonable judgment that such
change is in the Company's best interests, subject to the terms of Section 12(g)
of this Agreement.
(b) Unless earlier terminated as provided in Section 3, Executive's
employment under this Agreement shall be for a term of 3 year(s), commencing on
November 1, 1999 and ending on November 1, 2002. Executive's employment with the
Company shall end with the termination of this Agreement unless the Company
gives Executive written notice not less than thirty (30) days before the
expiration of this Agreement that the Company desires to continue Executive's
employment. If such notice is given, upon the expiration of this Agreement,
Executive shall continue to be employed by the Company as an "at will" employee
on the same basis as other Company employees who are "at will" and do not have
employment agreements.
(c) Executive warrants that Executive is not under any obligation,
contractual or otherwise, limiting or affecting Executive's ability or right to
perform freely services for Company.
2. Compensation and Benefits. As compensation for his services during
the Term of this Agreement, Executive shall be paid and receive the amounts and
benefits set forth below:
(a) An initial base salary ("Initial Base Salary") of $150,000.00 and,
effective March 1, 2000, of $200,000, subject to withholding of all applicable
taxes, expressed as an annual amount but payable in equal installments shall be
paid to Executive. Executive's Initial Base Salary shall be reviewed for
adjustments at such time as the Board conducts salary reviews for its executive
management generally, but not less frequently than annually. Executive's salary
shall be payable in accordance with the Company's regular payroll practices in
effect from time to time for executive management of the Company.
(b) Executive shall participate in the Company's bonus incentive
compensation program, as long as it is available to executive officers of the
Company, and, based on Executive's performance, may be entitled to a bonus of up
to 15% of Executive's Base Salary.
(c) In connection with commencement of employment, the Company has
granted prior to the date of this Agreement to Executive options for 175,000
shares of Company Common Stock, as granted by the Board and under the terms and
conditions set forth in a separate stock option agreement.
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(d) Executive shall be entitled to participate in the Company's stock
option plan, at the discretion of the Board, and the amount and terms of any
stock option grant shall be set forth in a separate agreement.
(e) Executive shall participate in, or receive benefits under, any then
current "employee benefit plan" (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended) or employee benefit
arrangement made available by the Company to its executives generally, including
plans (to the extent offered) providing 401(k) benefits, health care, life
insurance, disability and similar benefits. Without limiting the foregoing,
Executive shall be entitled to two (2) weeks of vacation per year, in accordance
with the Company's vacation pay policy.
3. Benefits Upon Termination.
(a) If Executive's employment is terminated either by the Company
(other than for Cause) or by the Executive for Good Reason or if Executive
becomes Disabled, Executive shall be entitled to the payments and benefits in
(b) and (c) below. If Executive dies prior to his termination of employment, his
designated beneficiary or beneficiaries will be entitled to the payments in (d)
below. Payments and benefits under subsections (b) and (c) are subject to
Executive's execution of a separation agreement acceptable to the Company which
will include a complete release of any and all claims relating to his
employment. If Executive's employment is terminated by the Company for Cause or
by the Executive voluntarily (other than for Good Reason), this Agreement shall
end as of the Termination Date of Executive's employment and Executive will be
entitled to no further payments or benefits (except as otherwise required by
law). The Term of this Agreement automatically ends as of the Termination Date.
The provisions of Sections 4-11 survive any termination of this Agreement or
termination of employment, other than by reason of Executive's death.
(b) Subject to and in accordance with the provisions of Section 3(a),
Executive shall continue to receive Executive's Base Salary as then in effect
(subject to withholding of all applicable taxes) for the period commencing as of
the Termination Date and continuing until the later of (1) end of the Term of
this Agreement set forth in Paragraph 1(b) or (2) one year. Payment shall be
made in the same manner as it was being paid as of the Termination Date;
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provided that if Executive terminates employment for Good Reason due to a
reduction in Executive's Base Salary, Executive's Base Salary shall be paid at
the rate in effect immediately before such reduction for purposes of this
subsection. During any period that he is paid hereunder, Executive shall be on
call to consult with the Company with respect to the Company's Business at
reasonable times and places and upon reasonable notice. Reasonable out of pocket
business expenses incurred in connection with such consulting shall be
reimbursed. Any amounts Executive has due and owing to the Company may offset
any amounts paid under this Agreement.
(c) If Executive properly elects COBRA coverage for group health
benefits upon his Termination Date and timely pays the premiums charged, if any,
under the Company's group health plan to active employees for the coverage
elected, Company shall pay the balance of Executive's COBRA premium during the
period payments are made under Section 3(b) above but not beyond the COBRA
continuation period. Thereafter, Executive will be charged the normal COBRA
premium for any remaining period of COBRA coverage. Group term life insurance
benefits, if any, shall be continued at the same level and in the same manner as
for active employees during the period payments are made under Section 3(b)
above. Any additional coverages Executive had at termination, including
dependent coverage, will also be continued for the period during which payments
are made under Section 3(b) on the same terms as before termination and to the
extent permitted by the applicable policies or contracts. Any costs Executive
was paying for such coverages at the time of termination shall be paid by
Executive through deduction from the amounts payable under Section 3(b) or, if
such withholding cannot be done, by separate check payable to the Company each
month in advance. If Executive qualifies (or would qualify) for the Company's
long term disability plan, the effective date of long term disability plan
coverage shall be treated as a Date of Termination for purposes of this Section
3.
(d) If the Executive dies prior to termination of employment under
Section 3(a) above, his designated beneficiary or beneficiaries will be entitled
to receive amounts (subject to applicable taxes) equal to Executive's Base
Salary as in effect at the date of death for a period from the date of death to
the later of (1) the end of the Term of this Agreement set forth in Paragraph
1(b) or (2) one year. Amounts shall be paid in installments in the same manner
as the
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Executive was being paid as of his date of death. Members of Executive's family
shall be entitled to continuation of benefits in accordance with Company
policies.
4. Confidential Information. During the term of employment and
continuing subsequent to any termination or expiration of this Employment
Agreement, Executive shall maintain Confidential Information as secret and
confidential unless Executive is required to disclose Confidential Information
pursuant to the terms of a valid and effective order issued by a court of
competent jurisdiction or a governmental authority. Executive shall use
Confidential Information solely for the purpose of carrying out those duties
assigned him as an employee of Company and not for any other purpose. The
disclosure of Confidential Information to Executive shall not be construed as
granting to Executive any license under any copyright, trade secret or any right
of ownership or right to use the information whatsoever. All physical items,
including electronic media, containing Confidential Information, including,
without limitation, any business plan, Company know-how, collection methods and
procedures, advertising techniques, marketing plans and methods, sales
techniques, documentation, contracts, reports, letters, notes, any computer
media, client lists, and all other information and materials of Company's
business and operations, shall remain the exclusive and confidential property of
Company and shall be returned, along with any copies or notes of Executive made
thereof or therefrom, to Company when Executive ceases his employment with
Company.
5. Non-Disparagement. Executive shall not at any time make false,
misleading or disparaging statements about the Company, including its products,
services, management, employees, and customers.
6. Non-Solicitation of Customers. Executive hereby covenants and agrees
that at no time during Executive's employment with Company and for a period of
one year immediately following termination of Executive's employment with
Company, whether voluntary or involuntary, shall Executive act in any way,
directly or indirectly, with the purpose or effect of soliciting, diverting or
taking away any strategic partner, business, customer, client or supplier of
Company that Executive contacted, directly or indirectly, or that anyone
directly or indirectly
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<PAGE> 6
supervised by Executive contacted, directly or indirectly, during Executive's
employment with Company.
7. Non-Solicitation of Employees. Executive hereby covenants and agrees
that at no time during Executive's employment with Company and for a period of
one year immediately following termination of Executive's employment with
Company, whether voluntary or involuntary, will Executive act in any way with
the purpose or effect of soliciting, recruiting, or encouraging, directly or
indirectly, any Person who is or was at any time during the one year period
prior to the Termination Date to leave the employ of Company, its divisions or
its subsidiaries.
8. Limitations on Post-Termination Competition. Executive hereby
covenants and agrees that at no time during Executive's employment with Company
and for a period of one year immediately following termination of Executive's
employment with Company, whether voluntary or involuntary, Executive shall not
perform Services within the Territory for any Person providing or offering goods
or services identical to or reasonably substitutable for Company's Business.
Executive acknowledges that (i) this covenant has unique, substantial, and
immeasurable value to Company, (ii) this covenant is reasonably limited in scope
and geography to protect Company's legitimate business interests, including its
property, confidential information and relationships, good will, economic
advantage, and customer relationships; (iii) the agreements, covenants and
undertakings of Executive set forth in this Agreement will not preclude
Executive from becoming gainfully employed following termination of employment
with Company; and (iv) the services Executive intends and is expected to provide
are special and unique.
9. Works. Executive acknowledges that Executive's work on and
contributions to documents, programs, methodologies, protocols, and other
expressions in any tangible medium (collectively, "Works") are within the scope
of Executive's employment and part of Executive's duties, responsibilities or
assignment. Executive's work on and contributions to the Works will be rendered
and made by Executive for, at the instigation of, and under the overall
direction of, Company, and all such work and contributions, together with the
Works, are and at all times shall
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be regarded, as "work made for hire" as that term is used in the United States
Copyright Laws. Without limiting this acknowledgment, Executive assigns, grants,
and delivers exclusively to Company all rights, titles, and interests in and to
any such Works, and all copies and versions, including all copyrights and
renewals. Executive will execute and deliver to Company, its successors and
assigns, any assignments and documents Company requests for the purpose of
establishing, evidencing, and enforcing or defending its complete, exclusive,
perpetual, and worldwide ownership of all rights, titles, and interests of every
kind and nature, including all copyrights, in and to the Works, and Executive
constitutes and appoints Company as its agent to execute and deliver any
assignments or documents Executive fails or refuses to execute and deliver, this
power and agency being coupled with an interest and being irrevocable.
10. Inventions and Ideas. Executive shall disclose promptly to Company,
and only to Company, any invention or idea of Executive (developed alone or with
others) conceived or made during Executive's employment by Company or within six
months of the Termination Date. Executive assigns to Company any such invention
or idea in any way connected with Executive's employment or related to Company's
business, research or development, or demonstrably anticipated research or
development, and will cooperate with Company and sign all papers deemed
necessary by Company to enable it to obtain, maintain, protect and defend
patents covering such inventions and ideas and to confirm Company's exclusive
ownership of all rights in such inventions, ideas and patents, and irrevocably
appoints Company as its agent to execute and deliver any assignments or
documents Executive fails or refuses to execute and deliver promptly, this power
and agency being coupled with an interest and being irrevocable. This
constitutes the Company's written notification that this assignment does not
apply to an invention for which no equipment, supplies, facility or trade secret
information of the Company was used and which was developed entirely on
Executive's own time, unless (a) the invention relates (i) directly to the
business of the Company, or (ii) to the Company's actual or demonstrably
anticipated research or development, or (b) the invention results from any work
performed by Executive for the Company.
11. Relief for Breach. Because any breach or threatened breach of
Sections 4 through 10 of this Agreement by Executive would result in continuing
material and irreparable harm to
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<PAGE> 8
Company, and because it would be difficult or impossible to establish the full
monetary value of such damage, Company shall be entitled to injunctive relief in
the event of Executive's breach or threatened breach of this Agreement.
Injunctive relief is in addition to any other available remedy, including
termination of this Agreement and damages. In the event of any threatened breach
by Executive, Company may suspend any payment due to Executive under Paragraph 3
and if Executive has breached this Agreement, any remaining amounts to be paid
under Paragraph 3 shall be forfeited. In the event of any breach or threatened
breach by either Executive or the Company which results in court-ordered relief,
the breaching party shall reimburse the non-breaching party for its reasonable
attorneys' fees and other expenses incurred to obtain such relief.
12. Definitions. For purposes of this Agreement, the following
definitions shall apply:
(a) "Board" or "Board of Directors" - means the Board of Directors of
the Company.
(b) "Business" - means Company's business of hosting, designing and
developing Web sites and supporting resellers of Web hosting services and hosts
of large Web sites through co-location and dedicated server programs.
(c) "Cause" - means the termination of Executive by the Company for one
or more of the following reasons:
(1) If, in its good faith judgment, the Board
determines that Executive has committed an act or acts which constitute
a felony (other than traffic-related offenses);
(2) If, in its good faith judgment, the Board
determines that the Executive has violated laws or Company policies
which result in material injury to the Company;
(3) If the Executive commits an act or acts of
dishonesty or fraud resulting or intended to result directly or
indirectly in significant gain or personal enrichment to the Executive
at the expense of the Company or to the significant detriment of the
Company;
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<PAGE> 9
(4) Upon the willful and continued failure by the
Executive substantially to perform his duties with the Company (other
than any such failure resulting from incapacity due to mental or
physical illness constituting a Disability, as defined herein); or
(5) If, in its good faith judgment, the Board
determines that the Executive has violated or threatened to violate the
provisions of Paragraphs 4 to 10 above or any other material breach of
this Agreement.
Executive shall not be deemed to have been involuntarily terminated for Cause
unless and until there shall have been delivered to him a copy of a resolution
duly adopted by the Board, finding that, in the good faith opinion of the Board,
Executive engaged or threatened to engage in conduct set forth above and
specifying the particulars thereof in detail. For purposes of subsections (2),
(3), (4) and (5), the Board must also deliver to Executive a demand in writing
for performance or cure, which demand specifically identifies the manner in
which the Board believes that Executive's conduct falls within such subsection
and details the Board's requirements for Executive to "cure" such conduct, if
appropriate. Involuntary termination occurs when Executive fails to "cure"
within the time period given by the Board and in accordance with the terms
provided by the Board. For purposes of this Agreement, no act or failure to act
by Executive shall be deemed to be "willful" unless done or omitted to be done
by Executive not in good faith and without reasonable belief that Executive's
action or omission was in the best interests of the Company.
(d) "Confidential Information" - means information, without regard to
form, relating to Company's customers, operation, finances, and business that
derives economic value, actual or potential, from not being generally known to
other Persons, including, but not limited to, technical or nontechnical data,
formulas, patterns, compilations (including compilations of customer
information), programs, models, concepts, designs (including without limitation,
designs for Company's remote development and consulting center) devices,
methods, techniques, processes, financial data or lists of actual or potential
customers (including identifying information about customers), whether or not in
writing. Confidential Information includes information disclosed to Company by
third parties that Company is obligated to maintain as confidential.
Confidential Information subject to this Agreement may include information that
is
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<PAGE> 10
not a trade secret under applicable law, but information not constituting a
trade secret only shall be treated as Confidential Information under this
Agreement for a three year period after the Termination Date.
(e) "Customers" - means strategic partners or customers of Company's
Business (1) that Executive contacted directly, or supervised directly or
indirectly through others contacting on behalf of Company, during the one year
period preceding the Termination Date; or (2) about whom Executive possessed
Confidential Information during the one year period preceding the Termination
Date.
(f) "Disability" - means the meaning ascribed to such term or its
variations, such as "Disabled", in the Company's long-term disability plan
covering the Executive, or in the absence of such plan, a meaning consistent
with Section 22(e)(3) of the Code.
(g) "Good Reason" means that one or more of the following has occurred
and, after giving the Company written notice of the occurrence and of
Executive's intention to resign from employment and the Company not curing the
event within 30 days of such written notice:
(i) a material diminution of position, duties,
responsibilities, authority or title or the
assignment of duties materially inconsistent with
Executive's position;
(ii) a reduction in Executive's Base Salary (annualized
rate);
(iii) relocation of Executive's work location outside the
Territory;
(iv) a material breach of this Agreement by the Company;
or
(v) the failure of a successor to the Company to assume
in writing this Agreement upon becoming a successor
or assignee of the Company.
Notwithstanding the foregoing, Executive's written consent to the
occurrence of any matter of Good Reason is a waiver of Executive's rights under
this Agreement to terminate his employment for that Good Reason.
(h) "Person" - means any individual, corporation, bank, partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or other entity.
(i) "Services" - means the services described on the Annex to this
Agreement which is made a part hereof.
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(j) "Termination Date" - means the last day Executive is employed by or
providing services for Company, whether the separation is voluntary or
involuntary, with or without Cause, or with or without advance notice.
(k) "Territory" - means the area within a 50 mile radius of the city
limits of Atlanta, Georgia. Executive acknowledges that Executive will perform
services on behalf of Company in the Territory.
13. Contract Non-Assignable. The parties acknowledge that this
Agreement has been entered into due to, among other things, the special skills
of Executive, and agree that this Agreement may not be assigned or transferred
by Executive, in whole or in part, without the prior written consent of the
Company.
14. Successors; Binding Agreement.
(a) In addition to any obligations imposed by law upon any successor to
the Company, the Company will require any successor (whether direct or indirect,
by purchase, merger, consolidation or otherwise) to all or substantially all of
the business and/or assets of the Company to expressly assume and agree to
perform this Agreement, in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such assumption and agreement prior to the
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled to hereunder if the
Company terminated the Executive's employment without Cause, except that, for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Termination Date.
(b) This Agreement shall inure to the benefit of and be enforceable by
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Executive shall die
while any amount would still be payable to Executive hereunder (other than
amounts which, by their terms, terminate upon the death of Executive) if
Executive had continued to live, all such amounts, unless otherwise provided
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herein, shall be paid in accordance with the terms of this Agreement to the
executors, personal representatives or administrators of Executive's estate.
15. Other Agents. Nothing in this Agreement is to be interpreted as
limiting the Company from employing other personnel on such terms and conditions
as may be satisfactory to the Company.
16. Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given if delivered or seven days after mailing if mailed, first class,
certified mail, postage prepaid:
To the Company: Interland, Inc.
101 Marietta Street, 2nd Fl.
Atlanta, GA 30303
Attention: President
With a copy to: Kilpatrick Stockton LLP
1100 Peachtree Street, Suite 2800
Atlanta, GA 30309-4530
Attention: David A. Stockton, Esq.
To the Executive: H. Christopher Covington
Interland, Inc.
101 Marietta Street, 2nd Fl.
Atlanta, GA 30303
Any party may change the address to which notices, requests, demands and other
communications shall be delivered or mailed by giving notice thereof to the
other party in the same manner provided herein.
17. Provisions Severable. Rights and restrictions in this Agreement may
be exercised and are applicable only to the extent they do not violate any
applicable laws, and are intended to be limited to the extent necessary so they
will not render this Agreement illegal, invalid, or unenforceable. If any term
shall be held illegal, invalid, or unenforceable by a court of competent
jurisdiction, the remaining terms shall remain in full force and effect. This
Agreement
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does not in any way limit Company's rights under the laws of unfair competition,
trade secret, copyright, patent, trademark or any other applicable law(s), which
are in addition to rights under this Agreement. The existence of a claim by
Executive, whether predicated on this Agreement or otherwise, shall not
constitute a defense to Company's enforcement of this Agreement.
18. Waiver. Failure of either party to insist, in one or more
instances, on performance by the other in strict accordance with the terms and
conditions of this Agreement shall not be deemed a waiver or relinquishment of
any right granted in this Agreement or the future performance of any such term
or condition or of any other term or condition of this Agreement, unless such
waiver is contained in a writing signed by the party making the waiver.
19. Amendments and Modifications. This Agreement may be amended or
modified only by a writing signed by both parties hereto.
20. Entire Agreement. This Agreement contains the entire agreement
between the parties hereto with respect to the subject matter hereof and
Executive's employment with the Company. This Agreement supersedes all prior
negotiations, discussions, agreements and undertakings, both written and oral,
among the parties hereto, with respect to Executive's terms and conditions of
employment with the Company. This Agreement may not be enlarged, modified or
altered except in a writing signed by the parties as provided in Section 20
hereof.
21. Governing Law. The validity and effect of this Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Georgia. Each party irrevocably (a) consents to the exclusive jurisdiction
and venue of the courts of Fulton County, State and federal courts in the
Northern District of Georgia, in any action arising under or relating to this
Agreement, and (b) waives any jurisdictional defenses (including personal
jurisdiction and venue) to any such action.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
EXECUTIVE:
/s/ Rahim Shah
-----------------------------------------------
Rahim Shah
COMPANY:
INTERLAND, INC.
By: /s/ Kenneth Gavranovic
--------------------------------------------
Kenneth Gavranovic
President & Chief Executive Officer
[ANNEX CONTINUES ON NEXT PAGE]
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ANNEX
TO
NONCOMPETITION PROVISIONS OF SECTION 8
OF EMPLOYMENT AGREEMENT
Name of Employee: Rahim Shah
Title: Executive Vice President
Description of Services:
Date of Agreement: February 24, 2000
15
<PAGE> 1
EXHIBIT 10.10
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made this ____ day of March, 2000, by and
between INTERLAND, INC., a Georgia corporation (the "CORPORATION"), and
__________________ (the "INDEMNIFIED PARTY").
WITNESSETH:
WHEREAS, the Indemnified Party currently serves as a director,
officer, or both of the Corporation, and in such capacity is performing a
valuable service; and
WHEREAS, pursuant to the Corporation's Articles of Incorporation and
Bylaws, each as amended to date (collectively the "CHARTER"), the Corporation
may indemnify its directors and officers to the fullest extent authorized by
applicable law; and
WHEREAS, Section 14-2-851 of the Georgia Business Corporation Code, as
amended to date (the "STATE STATUTE"), provides the statutory basis for the
indemnification of directors and officers of a Georgia corporation; and
WHEREAS, in order to induce the Indemnified Party to continue to
serve, the Corporation has determined and agreed to enter into this Agreement
with the Indemnified Party;
NOW, THEREFORE, in consideration of Indemnified Party's continued
service on behalf of the Corporation after the date hereof, the parties hereto
agree as follows:
1. INDEMNITY. The Corporation hereby agrees to hold harmless and
indemnify the Indemnified Party to the fullest extent authorized or permitted
by the provisions of the State Statute with respect to the indemnification of
directors and officers, or by any amendment thereof or other statutory
provision authorizing or permitting such indemnification that is adopted after
the date hereof.
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in
SECTION 3 hereof, the Corporation hereby further agrees to hold harmless and
indemnify Indemnified Party against any and all expenses (including reasonable
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by Indemnified Party in connection with any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (including an action by or in the right of the
Corporation) to which Indemnified Party is, was or at any time becomes a party,
or is threatened to be made a party, by reason of the fact that Indemnified
Party is, was or at any time becomes a director, officer, employee, or agent of
the Corporation, or is or was serving or at any time serves at the request of
the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise.
<PAGE> 2
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
SECTIONS 1 or 2 hereof shall be paid by the Corporation:
(a) In respect of expenses, judgments, fines, and settlement
amounts to the extent attributable to remuneration paid or other financial
benefit provided to the Indemnified Party by the Corporation if it shall be
determined by a final judgment or other final adjudication that such
remuneration or financial benefit was paid or provided in violation of the
Indemnified Party's duties and obligations to the Corporation;
(b) On account of any suit in which judgment is rendered
against Indemnified Party for an accounting of profits, made from the purchase
or sale by the Indemnified Party of securities of the Corporation, pursuant to
the provisions of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or similar provisions of any federal or state law, or on account of
any payment by the Indemnified Party to the Corporation in respect of any claim
for such accounting;
(c) On account of the Indemnified Party's conduct if it shall
be determined by a final judgment or other final adjudication to have been
knowingly fraudulent, deliberately dishonest, or grossly negligent, or to have
constituted willful misconduct; or
(d) If a final decision by a court having jurisdiction in the
matter shall determine that such indemnification is not lawful.
4. CONTRIBUTION. (a) If the indemnification provided in SECTIONS 1 OR
2 is unavailable and may not be paid to the Indemnified Party for any reason
(other than pursuant to SECTIONS 3(a), (b), (c) AND (d)), then in respect of
any threatened, pending, or completed action, suit, or proceeding in which the
Corporation is jointly liable with the Indemnified Party (or would be if joined
in such action, suit, or proceeding), the Corporation shall contribute to the
amount of expenses, judgments, fines, penalties, and settlements paid or
payable by the Indemnified Party in such proportion as is appropriate to
reflect (i) the relative benefits received by the Corporation on the one hand
and the Indemnified Party on the other from the transaction from which such
action, suit, or proceeding arose, and (ii) the relative fault of the
Corporation on the one hand and of the Indemnified Party on the other in
connection with the events that resulted in such expenses, judgments, fines,
penalties, or settlement amounts, as well as any other relevant equitable
considerations. The relative fault of the Corporation on the one hand and of
the Indemnified Party on the other shall be determined by reference to, among
other things, the parties' relative intent, knowledge, access to information,
and opportunity to correct or prevent the circumstances resulting in such
expenses, judgments, fines, penalties, or settlement amounts. The Corporation
agrees that it would not be just and equitable if contribution pursuant to this
SECTION 4 were determined by pro rata allocation or any other method of
allocation that does not take account of the foregoing equitable
considerations.
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<PAGE> 3
(b) The determination as to the amount of the contribution, if
any, shall be made by: (i) a court of competent jurisdiction upon the
application of both the Indemnified Party and the Corporation (if an action or
suit had been brought in, and final determination had been rendered by, such
court); (ii) the Board of Directors by a majority vote of a quorum consisting
of directors who were not parties to such action, suit, or proceeding; or (iii)
regular outside counsel of the Corporation, if a quorum is not obtainable for
purposes of clause (ii) above, or, even if obtainable, if a quorum of
disinterested directors so directs.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of the
Corporation contained herein shall continue during the period the Indemnified
Party is a director, officer, employee, or agent of the Corporation (or is
serving at the request of the Corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan, or other enterprise), and shall continue thereafter for so long
as the Indemnified Party shall be subject to any possible claim or threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, by reason of the fact that the Indemnified
Party was serving in any such capacity on behalf of the Corporation.
6. ADVANCEMENT OF EXPENSES. Expenses (including attorneys' fees),
judgments, fines, penalties, and amounts paid in settlement actually and
reasonably incurred by the Indemnified Party with respect to any action, suit,
or proceeding referred to in SECTIONS 1 or 2 shall be advanced by the
Corporation prior to the time of the disposition of such action, suit, or
proceeding promptly upon the receipt of a (a) written affirmation from the
Indemnified Party of his good faith belief that he is entitled to be
indemnified by the Corporation for such expenses, judgments, fines, penalties,
or amounts paid in settlement under the provisions of the State Statute, the
Charter, this Agreement, or otherwise, and (b) written undertaking to return
promptly any amounts advanced hereunder if it shall ultimately be determined
that the Indemnified Party is not entitled to indemnification from the
Corporation for such amounts under the provisions of the State Statute, the
Charter, this Agreement, or otherwise.
7. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by the
Indemnified Party of notice of the commencement of any action, suit, or
proceeding, the Indemnified Party will, if a claim in respect thereof is to be
made against the Corporation under this Agreement, notify the Corporation of
the commencement thereof, but the failure to notify the Corporation will not
relieve it from any liability that it may have to the Indemnified Party
otherwise than under this Agreement. With respect to any such action, suit, or
proceeding as to which the Indemnified Party so notifies the Corporation:
(a) The Corporation will be entitled to participate at its
own expense;
(b) Except as otherwise provided below, the Corporation may
assume the defense thereof, with counsel reasonably satisfactory to the
Indemnified Party. After notice from the Corporation to the Indemnified Party
of its election to assume such defense, the Corporation will not be liable to
the Indemnified Party under this Agreement for any legal or other expenses
subsequently incurred by the Indemnified Party in connection with the defense
thereof, other than reasonable costs of investigation or as otherwise provided
below. The Indemnified Party shall have
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<PAGE> 4
the right to employ its own counsel in such action, suit, or proceeding, but
the fees and expenses of such counsel incurred after notice from the
Corporation of its assumption of the defense thereof shall be at the expense of
the Indemnified Party, unless (i) the employment of counsel by the Indemnified
Party has been authorized by the Corporation, (ii) counsel to the Indemnified
Party shall have reasonably concluded that there may be a conflict of interest
between the Corporation and the Indemnified Party in the conduct of the defense
of such action and has advised the Indemnified Party in writing that such a
conflict of interest exists, or (iii) the Corporation shall not in fact have
employed counsel to assume the defense of such action, in each of which cases
the fees and expenses of counsel for the Indemnified Party shall be at the
expense of the Corporation. The Corporation shall not be entitled to assume the
defense of any action, suit, or proceeding brought by or on behalf of the
Corporation or as to which the Indemnified Party shall have made the conclusion
provided for in clause (ii) above; and
(c) The Corporation shall have no obligation to indemnify the
Indemnified Party under this Agreement for any amounts paid in settlement of
any action or claim effected without the Corporation's prior written consent.
The Corporation shall not settle any action or claim in any manner that would
impose any penalty or limitation on the Indemnified Party without the
Indemnified Party's prior written consent. Neither the Corporation nor the
Indemnified Party will unreasonably withhold their consent to any proposed
settlement.
8. REPAYMENT OF EXPENSES. The Indemnified Party agrees to reimburse
the Corporation for all reasonable expenses, judgments, fines, penalties, and
settlement amounts paid by the Corporation in defending any civil, criminal,
administrative, or investigative action, suit, or proceeding against the
Indemnified Party or advanced by the Corporation to the Indemnified Party in
such event, but only to the extent that it shall be ultimately determined that
the Indemnified Party is not entitled to be indemnified by the Corporation for
such expenses, judgments, fines, penalties, or amounts paid in settlement under
the provisions of the State Statute, the Charter, this Agreement, or otherwise.
9. ENFORCEMENT. (a) The Corporation expressly confirms and agrees that
it has entered into this Agreement and assumed the obligations imposed on it
hereby in order to induce the Indemnified Party to continue to serve on behalf
of the Corporation, and acknowledges that the Indemnified Party is relying upon
this Agreement in continuing to serve in such capacity.
(b) If the Indemnified Party is required to bring any action
to enforce rights or to collect moneys due under this Agreement and is
successful in such action, then the Corporation shall reimburse the Indemnified
Party for all of the Indemnified Party's reasonable fees and expenses in
bringing and pursuing such action.
10. SEVERABILITY. Each of the provisions of this Agreement is a
separate and distinct agreement and independent of the others, so that if any
provision hereof shall be held to be invalid or unenforceable in whole or in
part for any reason, such invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions hereof.
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<PAGE> 5
11. GENERAL AND MISCELLANEOUS. (a) This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Georgia,
without regard to its conflicts of laws rules.
(b) This Agreement shall be binding upon the Indemnified
Party, his heirs, personal representative, and assigns and upon the Corporation
and its successors and assigns, and shall inure to the benefit of and be
enforceable by the Indemnified Party, his heirs, personal representatives, and
assigns, and by the Corporation and its successors and assigns.
(c) No amendment, modification, termination, or cancellation
of this Agreement shall be effective unless in a writing signed by both parties
hereto.
12. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable
under this Agreement to make any payment to the extent the Indemnified Party
has otherwise actually received payment (under any insurance policy, Charter
provision, or otherwise) of the amounts otherwise indemnifiable hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
and as of the day and year first above written.
CORPORATION:
INTERLAND, INC.
By:
------------------------------------------
Kenneth Gavranovic,
President and Chief Executive Officer
INDEMNIFIED PARTY:
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EXHIBIT 10.11(a)
INTERLAND, INC.
STOCK INCENTIVE PLAN
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TABLE OF CONTENTS
<TABLE>
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ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION..................................................................1
1.1 Establishment of the Plan...................................................................1
1.2 Purpose of the Plan.........................................................................1
1.3 Duration of the Plan........................................................................1
ARTICLE 2. DEFINITIONS...........................................................................................1
ARTICLE 3. ADMINISTRATION........................................................................................4
3.1 The Committee...............................................................................4
3.2 Authority of the Committee..................................................................5
3.3 Decisions Binding...........................................................................5
ARTICLE 4. SHARES SUBJECT TO THE PLAN............................................................................5
4.1 Number of Shares............................................................................5
4.2 Lapsed Awards...............................................................................6
4.3 Adjustments In Authorized Shares............................................................6
ARTICLE 5. ELIGIBILITY AND PARTICIPATION.........................................................................6
ARTICLE 6. STOCK OPTIONS.........................................................................................6
6.1 Grant of Options............................................................................6
6.2 Agreement...................................................................................7
6.3 Option Price................................................................................7
6.4 Duration of Options.........................................................................7
6.5 Exercise of Options.........................................................................7
6.6 Payment.....................................................................................7
6.7 Limited Transferability.....................................................................8
6.8 Shareholder Rights..........................................................................8
ARTICLE 7. STOCK APPRECIATION RIGHTS.............................................................................8
7.1 Grants of SARs..............................................................................8
7.2 Duration of SARs............................................................................9
7.3 Exercise of SAR.............................................................................9
7.4 Determination of Payment of Cash and/or Common Stock Upon Exercise of SAR...................9
7.5 Nontransferability..........................................................................9
7.6 Shareholder Rights..........................................................................9
ARTICLE 8. RESTRICTED STOCK; STOCK AWARDS.......................................................................10
8.1 Grants.....................................................................................10
8.2 Restricted Period; Lapse of Restrictions...................................................10
8.3 Rights of Holder; Limitations Thereon......................................................10
8.4 Delivery of Unrestricted Shares............................................................11
8.5 Nonassignability of Restricted Stock.......................................................11
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ARTICLE 9. PERFORMANCE SHARE AWARDS.............................................................................12
9.1 Award......................................................................................12
9.2 Earning the Award..........................................................................12
9.3 Payment....................................................................................12
9.4 Shareholder Rights.........................................................................12
ARTICLE 10. DEFERRALS...........................................................................................13
ARTICLE 11. RIGHTS OF EMPLOYEES.................................................................................13
11.1 Employment................................................................................13
11.2 Participation.............................................................................13
ARTICLE 12. CHANGE IN CONTROL...................................................................................13
12.1 Definition................................................................................13
12.2 Limitation on Awards......................................................................14
ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION.............................................................14
13.1 Amendment, Modification and Termination...................................................14
13.2 Awards Previously Granted.................................................................15
13.3 Compliance With Code Section 162(m).......................................................15
ARTICLE 14. WITHHOLDING.........................................................................................15
14.1 Tax Withholding...........................................................................15
14.2 Share Withholding.........................................................................15
ARTICLE 15. INDEMNIFICATION.....................................................................................15
ARTICLE 16. SUCCESSORS..........................................................................................16
ARTICLE 17. LEGAL CONSTRUCTION..................................................................................16
17.1 Gender and Number.........................................................................16
17.2 Severability..............................................................................16
17.3 Requirements of Law.......................................................................16
17.4 Regulatory Approvals and Listing..........................................................16
17.5 Securities Law Compliance.................................................................16
17.6 Governing Law.............................................................................17
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INTERLAND, INC.
STOCK INCENTIVE PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. Interland, Inc., a Georgia Corporation
(hereinafter referred to as the "COMPANY"), hereby establishes a stock option
and incentive award plan known as the "Interland, Inc. Stock Incentive Plan"
(the "PLAN"), as set forth in this document. The Plan permits the grant of
Incentive Stock Options, Nonqualified Stock Options, Restricted Stock, Stock
Awards, Performance Share Awards and Stock Appreciation Rights.
The Plan shall become effective on the date it is approved by the
Board of Directors (the "EFFECTIVE DATE"), subject to approval of the Plan by
the Company's shareholders within the 12-month period immediately thereafter,
and shall remain in effect as provided in SECTION 1.3.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to secure for the
Company and its shareholders the benefits of the incentive inherent in stock
ownership in the Company by employees, directors, and other persons who perform
services for the Company, who are responsible for its future growth and
continued success. The Plan promotes the success and enhances the value of the
Company by linking the personal interests of Participants (as defined below) to
those of the Company's shareholders, and by providing Participants with an
incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in
its ability to motivate, attract and retain the services of Participants upon
whose judgment, interest and special effort the successful conduct of its
operation largely depends.
1.3 DURATION OF THE PLAN. The Plan shall commence on the Effective
Date, and shall remain in effect, subject to the right of the Board of
Directors to amend or terminate the Plan at any time pursuant to ARTICLE 13,
until the day prior to the tenth (10th) anniversary of the Effective Date.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan, the following terms shall have the meanings
set forth below:
(a) "Agreement" means an agreement entered into by each
Participant and the Company, setting forth the terms and
provisions applicable to Awards granted to Participants under
this Plan.
(b) "Award" means, individually or collectively, a grant under
this Plan of Incentive Stock Options, Nonqualified Stock
Options, Restricted Stock, Stock Awards, Performance Share
Awards or Stock Appreciation Rights.
(c) "Beneficial Owner" or "Beneficial Ownership" shall have the
meaning ascribed to such term in Rule 13d-3 of the Exchange
Act.
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(d) "Board" or "Board of Directors" means the Board of Directors
of the Company.
(e) "Cause" means: (i) willful misconduct on the part of a
Participant that is materially detrimental to the Company; or
(ii) the conviction of a Participant for the commission of a
felony. The existence of "Cause" under either (i) or (ii)
shall be determined by the Committee. Notwithstanding the
foregoing, if the Participant has entered into an employment
agreement that is binding as of the date of employment
termination, and if such employment agreement defines
"Cause," and/or provides a means of determining whether
"Cause" exists, such definition of "Cause" and means of
determining its existence shall supersede this provision.
(f) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor act thereto.
(g) "Committee" means the committee appointed to administer the
Plan with respect to grants of Awards, as specified in
Article 3, and to perform the functions set forth therein.
(h) "Common Stock" means the common stock of the Company, no par
value per share.
(i) "Company" means Interland, Inc., a Georgia corporation, or
any successor thereto as provided in ARTICLE 16.
(j) "Corresponding SAR" means an SAR that is granted in relation
to a particular Option and that can be exercised only upon
the surrender to the Company, unexercised, of that portion of
the Option to which the SAR relates.
(k) "Director" means any individual who is a member of the Board
of Directors of the Company.
(l) "Disability" shall have the meaning ascribed to such term in
the Company's long-term disability plan covering the
Participant, or in the absence of such plan, a meaning
consistent with Section 22(e)(3) of the Code.
(m) "Employee" means any employee of the Company or the Company's
Subsidiaries. Directors who are not otherwise employed by the
Company or the Company's Subsidiaries are not considered
Employees under this Plan.
(n) "Effective Date" shall have the meaning ascribed to such term
in SECTION 1.1.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.
(p) "Fair Market Value" shall be determined as follows:
(i) If, on the relevant date, the Shares are traded on a
national or regional securities exchange or on The
Nasdaq Stock Market ("Nasdaq") and closing
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sale prices for the Shares are customarily quoted,
on the basis of the closing sale price on the
principal securities exchange on which the Shares
may then be traded or, if there is no such sale on
the relevant date, then on the immediately preceding
day on which a sale was reported;
(ii) If, on the relevant date, the Shares are not listed
on any securities exchange or traded on Nasdaq, but
nevertheless are publicly traded and reported on
Nasdaq without closing sale prices for the Shares
being customarily quoted, on the basis of the mean
between the closing bid and asked quotations in such
other over-the-counter market as reported by Nasdaq;
but, if there are no bid and asked quotations in the
over-the-counter market as reported by Nasdaq on
that date, then the mean between the closing bid and
asked quotations in the over-the-counter market as
reported by Nasdaq on the immediately preceding day
such bid and asked prices were quoted; and
(iii) If, on the relevant date, the Shares are not
publicly traded as described in (i) or (ii), on the
basis of the good faith determination of the
Committee.
(q) "Incentive Stock Option" or "ISO" means an option to purchase
Shares granted under ARTICLE 6 which is designated as an
Incentive Stock Option and is intended to meet the
requirements of Section 422 of the Code.
(r) "Initial Value" means, with respect to a Corresponding SAR,
the Option Price per share of the related Option, and with
respect to an SAR granted independently of an Option, the
Fair Market Value of one share of Common Stock on the date of
grant.
(s) "Insider" shall mean an Employee who is, on the relevant
date, an officer or a director, or a ten percent (10%)
beneficial owner of any class of the Company's equity
securities that is registered pursuant to Section 12 of the
Exchange Act or any successor provision, as "officer" and
"director" are defined under Section 16 of the Exchange Act.
(t) "Named Executive Officer" means a Participant who, as of the
date of vesting and/or payout of an Award is one of the group
of "covered employees," as defined in the regulations
promulgated under Code Section 162(m), or any successor
statute.
(u) "Nonqualified Stock Option" or "NQSO" means an option to
purchase Shares granted under ARTICLE 6, and which is not
intended to meet the requirements of Code Section 422.
(v) "Option" means an Incentive Stock Option or a Nonqualified
Stock Option.
(w) "Option Price" means the price at which a Share may be
purchased by a Participant pursuant to an Option, as
determined by the Committee.
(x) "Participant" means an Employee, a Director, or other person
who performs services for the Company or a Subsidiary, who
has been determined by the Committee to
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contribute significantly to the profits or growth of the
Company and who has been granted an Award under the Plan
which is outstanding.
(y) "Performance Share Award" means an Award, which, in
accordance with and subject to an Agreement, will entitle the
Participant, or his estate in the event of the Participant's
death, to receive cash, Common Stock or a combination
thereof.
(z) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections
13(d) and 14(d) thereof, including a "group" as defined in
Section 13(d) thereof.
(aa) "Retirement" shall mean retiring from employment with the
Company or any Subsidiary on or after attaining age 65.
(bb) "Restricted Stock" means an Award of Common Stock granted in
accordance with the terms of ARTICLE 8 and the other
provisions of the Plan, and which is nontransferable and
subject to a substantial risk of forfeiture. Shares of Common
Stock shall cease to be Restricted Stock when, in accordance
with the terms hereof and the applicable Agreement, they
become transferable and free of substantial risk of
forfeiture.
(cc) "SAR" means a stock appreciation right that entitles the
holder to receive, with respect to each share of Common Stock
encompassed by the exercise of such SAR, the amount
determined by the Committee and specified in an Agreement. In
the absence of such specification, the holder shall be
entitled to receive in cash, with respect to each share of
Common Stock encompassed by the exercise of such SAR, the
excess of the Fair Market Value on the date of exercise over
the Initial Value. References to "SARs" include both
Corresponding SARs and SARs granted independently of Options,
unless the context requires otherwise.
(dd) "Shares" means the shares of Common Stock of the Company
(including any new, additional or different stock or
securities resulting from the changes described in SECTION
4.3).
(ee) "Stock Award" means a grant of Shares under ARTICLE 8 that is
not generally subject to restrictions and pursuant to which a
certificate for the Shares is transferred to the Employee.
(ff) "Subsidiary" means any corporation, partnership, joint
venture or other entity in which the Company has a fifty
percent (50%) or greater voting interest.
ARTICLE 3. ADMINISTRATION
3.1 THE COMMITTEE. The Plan shall be administered by the Board of
Directors or by the Compensation Committee of the Board, or by any other
committee or subcommittee appointed by
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the Board that is granted authority to administer the Plan. The members of the
Committee shall be appointed from time to time by, and shall serve at the
discretion of the Board of Directors.
3.2 AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan,
the Committee shall have full power to select the Employees, Directors, and
other persons who perform services for the Company or a Subsidiary, who shall
participate in the Plan (who may change from year to year); determine the size
and types of Awards; determine the terms and conditions of Awards in a manner
consistent with the Plan (including conditions on the exercisability of all or
a part of an Option or SAR, restrictions on transferability and vesting
provisions on Restricted Stock or Performance Share Awards and the duration of
the Awards); construe and interpret the Plan and any agreement or instrument
entered into under the Plan; establish, amend or waive rules and regulations
for the Plan's administration; and (subject to the provisions of ARTICLE 13)
amend the terms and conditions of any outstanding Award to the extent such
terms and conditions are within the discretion of the Committee as provided in
the Plan, including accelerating the time any Option or SAR may be exercised
and establishing different terms and conditions relating to the effect of the
termination of employment or other services to the Company. Further, the
Committee shall make all other determinations which may be necessary or
advisable in the Committee's opinion for the administration of the Plan. All
expenses of administering this Plan shall be borne by the Company.
3.3 DECISIONS BINDING. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Board shall be final, conclusive and binding on all Persons,
including the Company, the shareholders, Employees, Participants and their
estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to adjustment as provided in SECTION
4.3, the total number of Shares available for grant of Awards under the Plan
shall be four million (4,000,000) Shares. The Shares may, in the discretion of
the Company, be either authorized but unissued Shares or Shares held as
treasury shares, including Shares purchased by the Company, whether on the
market or otherwise.
The following rules shall apply for purposes of the determination of
the number of Shares available for grant under the Plan:
(a) The grant of an Option, SAR, Stock Award, Restricted
Stock Award or Performance Share Award shall reduce
the Shares available for grant under the Plan by the
number of Shares subject to such Award.
(b) While an Option, SAR, Stock Award, Restricted Stock
Award or Performance Share Award is outstanding, it
shall be counted against the authorized pool of
Shares, regardless of its vested status.
4.2 LAPSED AWARDS. If any Award granted under this Plan is canceled,
terminates, expires or lapses for any reason, or if Shares are withheld in
payment of the Option Price or for withholding taxes, any Shares subject to
such Award or that are withheld shall again be available
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for the grant of an Award under the Plan. However, in the event that prior to
the Award's cancellation, termination, expiration or lapse, the holder of the
Award at any time received one or more "benefits of ownership" pursuant to such
Award (as defined by the Securities and Exchange Commission, pursuant to any
rule or interpretation promulgated under Section 16 of the Exchange Act), the
Shares subject to such Award shall not again be made available for regrant
under the Plan.
4.3 ADJUSTMENTS IN AUTHORIZED SHARES AND AWARDS. In the event of a
corporate transaction involving the Company (including, without limitation, any
stock split, recapitalization, reorganization (whether or not such
reorganization comes within the definition of such term in Code Section 368),
merger, consolidation, separation, including a spin-off, other distribution of
stock or property of the Company, or any partial or complete liquidation of the
Company), the Committee, in its sole discretion, may make adjustments as it
determines to be appropriate and equitable to prevent dilution or enlargement
of rights, including but not limited to adjustment in the number and class of
Shares which may be delivered under the Plan, in the number and class of and/or
price of Shares subject to outstanding Awards granted under the Plan, and any
other adjustments as the Committee determines to be equitable; provided,
however, that the number of Shares subject to any Award shall always be a whole
number and the Committee shall make such adjustments as are necessary to insure
Awards of whole Shares.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
Any key Employee of the Company or any Subsidiary, including any such
Employee who is also a director of the Company or any Subsidiary, any
non-employee Director, and any other person who performs services for the
Company or a Subsidiary, whose judgment, initiative and efforts contribute or
may be expected to contribute materially to the successful performance of the
Company or any Subsidiary shall be eligible to receive an Award under the Plan.
In determining the individuals to whom such an Award shall be granted and the
number of Shares which may be granted pursuant to that Award, the Committee
shall take into account the duties of the respective individual, his or her
present and potential contributions to the success of the Company or any
Subsidiary, and such other factors as the Committee shall deem relevant in
connection with accomplishing the purpose of the Plan.
ARTICLE 6. STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan,
Options may be granted to Participants at any time and from time to time as
shall be determined by the Committee. The Committee shall have discretion in
determining the number of Shares subject to Options granted to each
Participant. An Option may be granted with or without a Corresponding SAR. No
Participant may be granted ISOs (under the Plan and all other incentive stock
option plans of the Company and any Subsidiary) which are first exercisable in
any calendar year for Common Stock having an aggregate Fair Market Value
(determined as of the date an Option is granted) that exceeds $100,000. The
preceding annual limit shall not apply to NQSOs. The Committee may grant a
Participant ISOs, NQSOs or a combination thereof, and may vary such Awards
among Participants; provided that only an Employee may be granted ISOs. The
maximum number of
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Shares subject to Options which can be granted under the Plan during any
calendar year to any individual is 500,000 Shares.
6.2 AGREEMENT. Each Option grant shall be evidenced by an Agreement
that shall specify the Option Price, the duration of the Option, the number of
Shares to which the Option pertains and such other provisions as the Committee
shall determine. The Option Agreement shall further specify whether the Award
is intended to be an ISO or an NQSO. Any portion of an Option that is not
designated as an ISO or otherwise fails or is not qualified as an ISO (even if
designated as an ISO) shall be a NQSO. If the Option is granted in connection
with a Corresponding SAR, the Agreement shall also specify the terms that apply
to the exercise of the Option and Corresponding SAR.
6.3 OPTION PRICE. The Option Price for each grant of an ISO shall not
be less than one hundred percent (100%) of the Fair Market Value of a Share on
the date the Option is granted. In no event, however, shall any Participant who
owns (within the meaning of Section 424(d) of the Code) stock of the Company
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company be eligible to receive an ISO at an Option
Price less than one hundred ten percent (110%) of the Fair Market Value of a
share on the date the ISO is granted. The Option Price for each grant of a NQSO
shall be established by the Committee and, in its discretion, may be less than
the Fair Market Value of a Share on the date the Option is granted.
6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however, that no
Option shall be exercisable later than the tenth (10th) anniversary date of its
grant; provided, further, however, that any ISO granted to any Participant who
at such time owns (within the meaning of Section 424(d) of the Code) stock of
the Company possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, shall not be exercisable later
than the fifth (5th) anniversary date of its grant.
6.5 EXERCISE OF OPTIONS. Options granted under the Plan shall be
exercisable at such times and be subject to such restrictions and conditions as
the Committee shall in each instance approve, including conditions related to
the employment of the Participant with the Company or any Subsidiary, which
need not be the same for each grant or for each Participant. Each Option shall
be exercisable for such number of Shares and at such time or times, including
periodic installments, as may be determined by the Committee at the time of the
grant. The Committee may provide in the Agreement for automatic accelerated
vesting and other rights upon the occurrence of a Change in Control of the
Company. Except as otherwise provided in the Agreement and ARTICLE 12, the
right to purchase Shares that are exercisable in periodic installments shall be
cumulative so that when the right to purchase any Shares has accrued, such
Shares or any part thereof may be purchased at any time thereafter until the
expiration or termination of the Option. The exercise or partial exercise of
either an Option or its Corresponding SAR shall result in the termination of
the other to the extent of the number of Shares with respect to which the
Option or Corresponding SAR is exercised.
6.6 PAYMENT. Options shall be exercised by the delivery of a written
notice of exercise to the Company, setting forth the number of Shares with
respect to which the Option is to be
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exercised, accompanied by full payment for the Shares. The Option Price upon
exercise of any Option shall be payable to the Company in full, either: (a) in
cash, (b) cash equivalent approved by the Committee, (c) if approved by the
Committee, by tendering previously acquired Shares (or delivering a
certification of ownership of such Shares) having an aggregate Fair Market
Value at the time of exercise equal to the total Option Price (provided that
the Shares which are tendered must have been held by the Participant for six
months [if required for accounting purposes] and for the period required by
law, if any, prior to their tender to satisfy the Option Price), or (d) by a
combination of (a), (b) and (c). The Committee also may allow cashless
exercises as permitted under Federal Reserve Board's Regulation T, subject to
applicable securities law restrictions, or by any other means which the
Committee determines to be consistent with the Plan's purpose and applicable
law.
As soon as practicable after receipt of a written notification of
exercise and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s), and may place appropriate
legends on the certificates representing such Shares.
6.7 LIMITED TRANSFERABILITY. If permitted by the Committee in the
Agreement, a Participant may transfer an Option granted hereunder, including
but not limited to transfers to members of his or her Immediate Family (as
defined below), to one or more trusts for the benefit of such Immediate Family
members, or to one or more partnerships where such Immediate Family members are
the only partners, if (i) the Participant does not receive any consideration in
any form whatsoever for such transfer, (ii) such transfer is permitted under
applicable tax laws, and (iii) the Participant is an Insider, such transfer is
permitted under Rule 16b-3 of the Exchange Act as in effect from time to time.
Any Option so transferred shall continue to be subject to the same terms and
conditions in the hands of the transferee as were applicable to said Option
immediately prior to the transfer thereof. Any reference in any such Agreement
to the employment by or performance of services for the Company by the
Participant shall continue to refer to the employment of, or performance by,
the transferring Participant. For purposes hereof, "IMMEDIATE FAMILY" shall
mean the Participant and the Participant's spouse, children and grandchildren.
Any Option that is granted pursuant to any Agreement that did not initially
expressly allow the transfer of said Option and that has not been amended to
expressly permit such transfer, shall not be transferable by the Participant
other than by will or by the laws of descent and distribution and such Option
thus shall be exercisable in the Participant's lifetime only by the
Participant.
6.8 SHAREHOLDER RIGHTS. No Participant shall have any rights as a
shareholder with respect to Shares subject to his Option until the issuance of
such Shares to the Participant pursuant to the exercise of such Option.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 GRANTS OF SARS. The Committee shall designate Participants to whom
SARs are granted, and will specify the number of Shares of Common Stock subject
to each grant. An SAR may be granted with or without a related Option. All SARs
granted under this Plan shall be subject to an Agreement in accordance with the
terms of this Plan. A payment to the Participant upon the exercise of a
Corresponding SAR may not be more than the difference between the Fair Market
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Value of the Shares subject to the ISO on the date of grant and the Fair Market
Value of the Shares on the date of exercise of the Corresponding SAR. The
maximum number of Shares underlying SARs which can be awarded under the Plan
during any calendar year to any individual is 500,000 Shares.
7.2 DURATION OF SARS. The duration of an SAR shall be set forth in the
Agreement as determined by the Committee. An SAR that is granted as a
Corresponding SAR shall have the same duration as the Option to which it
relates. An SAR shall terminate due to the Participant's termination of
employment at the same time as the date specified in ARTICLE 6 with respect to
Options, regardless of whether the SAR was granted in connection with the grant
of an Option.
7.3 EXERCISE OF SAR. An SAR may be exercised in whole at any time or
in part from time to time and at such times and in compliance with such
requirements as the Committee shall determine as set forth in the Agreement;
provided, however, that a Corresponding SAR that is related to an Incentive
Stock Option may be exercised only to the extent that the related Option is
exercisable and only when the Fair Market Value of the Shares exceeds the
Option Price of the related ISO. An SAR granted under this Plan may be
exercised with respect to any number of wholes shares less than the full number
of shares for which the SAR could be exercised. A partial exercise of an SAR
shall not affect the right to exercise the SAR from time to time in accordance
with this Plan and the applicable Agreement with respect to the remaining
shares subject to the SAR. The exercise of either an Option or Corresponding
SAR shall result in the termination of the other to the extent of the number of
Shares with respect to which the Option or its Corresponding SAR is exercised.
7.4 DETERMINATION OF PAYMENT OF CASH AND/OR COMMON STOCK UPON EXERCISE
OF SAR. At the Committee's discretion, the amount payable as a result of the
exercise of an SAR may be settled in cash, Common Stock, or a combination of
cash and Common Stock. A fractional share shall not be deliverable upon the
exercise of an SAR, but a cash payment shall be made in lieu thereof.
7.5 NONTRANSFERABILITY. Each SAR granted under the Plan shall be
nontransferable except by will or by the laws of descent and distribution.
During the lifetime of the Participant to whom the SAR is granted, the SAR may
be exercised only by the Participant. No right or interest of a Participant in
any SAR shall be liable for, or subject to any lien, obligation or liability of
such Participant. A Corresponding SAR shall be subject to the same restrictions
on transfer as the ISO to which it relates.
Notwithstanding the foregoing, if the Agreement so provides, a
Participant may transfer an SAR (other than a Corresponding SAR that relates to
an Incentive Stock Option) under the same rules and conditions as are set forth
in SECTION 6.7.
7.6 SHAREHOLDER RIGHTS. No Participant shall have any rights as a
shareholder with respect to Shares subject to an SAR until the issuance of
Shares (if any) to the Participant pursuant to the exercise of such SAR.
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ARTICLE 8. RESTRICTED STOCK; STOCK AWARDS
8.1 GRANTS. The Committee may from time to time in its discretion
grant Restricted Stock and Stock Awards to Participants and may determine the
number of Shares of Restricted Stock or Stock Awards to be granted. The
Committee shall determine the terms and conditions of, and the amount of
payment, if any, to be made by the Employee for such Shares or Restricted
Stock. A grant of Restricted Stock may, in addition to other conditions,
require the Participant to pay for such Shares of Restricted Stock, but the
Committee may establish a price below Fair Market Value at which the
Participant can purchase the Shares of Restricted Stock. Each grant of
Restricted Stock shall be evidenced by an Agreement containing terms and
conditions not inconsistent with the Plan as the Committee shall determine to
be appropriate in its sole discretion. The maximum number of Shares of Common
Stock or Restricted Stock which can be awarded under the Plan during any
calendar year to any individual is 500,000 Shares.
8.2 RESTRICTED PERIOD; LAPSE OF RESTRICTIONS. At the time a grant of
Restricted Stock is made, the Committee shall establish a period or periods of
time (the "RESTRICTED PERIOD") applicable to such grant which, unless the
Committee otherwise provides, shall not be less than one year. Subject to the
other provisions of this ARTICLE 8, at the end of the Restricted Period all
restrictions shall lapse and the Restricted Stock shall vest in the
Participant. At the time a grant is made, the Committee may, in its discretion,
prescribe conditions for the incremental lapse of restrictions during the
Restricted Period and for the lapse or termination of restrictions upon the
occurrence of other conditions in addition to or other than the expiration of
the Restricted Period with respect to all or any portion of the Restricted
Stock. Such conditions may, but need not, include the following:
(a) The death, Disability or Retirement of the Employee
to whom Restricted Stock is granted, or
(b) The occurrence of a Change in Control (as defined in
SECTION 12.1).
The Committee may also, in its discretion, shorten or terminate the Restricted
Period, or waive any conditions for the lapse or termination of restrictions
with respect to all or any portion of the Restricted Stock at any time after
the date the grant is made.
8.3 RIGHTS OF HOLDER; LIMITATIONS THEREON. Upon a grant of Restricted
Stock, a stock certificate (or certificates) representing the number of Shares
of Restricted Stock granted to the Participant shall be registered in the
Participant's name and shall be held in custody by the Company or a bank
selected by the Committee for the Participant's account. Following such
registration, the Participant shall have the rights and privileges of a
shareholder as to such Restricted Stock, including the right to receive
dividends, if and when declared by the Board of Directors, and to vote such
Restricted Stock, except that the right to receive cash dividends shall be the
right to receive such dividends either in cash currently or by payment in
Restricted Stock, as the Committee shall determine, and except further that,
the following restrictions shall apply:
(a) The Participant shall not be entitled to delivery of
a certificate until the expiration or termination of
the Restricted Period for the Shares represented
-10-
<PAGE> 14
by such certificate and the satisfaction of any and
all other conditions prescribed by the Committee;
(b) None of the Shares of Restricted Stock may be sold,
transferred, assigned, pledged, or otherwise
encumbered or disposed of during the Restricted
Period and until the satisfaction of any and all
other conditions prescribed by the Committee; and
(c) All of the Shares of Restricted Stock that have not
vested shall be forfeited and all rights of the
Participant to such Shares of Restricted Stock shall
terminate without further obligation on the part of
the Company, unless the Participant has remained an
employee of (or non-Employee Director of or active
consultant providing services to) the Company or any
of its Subsidiaries, until the expiration or
termination of the Restricted Period and the
satisfaction of any and all other conditions
prescribed by the Committee applicable to such
Shares of Restricted Stock. Upon the forfeiture of
any Shares of Restricted Stock, such forfeited
Shares shall be transferred to the Company without
further action by the Participant and shall, in
accordance with SECTION 4.2, again be available for
grant under the Plan. If the Participant paid any
amount for the shares of Restricted Stock that are
forfeited, the Company shall pay the Participant the
lesser of the Fair Market Value of the Shares on the
date they are forfeited or the amount paid by the
Participant.
With respect to any Shares received as a result of adjustments under
SECTION 4.3 hereof and any Shares received with respect to cash dividends
declared on Restricted Stock, the Participant shall have the same rights and
privileges, and be subject to the same restrictions, as are set forth in this
ARTICLE 8.
8.4 DELIVERY OF UNRESTRICTED SHARES. Upon the expiration or
termination of the Restricted Period for any Shares of Restricted Stock and the
satisfaction of any and all other conditions prescribed by the Committee, the
restrictions applicable to such Shares of Restricted Stock shall lapse and a
stock certificate for the number of Shares of Restricted Stock with respect to
which the restrictions have lapsed shall be delivered, free of all such
restrictions except any that may be imposed by law, to the holder of the
Restricted Stock. The Company shall not be required to deliver any fractional
Share but will pay, in lieu thereof, the Fair Market Value (determined as of
the date the restrictions lapse) of such fractional Share to the holder
thereof. Concurrently with the delivery of a certificate for Restricted Stock,
the holder shall be required to pay an amount necessary to satisfy any
applicable federal, state and local tax requirements as set out in ARTICLE 14
below.
8.5 NONASSIGNABILITY OF RESTRICTED STOCK. Unless the Committee
provides otherwise in the Agreement, no grant of, nor any right or interest of
a Participant in or to, any Restricted Stock, or in any instrument evidencing
any grant of Restricted Stock under the Plan, may be assigned, encumbered or
transferred except, in the event of the death of a Participant, by will or the
laws of descent and distribution.
-11-
<PAGE> 15
ARTICLE 9. PERFORMANCE SHARE AWARDS
9.1 AWARD. The Committee may designate Participants to whom
Performance Share Awards will be granted from time to time for no consideration
and specify the number of shares of Common Stock covered by the Award. No more
than 500,000 Performance Shares may be earned by any individual with respect to
any calendar year.
9.2 EARNING THE AWARD. A Performance Share Award, or portion thereof,
will be earned, and the Participant will be entitled to receive Common Stock, a
cash payment or a combination thereof, only upon the achievement by the
Participant, the Company, or a Subsidiary of such performance objectives as the
Committee, in its discretion, shall prescribe on the date of grant. To the
extent required, the performance objectives applicable to Awards to Named
Executive Officers intended to qualify under Code Section 162(m) shall be
selected from among the following measures: return on equity or assets,
earnings per share, total earnings, earnings growth, return on capital, profit
before taxes, profit after taxes, economic value added and increase in Fair
Market Value of the Shares. The determination as to whether such objectives
have been achieved shall be made by the Committee, and such determination shall
be conclusive; provided, however, that the period in which such performance is
measured shall be at least one year.
The Committee may in determining whether performance targets have been
met adjust the Company's financial results to exclude the effect of unusual
charges or income items or other events, including acquisitions or dispositions
of businesses or assets, restructurings, reductions in force, currency
fluctuations or changes in accounting, which are distortive of financial
results (either on a segment or consolidated basis); provided, that for
purposes of determining the Performance Share Awards of Named Executive
Officers, the Committee shall exclude unusual items whose exclusion has the
effect of increasing income or earnings if such items constitute "extraordinary
items" under generally accepted accounting principles or are significant
unusual items. In addition, the Committee will adjust its calculations to
exclude the effect on financial results of changes in the Code or other tax
laws, or the regulations relating thereto.
9.3 PAYMENT. In the discretion of the Committee, the amount payable
when a Performance Share Award is earned may be settled in cash, by the grant
of Common Stock or a combination of cash and Common Stock. The aggregate Fair
Market Value of the Common Stock received by the Participant pursuant to a
Performance Share Award, together with any cash paid to the Participant, shall
be equal to the aggregate Fair Market Value, on the date the Performance Shares
are earned, of the number of Shares of Common Stock equal to each Performance
Share earned. A fractional Share will not be deliverable when a Performance
Share Award is earned, but a cash payment will be made in lieu thereof.
9.4 SHAREHOLDER RIGHTS. No Participant shall have, as a result of
receiving a Performance Share Award, any rights as a shareholder until and to
the extent that the Performance Shares are earned and Common Stock is
transferred to such Participant. If the Agreement so provides, a Participant
may receive a cash payment equal to the dividends that would have been payable
with respect to the number of Shares of Common Stock covered by the Award
between (a) the date that the Performance Shares are awarded and (b) the date
that a transfer of Common Stock to the Participant, cash settlement, or
combination thereof is made pursuant to the
-12-
<PAGE> 16
Performance Share Award. A Participant may not sell, transfer, pledge,
exchange, hypothecate, or otherwise dispose of a Performance Share Award or the
right to receive Common Stock thereunder other than by will or the laws of
descent and distribution. After a Performance Share Award is earned and paid in
Common Stock, a Participant will have all the rights of a shareholder with
respect to the Common Stock so awarded.
ARTICLE 10. DEFERRALS
The Committee may permit a Participant to defer to another plan or
program such Participant's receipt of Shares or cash that would otherwise be
due to such Participant by virtue of the exercise of an Option, the vesting of
Restricted Stock, or the earning of a Performance Share Award. If any such
deferral election is required or permitted, the Committee shall, in its sole
discretion, establish rules and procedures for such payment deferrals.
ARTICLE 11. RIGHTS OF EMPLOYEES
11.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in
any way the right of the Company or a Subsidiary to terminate any Participant's
employment by, or performance of services for, the Company at any time, nor
confer upon any Participant any right to continue in the employ or service of
the Company or a Subsidiary. For purposes of the Plan, transfer of employment
of a Participant between the Company and any one of its Subsidiaries (or
between Subsidiaries) shall not be deemed a termination of employment.
11.2 PARTICIPATION. No Employee shall have the right to be selected to
receive an Award under this Plan, or, having been so selected, to be selected
to receive a future Award.
ARTICLE 12. CHANGE IN CONTROL
12.1 DEFINITION. For purposes of the Plan, a "Change in Control" means
any of the following events:
(a) The acquisition (other than from the Company) by any
Person of Beneficial Ownership of forty percent
(40%) or more of the combined voting power of the
Company's then outstanding voting securities;
provided, however, that for purposes of this Section
13.1, Person shall not include any person who on the
date hereof owns 10% or more of the Company's
outstanding securities, and a Change in Control
shall not be deemed to occur solely because forty
percent (40%) or more of the combined voting power
of the Company's then outstanding securities is
acquired by (i) a trustee or other fiduciary holding
securities under one or more employee benefit plans
maintained by the Company or any of its
subsidiaries, or (ii) any corporation, which,
immediately prior to such acquisition, is owned
directly or indirectly by the shareholders of the
Company in the same proportion as their ownership of
stock in the Company immediately prior to such
acquisition.
-13-
<PAGE> 17
(b) Approval by shareholders of the Company of (1) a
merger or consolidation involving the Company if the
shareholders of the Company, immediately before such
merger or consolidation do not, as a result of such
merger or consolidation, own, directly or
indirectly, more than fifty percent (50%) of the
combined voting power of the then outstanding voting
securities of the corporation resulting from such
merger or consolidation in substantially the same
proportion as their ownership of the combined voting
power of the voting securities of the Company
outstanding immediately before such merger or
consolidation, or (2) a complete liquidation or
dissolution of the Company or an agreement for the
sale or other disposition of all or substantially
all of the assets of the Company.
(c) A change in the composition of the Board such that
the individuals who, as of the Effective Date,
constitute the Board (such Board shall be
hereinafter referred to as the "INCUMBENT BOARD")
cease for any reason to constitute at least a
majority of the Board; provided, however, for
purposes of this SECTION 12.1 that any individual
who becomes a member of the Board subsequent to the
Effective Date whose election, or nomination for
election by the Company's shareholders, was approved
by a vote of at least a majority of those
individuals who are members of the Board and who
were also members of the Incumbent Board (or deemed
to be such pursuant to this proviso) shall be
considered as though such individual were a member
of the Incumbent Board; but, provided, further, that
any such individual whose initial assumption of
office occurs as a result of either an actual or
threatened election contest (as such terms are used
in Rule 14a-11 of Regulation 14A promulgated under
the Exchange Act, including any successor to such
Rule), or other actual or threatened solicitation of
proxies or consents by or on behalf of a Person
other than the Board, shall not be so considered as
a member of the Incumbent Board.
12.2 LIMITATION ON AWARDS. Notwithstanding any other provisions of the
Plan and unless provided otherwise in the Agreement, if the right to receive or
benefit from any Award under this Plan, either alone or together with payments
that a Participant has the right to receive from the Company or a Subsidiary,
would constitute a "parachute payment" (as defined in Section 280G of the
Code), all such payments shall be reduced to the largest amount that will
result in no portion being subject to the excise tax imposed by Section 4999 of
the Code.
ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION
13.1 AMENDMENT, MODIFICATION AND TERMINATION. The Board may, at any
time and from time to time, alter, amend, suspend or terminate the Plan in
whole or in part; provided, that, unless approved by the holders of a majority
of the total number of Shares of the Company represented and voted at a meeting
at which a quorum is present, no amendment shall be made to the Plan if such
amendment would (a) materially modify the eligibility requirements provided in
ARTICLE 5; (b) increase the total number of Shares (except as provided in
SECTION 4.3) which may be
-14-
<PAGE> 18
granted under the Plan; (c) extend the term of the Plan; or (d) amend the Plan
in any other manner which the Board, in its discretion, determines should
become effective only if approved by the shareholders even if such shareholder
approval is not expressly required by the Plan or by law.
13.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant holding such Award. The Committee shall, with the written consent
of the Participant holding such Award, have the authority to cancel Awards
outstanding and grant replacement Awards therefor.
13.3 COMPLIANCE WITH CODE SECTION 162(m). At all times when the
Committee determines that compliance with Code Section 162(m) is required or
desired, all Awards granted under this Plan to Named Executive Officers shall
comply with the requirements of Code Section 162(m). In addition, in the event
that changes are made to Code Section 162(m) to permit greater flexibility with
respect to any Award or Awards under the Plan, the Committee may, subject to
this ARTICLE 13, make any adjustments it deem appropriate.
ARTICLE 14. WITHHOLDING
14.1 TAX WITHHOLDING. The Company shall have the power and the right
to deduct or withhold, or require a Participant to remit to the Company, an
amount sufficient to satisfy federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising in connection with an Award under this Plan.
14.2 SHARE WITHHOLDING. With respect to withholding required upon the
exercise of Options, or upon any other taxable event arising as a result of
Awards granted hereunder which are to be paid in the form of Shares,
Participants may elect, subject to the approval of the Committee, to satisfy
the withholding requirement, in whole or in part, by having the Company
withhold Shares having a Fair Market Value on the date the tax is to be
determined equal to the minimum statutory total tax which could be imposed on
the transaction. All elections shall be irrevocable, made in writing, signed by
the Participant, and elections by Insiders shall additionally comply with all
legal requirements applicable to Share transactions by such Participants.
ARTICLE 15. INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or
the Board, shall be indemnified and held harmless by the Company against and
from any loss, cost, liability or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, action, suit or proceeding to which he or she may be a party or in which
he or she may be involved by reason of any action taken or failure to act under
the Plan and against and from any and all amounts paid by him or her in
settlement thereof, with the Company's approval, or paid by him in satisfaction
of any judgment in any such action, suit or proceeding against him, provided he
shall give the Company an opportunity, at its own expense, to handle and defend
the same before he undertakes to handle and defend it on his own behalf. The
foregoing right of indemnification shall be in addition to any other rights of
indemnification to which such persons may be entitled
-15-
<PAGE> 19
under the Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold
them harmless.
ARTICLE 16. SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether
the existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE 17. LEGAL CONSTRUCTION
17.1 GENDER AND NUMBER. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
17.2 SEVERABILITY. If any provision of the Plan shall be held illegal
or invalid for any reason, the illegality or invalidity shall not affect the
remaining parts of the Plan, and the Plan shall be construed and enforced as if
the illegal or invalid provision had not been included.
17.3 REQUIREMENTS OF LAW. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
17.4 REGULATORY APPROVALS AND LISTING. The Company shall not be
required to issue any certificate or certificates for Shares under the Plan
prior to (i) obtaining any approval from any governmental agency which the
Company shall, in its discretion, determine to be necessary or advisable, (ii)
the admission of such shares to listing on any national securities exchange or
Nasdaq on which the Company's Shares may be listed, and (iii) the completion of
any registration or other qualification of such Shares under any state or
federal law or ruling or regulation of any governmental body which the Company
shall, in its sole discretion, determine to be necessary or advisable.
Notwithstanding any other provision set forth in the Plan, if required
by the then-current Section 16 of the Exchange Act, any "derivative security"
or "equity security" offered pursuant to the Plan to any Insider may not be
sold or transferred for at least six (6) months after the date of grant of such
Award. The terms "equity security" and "derivative security" shall have the
meanings ascribed to them in the then-current Rule 16(a) under the Exchange
Act.
17.5 SECURITIES LAW COMPLIANCE. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the Exchange Act. To the extent any provisions of
the Plan or action by the Committee fails to so comply, it shall be deemed null
and void, to the extent permitted by law and deemed advisable by the Committee.
-16-
<PAGE> 20
17.6 GOVERNING LAW. To the extent not preempted by Federal law, the
Plan, and all agreements hereunder, shall be construed in accordance with and
governed by the laws of the State of Georgia.
AS APPROVED BY THE BOARD OF DIRECTORS OF INTERLAND, INC. ON JULY 1,
1999.
INTERLAND, INC.
By: /s/ Kenneth Gavranovic
------------------------------
Kenneth Gavranovic, President
-17-
<PAGE> 1
EXHIBIT 10.11(b)
FIRST AMENDMENT TO THE
INTERLAND, INC.
STOCK INCENTIVE PLAN
THIS AMENDMENT is made as of the 1st day of December, 1999,
by Interland, Inc., a Georgia corporation (the "Company");
W I T N E S S E T H:
--------------------
WHEREAS, the Company established the Interland, Inc. Stock Incentive
Plan (the "Plan") effective August 26, 1999; and
WHEREAS, Article 13 of the Plan permits the Board of Directors of the
Company, upon receiving approval of the Shareholders, to amend the Plan; and
WHEREAS, the Board of Directors and Shareholders of the Company desire
to amend the Plan to increase the total number of Shares which may be granted
or awarded under the Plan.
NOW, THEREFORE, for and in consideration of the foregoing premises,
and other good and valuable consideration, the Plan is amended as follows:
1. Section 4.1 is hereby amended by deleting the number "4,000,000"
and replacing it with the number "4,500,000."
2. This First Amendment shall be effective as of the date first above
written. Except as hereby amended, the Plan shall remain in full force and
effect.
IN WITNESS WHEREOF, the undersigned does hereby execute this First
Amendment to the Plan as of the date first above written.
INTERLAND, INC.
By:/s/ Kenneth Gavranovic
------------------------------
Kenneth Gavranovic, President
<PAGE> 1
EXHIBIT 10.11(c)
SECOND AMENDMENT TO THE
INTERLAND, INC.
STOCK INCENTIVE PLAN
THIS AMENDMENT is made as of the 8th day of March, 2000, by
Interland, Inc., a Georgia corporation (the "Company");
W I T N E S S E T H:
WHEREAS, the Company established the Interland, Inc. Stock Incentive
Plan (the "Plan") effective July 1, 1999 and approved by its shareholders
August 26, 1999; and
WHEREAS, Article 13 of the Plan permits the Board of Directors of the
Company, upon receiving approval of the Shareholders, to amend the Plan; and
WHEREAS, a First Amendment to the Plan was adopted by the Board of
Directors on December 1, 1999 increasing the total number of Shares which may
be granted or awarded under the Plan; and
WHEREAS, the Board of Directors and Shareholders of the Company desire
to amend the Plan to further increase the total number of Shares which may be
granted or awarded under the Plan.
NOW, THEREFORE, for and in consideration of the foregoing premises,
and other good and valuable consideration, the Plan is amended as follows:
1. Section 4.1 is hereby amended by deleting the number "4,500,000" and
replacing it with the number "7,000,000."
2. This Second Amendment shall be effective as of the date first above written.
Except as hereby amended, the Plan shall remain in full force and effect.
IN WITNESS WHEREOF, the undersigned does hereby execute this Second
Amendment to the Plan as of the date first above written.
INTERLAND, INC.
By: /s/ Kenneth Gavranovic
-----------------------------------------
Kenneth Gavranovic, President
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 15, 2000
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTERLAND FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,510
<SECURITIES> 1,007
<RECEIVABLES> 655
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 27,727
<PP&E> 8,525
<DEPRECIATION> (982)
<TOTAL-ASSETS> 35,976
<CURRENT-LIABILITIES> 14,477
<BONDS> 0
0
34,423
<COMMON> 12,811
<OTHER-SE> (29,739)
<TOTAL-LIABILITY-AND-EQUITY> 35,976
<SALES> 9,121
<TOTAL-REVENUES> 9,121
<CGS> 7,897
<TOTAL-COSTS> 7,897
<OTHER-EXPENSES> 17,994
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (14)
<INCOME-PRETAX> (16,784)
<INCOME-TAX> 0
<INCOME-CONTINUING> (16,784)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,784)
<EPS-BASIC> (0.85)
<EPS-DILUTED> (0.85)
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTERLAND FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
[CURRENCY] U.S. DOLLARS
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] DEC-31-1998
[EXCHANGE-RATE] 1
[CASH] 706
[SECURITIES] 0
[RECEIVABLES] 0
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 742
[PP&E] 1,104
[DEPRECIATION] (115)
[TOTAL-ASSETS] 1,781
[CURRENT-LIABILITIES] 2,369
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 1,515
[OTHER-SE] (2,453)
[TOTAL-LIABILITY-AND-EQUITY] 1,781
[SALES] 1,387
[TOTAL-REVENUES] 1,387
[CGS] 1,096
[TOTAL-COSTS] 1,096
[OTHER-EXPENSES] 2,612
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] (18)
[INCOME-PRETAX] (2,339)
[INCOME-TAX] 0
[INCOME-CONTINUING] (2,339)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (2,339)
[EPS-BASIC] (0.14)
[EPS-DILUTED] (0.14)
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTERLAND FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
[/LEGEND]
[MULTIPLIER] 1,000
[CURRENCY] U.S. DOLLARS
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1997
[PERIOD-START] SEP-18-1997
[PERIOD-END] DEC-31-1997
[EXCHANGE-RATE] 1
[CASH] 0
[SECURITIES] 0
[RECEIVABLES] 0
[ALLOWANCES] 0
[INVENTORY] 0
[CURRENT-ASSETS] 0
[PP&E] 0
[DEPRECIATION] 0
[TOTAL-ASSETS] 0
[CURRENT-LIABILITIES] 0
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 0
[OTHER-SE] 0
[TOTAL-LIABILITY-AND-EQUITY] 0
[SALES] 5
[TOTAL-REVENUES] 5
[CGS] 0
[TOTAL-COSTS] 0
[OTHER-EXPENSES] 119
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 0
[INCOME-PRETAX] (114)
[INCOME-TAX] 0
[INCOME-CONTINUING] (114)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (114)
[EPS-BASIC] (0.01)
[EPS-DILUTED] (0.01)
</TABLE>
