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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2001
COMMISSION FILE NUMBER: 0-17932
INTERLAND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1404301
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
303 PEACHTREE CENTER AVENUE, SUITE 500, ATLANTA, GA 30303
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
(404) 720-8301
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
REGISTERED ON THE NASDAQ NATIONAL MARKET
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of October 31, 2001 was approximately $89 million.
The number of outstanding shares of the registrant's Common Stock on October 31,
2001 was 137,755,968.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 2001 Annual Meeting of
Shareholders, to be held on April 3, 2002, are incorporated by reference into
Part III of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
STATEMENTS CONTAINED IN THIS FORM 10-K THAT ARE NOT PURELY HISTORICAL ARE
FORWARD-LOOKING STATEMENTS AND ARE BEING PROVIDED IN RELIANCE UPON THE "SAFE
HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ALL
FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE HEREOF AND ARE BASED ON
CURRENT MANAGEMENT EXPECTATIONS AND INFORMATION AVAILABLE TO THE COMPANY AS OF
SUCH DATE. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY FORWARD-LOOKING
STATEMENT. IT IS IMPORTANT TO NOTE THAT ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM HISTORICAL RESULTS OR THOSE CONTEMPLATED IN THE FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, AND
INCLUDE TREND INFORMATION. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED IN "ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--CERTAIN FACTORS" AND IN OTHER COMPANY FILINGS WITH THE SECURITIES
AND EXCHANGE COMMISSION. ALL REFERENCES TO "INTERLAND" OR THE "COMPANY" IN THIS
ANNUAL REPORT ON FORM 10-K MEAN INTERLAND, INC., A MINNESOTA CORPORATION, AND
ALL ENTITIES OWNED OR CONTROLLED BY INTERLAND, INC., EXCEPT WHERE IT IS MADE
CLEAR THAT THE TERM ONLY MEANS THE PARENT COMPANY.
GENERAL
Interland is a leading Web hosting company that offers a broad range of
business-class hosting products and services, including shared and dedicated
hosting services, electronic commerce and other applications hosting services,
and other Web hosting-related products and services. Historically the Company
had provided a variety of computer products and related services through PC
Systems, its computer manufacturing business, and SpecTek, its memory products
business. During fiscal 2001, the Company discontinued both its PC Systems
business and SpecTek (see the footnote entitled "Discontinued Operations" to the
consolidated financial statements of the Company included elsewhere in this
Annual Report on Form 10-K). As a result, following the disposition of these
business segments, the Company is exclusively a Web hosting company.
The Company was originally established on April 7, 1995, as Micron Electronics,
Inc., through the merger of three businesses: Micron Computer, Inc.; Micron
Custom Manufacturing Services, Inc.; and ZEOS International, LTD. The Company's
continuing operation, its Web hosting business, was formed through the
acquisition and integration of five companies between 1999 and 2001. On August
2, 1999, the Company acquired 100% of the outstanding stock of NetLimited, Inc.
d.b.a. "HostPro", a Los Angeles-based Web and applications hosting provider. On
September 2, 1999, the Company acquired the property and equipment of Micron
Internet Services, formerly a division of Micron Technology, Inc., a Boise,
Idaho-based provider of nationwide dial-up and broadband Internet access,
virtual private network solutions, and e-commerce services. On December 14, 1999
the Company acquired LightRealm, Inc., a Kirkland, Washington-based Web and
applications hosting and Internet access company serving small- and medium-sized
businesses. On March 16, 2000, the Company acquired Worldwide Internet
Publishing Corporation, a Boca Raton, Florida-based Web hosting company that
also served small- and medium sized businesses. On August 6, 2001, the Company
acquired Interland, Inc. ("Interland-Georgia"), an Atlanta, Georgia-based Web
and applications hosting company serving small- and medium-sized businesses. In
connection with the acquisition of Interland-Georgia, Micron Electronics, Inc.
changed its name to Interland, Inc. and its trading symbol to "INLD." The
Company's principal executive offices are located at 303 Peachtree Center
Avenue, Suite 500, Atlanta Georgia. The Company's telephone number is (404)
720-8301 and its Web site is located at interland.com. Information contained in
the Company's Web site is not part of this annual report.
The Company's operations are reported on a fiscal basis with its fiscal year
ending on August 31. All references contained herein including annual and
quarterly periods are on a fiscal basis. On August 30, 2001, Micron Technology
Inc. ("MTI") sold all of its shares of Interland common stock (the
"Securities"), representing approximately 43% of the Company's outstanding
common stock, to Micron Semiconductor Products, Inc. ("MSP"), a wholly
subsidiary of MTI. Also on August 30, 2001, MSP donated all of the Securities to
Micron Technology Foundation, Inc. (the "Foundation"). As of August 31, 2001,
the Foundation owned approximately 43% of the Company's outstanding common
stock.
CORPORATE STRATEGY
Interland's strategic objective is to be the leading provider of standardized
Web hosting products and services to small- and medium-sized businesses. The
Company intends to profitably serve its target market by achieving scale and
efficiency in its operations. Interland believes the most profitable segment of
the Web hosting market is serving small- and medium-sized businesses ("SMBs").
This market is large, growing rapidly, and may be served with standardized
products and services. Standardization of products and services permit the use
of standardized processes, and of a higher degree of automation in many areas of
operation, including the sales process. This approach stands in sharp contrast
to that of many competitors that focus on providing labor-intensive, customized
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solutions to larger enterprises. By delivering business-class Web hosting
solutions for SMBs in a scalable and efficient manner, Interland believes that
it can offer better value to its customers, leading to growing market share and
profits. On the other hand, certain aspects of the SMB market present
substantial challenges and risks. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Certain Factors
- -Interland's target market presents substantial risks."
The primary goal of the merger of Micron Electronics and Interland-Georgia was
to create a new company with much greater scale. In order to maximize the
benefits of its new size, the Company has undergone a rigorous merger
integration process. This process has resulted in the identification and
implementation of numerous cost synergies, greatly enhancing the Company's
operational efficiency prospects. As a result of its integration progress, the
Company has accelerated its profitability targets, recently announcing that it
expects its ongoing operations to be free cash flow positive by the end of
fiscal 2002. To further accelerate its profitability objectives, the Company has
embarked on an effort to acquire and integrate Web hosting accounts from
competitors. The Company believes that such acquired accounts, added to internal
account growth, will permit the Company to spread its fixed costs over a larger
base, and to derive a greater percentage of profit from incremental revenues.
Finally, the Company enjoys a strong financial position with low debt, a
substantial cash balance and, as a result, a business model that is not expected
to require additional capital. This advantage over most of its competitors
should enable the Company to reach its strategic and financial objectives.
PRODUCTS AND SERVICES
Interland offers 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 and managed services;
- - E-commerce and other applications hosting services; and
- - Other Web hosting-related products and services.
Most of the Company's hosting revenues are generated from recurring monthly
fees. The remainder is derived from one-time setup fees for installation. The
Company sells its services under agreements having terms of one to 24 months.
The Company commonly sells its services under agreements having terms of one to
24 months, but provide that the customer may nonetheless cancel during an
initial thirty-day "trial period". During fiscal 2001, from ongoing operations,
the Company derived 74.8% of its revenues from hosting and other hosting-related
services. The balance of the revenues was generated primarily by equipment sales
and connectivity services.
In June 2001, the Company sold substantially all of its consumer dial-up
accounts for $3.8 million. Revenues from these accounts were approximately 8.2%
of total revenues for fiscal 2001.
Shared hosting
Shared hosting services range from entry-level starter packages to business
e-commerce shared Web hosting products. Interland's 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. Starter packages are designed for Web sites with relatively low volumes
of traffic and provide a Web presence at minimal cost. The Company's products
are scalable solutions that make it simple to upgrade to more full-featured
services. The majority of the Company's customers currently use its shared
hosting services.
Interland's services feature easy-to-use control panels and extensive online
documentation that allow customers to easily control their own applications.
Business e-commerce packages feature important e-commerce services including
Secure Socket Layer encryption for e-commerce transactions, shopping carts and
database technology to conduct product and service sales online. Through the
Company's other business relationships, its customers can also obtain merchant
account and online payment processing services.
During fiscal 2001, the Company introduced a new shared hosting product,
Freedom, which offers features and benefits, including a significantly expanded
ability for the customer to administer the server, which until now have only
been available on more expensive dedicated hosting products. Freedom is an
example of virtual private server technology, which allows account
administrators to have virtual root access in a shared server environment. In
addition, Freedom features include the ability to host multiple Web sites,
configure multiple shell users, unlimited e-mail accounts, Microsoft Web
development tools, and e-commerce capabilities.
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Dedicated hosting
In contrast to a shared hosting environment, which hosts multiple customers on
one server, dedicated hosting employs one or more servers dedicated to a single
customer. Dedicated hosting provides a customer with increased performance,
server access, the ability to use custom applications, greater security and
higher levels of technical support. Interland provides both managed and
unmanaged dedicated services. For dedicated managed hosting services, the
Company monitors, administers and trouble-shoots the software that operates the
client server. For unmanaged dedicated hosting services, the customer
administers the server remotely, with the Company providing the hardware
monitoring and network and hardware support. Dedicated hosting services are
targeted for Web sites that generally require sophisticated databases for
critical application needs or typically experience high user traffic volumes.
The Company's managed services are targeted to those who need the complex
services required for mission-critical Web sites, but do not want to administer
their own server. The dedicated services come with proprietary control panel
technology, which enables customers to setup and maintain Web sites on the
server.
Interland offers dedicated Web hosting services for major computer platforms,
including Microsoft NT, Windows and Linux.
E-commerce and other applications hosting services
Interland's applications hosting services allow customers to outsource to it the
deployment, configuration, hosting, management and support of various software
applications. The Company's applications hosting services allow 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. The Company
therefore believes that outsourcing these functions to it is a desirable and
increasingly preferred alternative for these businesses. The types of
applications the Company hosts for customers include collaboration tools,
business tools, mail-service tools and e-commerce applications. Currently, the
applications the Company hosts consist mainly of Microsoft Exchange Server,
Office Server Extension and various e-commerce and security products.
Other Web hosting-related products and services
Interland also provides other complementary products and services including
domain name registration, Web site design, technical consulting and Web site
marketing tools. The Company believes these value-added products and services
will enable it to provide its customers with a single vendor with the necessary
tools to create, host and maintain a successful Web presence. The Company
believes that the outsourcing of these functions is a desirable and increasingly
preferred alternative for small- and medium-sized businesses.
SALES AND MARKETING
Interland utilizes multiple sales and distribution channels in an effort to
maximize its market share. These channels include direct sales through both
sales professionals and online sales, indirect sales through reseller and
private-label arrangements, and other channels.
Direct sales
Direct sales efforts are carried out by in-bound and out-bound sales
professionals, located in Atlanta, Georgia.
In-bound sales force
Interland's in-bound sales force responds to incoming inquiries about
products and services generated by Web, direct mail, advertising and
business referrals. The Company's sales force is trained in a relationship
selling approach that allows them to assess the hosting needs of customers
and to recommend the appropriate solutions. This methodology gives
customers a one-on-one consulting relationship with a sales professional in
which the specific needs of the customer are appropriately addressed. The
Company has 33 in-bound sales representatives.
Out-bound sales force
Interland's out-bound sales force generates new business through
telemarketing, direct mail and Internet contact. The Company has 10
out-bound sales representatives.
In addition to initial training, every sales specialist attends on-going
weekly training sessions to enhance product knowledge and selling skills.
Training is also performed through an on-demand web-based training tool.
This emphasis on training ensures that all sales personnel are proficient
with regards to technological advances and the latest service offerings.
Online sales
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The Company's Internet marketing sales programs offer an automated online
sales interface to potential customers. This enables customers to purchase
services at any time directly from Interland's Web site without the
intervention of Company personnel.
Indirect sales
Indirect sales efforts are carried out through resellers and private-label
relationships and other channels.
Resellers and private label relationships
Interland currently has a network of more than 3,000 resellers, large
channel and private-label relationship partners, including system
integrators, value-added hardware and software resellers, Web developers,
Web consulting companies and Internet service providers. These resellers
allow the Company to reach a larger customer audience cost effectively.
Other sales and distribution channels
Interland also pursues sales through a number of other indirect channels,
including Internet marketing, customer referrals and industry referrals.
Internet marketing
A portion of Interland's new customers come from online sales referred to
the Company's Web site through the Company's online advertising efforts and
from its marketing partners' Web sites.
Customer referrals
Interland considers customer referrals an excellent source of new
customers. Many new customers have come to the Company through referrals
from other customers who have had a good relationship with the Company. The
Company rewards its customers for these referrals with discounts on their
services.
Industry referrals
Interland has received many referral customers from other providers of
Internet related services, including Web designers and other Internet
industry professionals. These other service providers who work with the
Company on a regular basis have experience with and knowledge of the
Company's services that make them a valuable source of new customers.
Marketing
Interland markets its products and services through a variety of means,
including its Web sites, print advertising in Internet-related trade
publications and other periodicals, direct mail campaigns and online
advertising. Other marketing activities include participation in industry events
and affiliate relationships, including cooperative marketing with related
services.
KEY STRATEGIC RELATIONSHIPS
Interland has established and intends to continue to forge strategic
relationships with leading technology providers, including major software,
hardware, development and Internet marketing organizations, to enhance its
products and services. These relationships enable the Company to more quickly
gain access to innovative technologies, to provide more creative solutions for
its customers and to allow it to offer its customers resources that would
otherwise be prohibitively expensive for them to acquire. The Company is also
able to build upon the research, development and expertise of these companies in
developing and launching new products. The Company believes that these
relationships will enable it to continue to provide its customers with the
necessary tools to create, host and maintain a successful Web presence and to
have access to sophisticated e-commerce and applications solutions. These
relationships also provide the Company with opportunities to market to customers
to which it might not otherwise have access.
Microsoft Corporation
Interland is a Microsoft Certified Solution Partner and is currently engaged in
several initiatives with Microsoft, including a development, license and
co-marketing agreement. The Company has agreed to develop software and related
materials that will enable the installation of packaged hosted service on
Microsoft's Windows 2000 and NT platforms and has granted Microsoft a perpetual,
irrevocable license to the software. The Company will pay Microsoft five percent
of the total gross revenues that it receives from licensing or otherwise
exploiting the software for five years following Microsoft's acceptance of the
software. In return, Microsoft provides the Company 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. The agreement will continue
until terminated by either party for cause or by Microsoft if the Company fails
to deliver the software or related documentation. The Company has entered into
an updated application services agreement that revises the framework under which
it can obtain and license various Microsoft products. The updated agreement
governs the Company's use of Exchange Server, Office Server Extension and other
products in its hosting operations and requires the
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Company to include particular licensing terms in its sub-licenses to end-users.
Under the agreement, the Company pays Microsoft on a per-processor or
unique-individual-user basis for each of the covered products. The agreement has
a term of two years, and expires on January 31, 2003.
VeriSign
Interland has a strategic alliance with VeriSign, a leading Internet trust
authority. Through a Premier Program agreement, the Company utilizes VeriSign's
domain name registration, secure socket layer digital certificate and secure
payment processing services. This relationship provides the Company with the
ability to license access to VeriSign's domain name record servers and registry
database. VeriSign promotes the Company as a preferred hosting partner, and in
return the Company uses VeriSign as its exclusive registrar of generic top-level
domain names. The Company pays for domain name registration services through a
wholesale cost model and can offer domain name registration services for a
period of up to ten years. The term of the agreement is four years through March
13, 2004 and will renew automatically for one-year terms.
Verizon
Interland has entered into business relationship with Verizon, a leading
provider of communications and information services. The business relationship
consists of a marketing channel relationship and a service provider
relationship. Under the marketing channel relationship, the Company jointly
markets with Verizon and promotes a co-branded version of its products and
services to some of Verizon's customers. In return for Verizon's identification
of customers, the Company will pay Verizon a percentage of revenues received
under the marketing channel relationship. Under the service provider
relationship, Verizon has the right to market and sell a co-branded version of
the Company's products and services to its business customers. The term of the
business relationship is three years through July 4, 2003 for the marketing
channel relationship and through October 9, 2003 for the service provider
relationship and each automatically renews for successive three-year terms. As
part of the marketing channel relationship, Verizon and the Company have
committed a total of $6.0 million toward marketing efforts over the remaining
term of the agreement.
CUSTOMERS
Interland typically provides hosting services directly to end-user business
customers. The Company also provides hosting services to Web developers, Web
consulting firms and other organizations that bundle the Company's services with
their own products or services for sale to their end-user customers. As of
August 31, 2001, the Company hosted more than 300,000 paid Web sites.
NETWORK INFRASTRUCTURE, TECHNOLOGY AND OPERATIONS
To provide a secure and reliable hosting environment, Interland has constructed
a managed infrastructure, consisting of data centers, a redundant Internet
communications backbone, enterprise management software and an advanced network.
The Company's primary data centers are located in Atlanta, Georgia and Los
Angeles, California; with additional facilities located in Seattle, Washington
and Boise, Idaho.
Data centers
The data centers include:
- state-of-the-art network operations centers that are managed and
monitored 24 hours per day, every day of the year;
- monitoring of all critical systems;
- redundant network hardware;
- parallel-redundant backup power generators;
- fire suppression systems;
- cooling systems that include independent full-grade mechanical
systems;
- security, including security guards and video monitoring and entry
restriction via access devices; and
- multiple tier-1 backbones providing Internet connectivity.
Proprietary technology
Interland has developed various proprietary technologies that are designed to
allow customers to order, change and manage their Web hosting accounts easily
regardless of their level of technical expertise. Proprietary technologies also
enable the Company to automate a number of back-end functions and processes. For
example, the Company's provisioning system allows a sales order to be ready for
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customer use automatically within minutes of its entry. The Company's
administration page technology lets customers modify their Web sites from the
Internet without having to contact the Company's support staff. This technology
provides the Company with the opportunity to achieve greater operational
efficiencies and allows the customer to change passwords, protect specific
directories, and to create database sources without the assistance of the
Company's technical support staff.
Network operations centers
Interland monitors its network operations 24 hours a day, every day of the year
with technical experts in Windows 2000 and NT and Linux operating platforms. The
network operations center personnel monitor each piece of equipment, including
routers, switches and servers, as well as all Internet and communication
connections. The systems used in the network operations centers are designed to
allow its systems engineers and administrators and support staff to be promptly
alerted to problems, and the Company has documented procedures for rapidly
resolving technical problems that arise.
INTERNATIONAL REVENUES
Interland's international revenues totaled $10.6 million, $3.1 million, and $0.0
million in 2001, 2000 and 1999, respectively. International revenues are
denominated in U.S. dollars. These amounts represent revenues from international
customers generated and supported in the U.S.
COMPETITION
Interland believes that the primary competitive factors in the mass market
segment of the hosting market include features, customer service, ease of use
and price. At the higher end of the market, reliability and technical expertise
tend to drive the purchasing decision. Although the market is intensely
competitive, the Company believes that it compares favorably with its
competition on these factors.
Current and potential competitors in the market include Web hosting service
providers, applications hosting providers, Internet service providers,
telecommunications companies, large information technology firms that provide a
wide array of information technology services and computer hardware suppliers.
The Company's competitors may operate in one or more of these areas and include
companies such as XO Communications and Verio. In addition, large companies such
as AT&T, Sprint and WorldCom have entered or indicated their intent to enter
into one or more of these markets.
INTELLECTUAL PROPERTY
Interland relies on a combination of laws (including patent, copyright,
trademark, service mark and trade secret laws) and contractual restrictions to
establish and protect proprietary rights in its services. As of August 31, 2001,
the Company owned one issued U.S. patent and had 33 patent applications on file.
Interland has entered into confidentiality and other agreements with its
employees and contractors, including agreements in which the employees and
contractors assign their rights in inventions to it. It has also entered into
nondisclosure agreements with its suppliers, distributors and some customers in
order to limit access to and disclosure of its proprietary information.
Nonetheless, neither the intellectual property laws nor contractual
arrangements, nor any of the other steps the Company has taken to protect its
intellectual property can ensure that others will not use its technology, or
that others will not develop similar technologies.
Interland licenses or leases many technologies used in its Internet application
services. The Company expects that it and its 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 the
Company does not believe that its technologies or services otherwise infringe
the proprietary rights of any third parties, the Company cannot be sure that
third parties will not assert claims against it in the future or that these
claims will not be successful. Although it has discontinued operations as a
manufacturer of personal computers in the electronics industry, the Company is
nonetheless subject to litigation arising from its past activities. It is not
uncommon in the electronics industry for patent, trademark and other
intellectual property rights claims to be asserted against companies, including
component suppliers and personal computer manufacturers. Periodically, the
Company is made aware that technology it has used in these discontinued
operations may have infringed on intellectual property rights held by others.
The Company has evaluated all such claims and, if necessary and appropriate,
sought to obtain licenses for the use of such technology. If the Company or its
suppliers were unable to obtain licenses necessary to use intellectual property
in its discontinued operations' products or processes, it may be legally liable
to the owner of such intellectual property. Moreover, even in those instances
where the Company is justified in denying claims that it has infringed on the
intellectual property rights of others, it may nonetheless be forced to defend
legal actions taken against the Company relating to allegedly protected
technology, and such legal actions may require the Company to expend substantial
funds. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Certain Factors -- Interland faces risks relating to
existing litigation."
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GOVERNMENT REGULATION
Interland is not currently subject to direct federal, state or local government
regulation, other than regulations that apply to businesses generally. This
could change in the future - see "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations - Certain Factors --
Interland's business may be impacted by government regulation and legal
uncertainties."
EMPLOYEES
As of November 9, 2001, Interland employed approximately 761 employees. All of
the Company's employees are located in the United States, and none are
represented by a labor organization with respect to their employment by the
Company. As of November 9, 2001, the Company has never had an organized work
stoppage and it considers its employee relations to be satisfactory.
ENVIRONMENTAL REGULATIONS
Some risks of costs and liabilities related to environmental matters have been
inherent in the Company's discontinued operations, as with many similar
businesses, and its operations are subject to certain federal, state and local
environmental regulatory requirements relating to environmental and waste
management. In connection with the Company's discontinued operations, it
periodically generated and handled limited amounts of materials that were
considered hazardous waste under applicable law. The Company contracted for the
off-site disposal of these materials. The Company believes it has operated in
compliance with applicable environmental regulations.
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
The executive officers and directors of Interland and their ages as of November
9, 2001, are as follows:
Name Age Position
- ---- --- --------
Joel J. Kocher 45 Chairman of the Board of Directors, President and Chief Executive Officer
Kenneth Gavranovic 31 Vice Chairman and Chief Technology Officer
David A. Buckel 40 Senior Vice President and Chief Financial Officer
Mark Alexander 36 Senior Vice President of Sales and Marketing
Nick Farsi 48 Senior Vice President and Chief Information Officer
Savino R. "Sid" Ferrales 51 Senior Vice President, Chief Human Resources Officer
Garrett Mullins 43 Vice President of Sales
Cliff C. Luckey 42 Vice President of Engineering and Data Center Operations
Allen L. Shulman 53 Vice President and General Counsel
Barbara A. Gibson 39 Vice President of Public Relations
Gregg A. Mockenhaupt 32 Director
John B. Balousek 56 Director
Robert Lee 53 Director
Robert T. Slezak 43 Director
JOEL J. KOCHER is Chairman and Chief Executive Officer. He joined the Company in
January 1998 as President, Chief Operating Officer, and Director, and was
appointed Chairman and Chief Executive Officer in June 1998. Prior to joining
the Company, he served as Executive Vice President and then Chief Executive
Officer of Artistsoft, Inc., a computer networking and telephony company, from
August 1997 to January 1998. From December 1996 until August 1997, Mr. Kocher
served as President and Chief Operating Officer at Power Computing Corporation,
a personal computer company. Prior to that time, he served as President of
Worldwide Marketing, Sales and Service at Dell Computer Corporation from 1987 to
1994.
KENNETH GAVRANOVIC has served as Chief Technology Officer and Vice-Chairman of
the Board of Directors since August 2001. Previously, Mr. Gavranovic co-founded
Interland-Georgia in September 1997 and served as its Chief Executive Officer
from December 1999 to August 2001, President from December 1999 to January 2001
and Chairman of the Board of Directors from March 2000 to July 2001. From 1995
to 1997, Mr. Gavranovic served as Vice President of Worldwide Internet
Publishing Corporation, a Web hosting company that he co-founded. From 1992 to
1994, Mr. Gavranovic founded and served as Vice President of Interactive Media
Solutions, a telecommunications software company.
DAVID A. BUCKEL has served as Senior Vice President and Chief Financial Officer
since June 2001, prior to which he had served as Vice President of Corporate
Development of HostPro, Inc. since March 2001. Prior to joining the Company, Mr.
Buckel worked at
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Applied Theory, Inc. from July 1995 to March 2001, and served as their Senior
Vice President and Chief Financial Officer from December 1998. From 1987 to
1995, he worked as Operations Controller for Suit-Kote Corp., a road
construction company. Mr. Buckel has an MBA from Syracuse University with a
concentration in finance and operations management.
MARK ALEXANDER has served as Senior Vice President of Sales and Marketing since
August 2001. Mr. Alexander served as Senior Vice President of Sales, Marketing
and Business Development for Interland-Georgia from April 2000 to August 2001.
From October 1998 to April 2000, he served as the Vice President of Marketing
and as the Executive Director of Marketing of International Division of
BellSouth Corporation. Before joining BellSouth, he was employed by
Scientific-Atlanta from August 1994 to October 1998 as the Managing Director of
the Asia Pacific region and as the Regional Sales Director of the Europe, Middle
East and Africa region. Mr. Alexander received a Bachelor of Science in
management from the Georgia Institute of Technology and an MBA from Emory
University.
NICK FARSI has served as Senior Vice President and Chief Information Officer
since August 2001. Mr. Farsi served as Senior Vice President and Chief
Information Officer for Interland-Georgia from September 2000 to August 2001.
From March 2000 to September 2000, he served as the Chief Information Officer of
Avana Communication, an internet service provider. From 1994 to March 2000, Mr.
Farsi served as Senior Director of Information Technology for BellSouth Cellular
Corporation. In 1979, he started his information technology career as a computer
programmer with Federated Systems Group, a subsidiary of Federated Department
Stores, and from 1991 to 1994 served as Divisional Vice President of Application
Development. Mr. Farsi received his Bachelor of Science in business
administration from the Citadel, Military College of South Carolina.
SAVINO R. "SID" FERRALES has served as Senior Vice President and Chief Human
Resources Officer since February 1998. From December 1997 to January 1998, Mr.
Ferrales performed human resource consulting work for Micron Electronics, Inc.
Prior to that, he served as Vice President of Human Resources at Power Computing
Corporation from March 1997 to November 1997. From June 1995 to February 1997,
Mr. Ferrales served as Vice-President, Worldwide Human Resources, for Digital
Equipment Corporation. From June 1994 to June 1995, he was a principal in OMC
Group, a human resources consulting firm. From January 1989 to June 1994, he
served as Vice President of Human Resources at Dell Computer Corporation. He has
over twenty-five years experience in human resources and organization
development with several high technology companies, including more than ten
years at Motorola, Inc. He holds a Bachelor of Arts in sociology from Southwest
Texas State University, as well as a Master's degree specializing in counseling.
GARRETT MULLINS has served as Vice President of Sales since March 2001. He
served as Vice President of Operations, Western region for Covad Communications,
Inc. from December 1999 to March 2001. Mr. Mullins served as Senior Vice
president for Sales and Member Services of Autoweb.com, Inc., an Internet
automobile retailer, from January 1999 to December 1999. From January 1996 to
January 1999, he served as Vice President of Technology Business Unit Operations
for Teletech Teleservices, Inc., a customer relationship management services
provider. Mr. Mullins has 20 years of senior-level experience in operations and
sales with field and staff operations, corporate sales, business development and
large call center deployment. He received his education from Auburn University
with a Bachelor of Science in political science and pre-law.
CLIFF C. LUCKEY has served as Vice President of Engineering and Data Center
Operations since August 2001, prior to which he had served as Vice President of
Engineering and Chief Technology Officer for HostPro, Inc. since September 2000.
From August 1999 to September 2000, he was Vice President of Internet Solutions
and Chief Technology Officer for Aperian, Inc., an application service provider.
From September 1995 to August 1999, Mr. Luckey held senior positions at GTE
including Director of the Enterprise Management Center. In addition, he has had
extensive experience in various technical positions while at Computer Science
Corporation and IBM.
ALLEN L. SHULMAN has served as Vice President and General Counsel since November
2001. Mr. Shulman served as General Counsel of CheckFree Corporation from May
1997 until October 2001 and additionally as Chief Financial Officer from August
1998 to June 2000. From 1983 to 1996, Mr. Shulman held a number of executive
positions with United Refrigerated Services, Inc., including Chief Operating
Officer, Chief Financial Officer, and General Counsel. From 1976 to 1983 he was
in private law practice in New Jersey and in Chicago.
BARBARA A. GIBSON has served as Vice President of Public Relations since
February 2000. From November 1997 to February 2000, she worked for MCI WorldCom,
first as Regional Manager of Public Policy Communications, then as Director of
Corporate Communications. From May 1994 to November 1997, Ms. Gibson was the
principle of M. Power Communications, a public relations firm. Her experience
also includes various leadership roles with companies including WMFE-TV/FM,
Greater Orlando Chamber of Commerce, Harcourt Brace Jovanovich, Southwestern
Bell Telephone and Holder by Associates Advertising. Ms. Gibson has more than 18
years of experience in senior-level communications with extensive experience in
public affairs, public relations, corporate
8
communications, advertising and marketing. Ms. Gibson completed her education at
the Oklahoma City University with a Bachelor of Arts, mass communications,
advertising and public relations. She holds the professional designation of
Accredited Business Communicator from the International Association of Business
Communicators.
GREGG A. MOCKENHAUPT has served as a member of the Board of Directors since
August 2001. Prior to joining the Company, Mr. Mockenhaupt served as a Director
of Interland-Georgia from December 1999 to August 2001. He has been employed by
Crest Communications Holdings, LLC, a private investment firm and a provider of
strategic and financial advisory services to the communications industry, since
March 1996, and from mid-1998, has served as a Managing Director. Mr.
Mockenhaupt also currently serves as a Director of several private companies in
the communications technology industry. From 1994 to March 1996, Mr. Mockenhaupt
served as an Associate in the Mergers & Acquisitions Group of Smith Barney Inc.
JOHN B. BALOUSEK has served as a member of the Board of Directors since August
1999. He currently serves as a Director on the boards of Geoworks Corporation
and several privately held firms. From 1998 to 1999, Mr. Balousek served as
Executive Vice President and a founder of PhotoAlley.com, a San-Francisco-based
start-up company providing electronic commerce services. He served as Chairman
and CEO of True North Technologies, a digital and interactive services company
of True North Communications, parent company of Foote Cone & Belding
Communications, Inc., a global advertising and communications company, from
March to July 1996. Mr. Balousek continued to serve as a Director of True North
Communications until January 1997. From 1991 to February 1996, Mr. Balousek
served as President, Chief Operating Officer and Director of Foote Cone &
Belding Communications.
ROBERT LEE has served as a member on the Board of Directors since April 1999. He
is currently also a Director on the boards of CIDCO and iAsiaWorks, both
publicly held companies, as well as several privately held firms. From 1995 to
May 1998, Mr. Lee served as President of Business Communications Services for
Pacific Bell. Mr. Lee also served as Executive Vice President, California Market
Group, for Pacific Bell from 1993 to 1995.
ROBERT T. SLEZAK has served as a member on the Board of Directors since August
2001. He currently also serves as a Director on the boards of Ameritrade, Matrix
Bancorp, Inc. and BAM! Entertainment, Inc. Mr. Slezak has worked as an
independent management consultant since November 1999. From 1989 to November
1999, Mr. Slezak served as Chief Financial Officer of Ameritrade Holding
Corporation, managing the accounting, finance, tax, mergers and acquisitions and
regulatory reporting functions of this online brokerage firm.
ITEM 2. PROPERTIES
Interland leases several facilities which include approximately 107,000 square
feet in Atlanta, Georgia, 18,000 square feet in Los Angeles, California, and
5,400 square feet in Westin, Washington. In connection with the acquisition of
Interland-Georgia in August 2001, the Company adopted a restructuring plan, and
as a result, is exiting approximately 250,000 square feet of office and data
center facilities.
ITEM 3. LEGAL PROCEEDINGS
On October 2, 2001, Capetronic Computer USA filed a Complaint in Dallas County,
Texas Court seeking damages of approximately $2.1 million for goods purchased by
the Company's PC Systems business. The Company removed the case to federal court
in the Northern District of Texas, Dallas Division, and counterclaimed for legal
fees owed by Capetronic for legal fees they had agreed to indemnify the Company
for that were incurred on an unrelated patent lawsuit. These legal fees amounted
to approximately $1.3 million. This claim is currently in the early stages of
discovery, and the Company is therefore unable to estimate total expenses,
possible loss or range of loss that may ultimately be connected with the matter.
Interland is defending a consumer class action lawsuit filed in the Federal
District Court of Minnesota based on the alleged sale of defective computers. No
class has been certified in the case. The case involves a claim that the Company
sold computer products with a defect that may cause errors when information is
written to a floppy disk. Substantially similar lawsuits have been filed against
other major computer manufacturers. The case is currently in the early stages of
discovery, and the Company is therefore unable to estimate total expenses,
possible loss or range of loss that may ultimately be connected with the matter.
On June 1, 2001, Plaintiff Kimberley Smith filed a Complaint and Demand for Jury
Trial in the U.S. District Court for Idaho alleging violations of the Fair Labor
Standards Act ("FLSA") for alleged failures to pay non-exempt employees overtime
for hours worked in
9
excess of 40 in a week, as well as other alleged violations of the FLSA and
state wage and hour laws. On June 8, 2001, an Amended Complaint and Demand for
Jury Trial was filed by Plaintiff Smith in which an additional individual,
Plaintiff Michael Hinckley, joined. Ms. Smith and Mr. Hinckley seek individual
damages and class certification and relief as well as injunctive relief,
prejudgment interest and attorneys' fees and costs. Thus far, forty-four
additional, mostly former employees, have filed written notice of consents
seeking to join in the action. The Company filed an answer to the Complaint on
June 29, 2001. The Court ordered a hearing to determine whether to conditionally
certify the FLSA collective action, but no trial date has been set. The case is
currently in the early stages of discovery, and the Company is therefore unable
to estimate total expenses, possible loss or range of loss that may ultimately
be connected with the matter.
The Company is party to various other legal actions arising in the normal course
of business, none of which is expected to have a material adverse effect on its
business, financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Interland held a Special Meeting of Shareholders on August 6, 2001, and
transacted the following business:
(a) Approval of the issuance of shares of the Company's common stock, pursuant
to the Agreement and Plan of Merger, dated as of March 22, 2001, among the
Company, Interland-Georgia and a wholly owned subsidiary of the Company, at
an exchange ratio of 0.861 shares of the Company's common stock for each
outstanding share of common stock of Interland-Georgia with cash paid in
lieu of any fractional shares.
Votes For Votes Against Abstentions Broker Non-votes
---------- ------------- ----------- ----------------
69,398,940 462,805 75,640 26,918,780
(b) Approval of an amendment to the Company's articles of incorporation to
increase the number of authorized shares of capital stock to 200,000,000
shares and change its name to "Interland, Inc."
Votes For Votes Against Abstentions Broker Non-votes
---------- ------------- ----------- ----------------
69,301,736 538,805 96,844 26,918,780
(c) Approval of an amendment to the Company's bylaws to:
- - provide that all directors shall hold office for a period of at least two
years after the closing of the merger;
- - permit the removal of directors only for "cause" during the two-year period
following the closing of the merger;
- - effective after the expiration of the two-year period after the closing of
the merger, change the term of all directors to an indefinite term, and
permit their removal with or without cause; and
- - authorize the Board of Directors to decrease the size of the Board in the
future.
Votes For Votes Against Abstentions Broker Non-votes
---------- ------------- ----------- ----------------
65,708,155 4,096,028 133,202 26,918,780
(d) Increase the size of the Company's Board of Directors to eight (8) members.
Votes For Votes Against Abstentions Broker Non-votes
---------- ------------- ----------- ----------------
91,869,869 570,491 84,684 4,331,121
(e) Elect three additional directors to the Company's Board of Directors.
Votes For Votes Withheld Broker Non-votes
--------- -------------- ----------------
Kenneth Gavranovic 91,374,732 1,150,312 4,331,121
Gregg A. Mockenhaupt 92,082,952 442,092 4,331,121
Robert T. Slezak 92,080,181 444,863 4,331,121
At the time of the Special Meeting of Shareholders, the continuing members of
the Board of Directors were Joel J. Kocher, John B. Balousek, Robert Lee, Robert
A. Lothrop and Steven R. Appleton. On November 9, 2001, Robert A. Lothrop and
Steven R. Appleton resigned from their positions on the Board of Directors.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Interland's common stock trades on the NASDAQ National Market under the symbol
"INLD." Prior to August 7, 2001, the Company's stock traded under the symbol
"MUEI" on the NASDAQ National Market. The following table shows for the fiscal
periods indicated the high and low sales prices for the Company's common stock,
as reported by the NASDAQ National Market:
High Low
---- ---
2001 Fourth Quarter $ 1.84 $1.11
Third Quarter 4.00 1.50
Second Quarter 5.00 3.03
First Quarter 14.44 5.25
2000 Fourth Quarter $14.44 $9.19
Third Quarter 20.69 8.19
Second Quarter 13.31 9.81
First Quarter 13.75 9.56
HOLDERS OF RECORD
On August 31, 2001, the closing price of Interland's common stock as reported on
the Nasdaq National Market was $1.56. As of August 31, 2001, there were
approximately 2,774 shareholders of record.
DIVIDENDS
Interland has not declared or paid any cash dividend and does not foresee paying
any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA (In thousands)
The following selected historical consolidated statements of income data for the
years ended August 31, 2001, August 31, 2000 and September 2, 1999 and the
historical consolidated balance sheet data as of August 31, 2001 and 2000 have
been derived from the Company's audited consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K. The Company
has disposed of its PC Systems and SpecTek business segments, which are reported
separately as discontinued operations. See the note entitled "Discontinued
Operations" in the Company's consolidated financial statements included
elsewhere in this Annual Report on Form 10-K. The selected historical
consolidated statement of income data below reflects the results of the
Company's continuing operations, the Web hosting business.
In fiscal 2001, the Company acquired one Web and applications hosting company,
in fiscal 2000, the Company acquired two Web and applications hosting companies
and in fiscal 1999, the Company acquired one Web and applications hosting
company and one Internet access company. These acquisitions are reflected in the
consolidated financial statements as of the date of acquisition. See the note
entitled "Acquisitions" in the Company's consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.
The information contained below should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the notes thereto included elsewhere
in this Annual Report on Form 10-K. Results of operations for the periods
presented are not necessarily indicative of results of operations for future
periods.
2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
Statements of income data: (unaudited) (unaudited)
Revenues from continuing operations $ 60,752 $ 32,862 $ 464 $ - $ -
Income (loss) from continuing operations (145,717) (26,192) 5,187 5,081 2,733
Earnings (loss) per share, continuing operations:
Basic $ (1.46) $ (0.27) $ 0.05 $ 0.05 $ 0.03
Diluted (1.46) (0.27) 0.05 0.05 0.03
Balance sheet data: (unaudited) (unaudited)
Total assets $ 429,280 $ 563,920 $ 502,826 $ 452,414 $ 419,270
Total debt 39,106 1,971 9,993 14,183 18,375
Shareholders' equity 296,430 506,580 458,499 416,894 365,571
11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this Form 10-K that are not purely historical are
forward-looking statements and are being provided in reliance upon the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates," and similar expressions identify forward-looking statements. These
forward-looking statements include but are not limited to statements regarding
Interland's expectations of the Company's future liquidity needs, its
expectations regarding the business and financial results of the combined
company, its expectations regarding its future operating results including its
planned increase in its revenues levels and the actions the Company expects to
take in order to maintain its existing customers and expand its operations and
customer base. All forward-looking statements are made as of the date hereof and
are based on current management expectations and information available to it as
of such date. The Company assumes no obligation to update any forward-looking
statement. It is important to note that actual results could differ materially
from historical results or those contemplated in the forward-looking statements.
Forward-looking statements involve a number of risks and uncertainties, and
include trend information. Factors that could cause actual results to differ
materially include, but are not limited to, those identified in "Certain
Factors" and in the Company's other filings with the Securities and Exchange
Commission. All yearly references are to the Company's fiscal years ended August
31, 2001, August 31, 2000 or September 2, 1999 unless otherwise indicated. All
quarterly references are also on a fiscal basis, unless otherwise indicated. All
tabular dollar amounts are stated in thousands.
OVERVIEW
Interland is a leading Web hosting company that offers a broad range of
business-class hosting products and services, including shared and dedicated
hosting services, electronic commerce and other applications hosting services,
and other Web hosting-related products and services. Historically, the Company
had provided a variety of computer products and related services through its PC
Systems, SpecTek, and Web hosting business segments. During fiscal 2001, the
Company discontinued its PC Systems business, its computer manufacturing
business, and SpecTek, its memory products business. See the note entitled
"Discontinued Operations" to the consolidated financial statements included
elsewhere in this Annual Report on Form 10-K. As a result, following the
disposition of these business segments, the Company has become exclusively a Web
hosting company.
The Company was originally established on April 7, 1995 as Micron Electronics,
Inc. through the merger of three businesses: Micron Computer, Inc., Micron
Custom Manufacturing Services, Inc. and ZEOS International, LTD. The Web hosting
business, the Company's continuing operation, was formed through the acquisition
and integration of five companies between 1999 and 2001. On August 2, 1999, the
Company acquired 100% of the outstanding stock of NetLimited, Inc. d.b.a.
"HostPro", a Web and applications hosting provider. On September 2, 1999, the
Company acquired the property and equipment of Micron Internet Services,
formerly a division of Micron Technology, a provider of dedicated, nationwide
dial-up and broadband Internet access, virtual private network solutions and
e-commerce services. On December 14, 1999, the Company acquired LightRealm, Inc.
a Kirkland, Washington-based Web and applications hosting and Internet access
company serving small- and medium-sized businesses. On March 16, 2000, the
Company acquired Worldwide Internet Publishing Corporation, a Boca-Raton,
Florida-based Web hosting company that also served small- and medium-sized
businesses. On August 6, 2001, the Company acquired Interland, Inc.
("Interland-Georgia"), an Atlanta, Georgia-based provider of a broad range of
Web hosting, applications hosting and other related Web-based business solutions
specifically designed to meet the needs of small- and medium-sized businesses.
In connection with the acquisition of Interland-Georgia, Micron Electronics,
Inc. changed its name to Interland, Inc. and its trading symbol to "INLD." The
Company's principal executive offices are located at 303 Peachtree Center
Avenue, Suite 500, Atlanta Georgia.
Interland's business is rapidly evolving and has a limited operating history. As
a result, the Company believes that period-to-period comparisons of its revenues
and operating results, including our cost of revenues and other operating
expenses as a percentage of total revenue, are not meaningful and should not be
relied upon as indicators of future performance. The Company does not believe
that its
12
historical growth rates are an indication of future results. In addition, the
Company's financial results for fiscal 2001 only reflect the integration of
Interland-Georgia for 25 days.
Revenues are primarily generated by providing shared and dedicated hosting
services, e-commerce and other applications hosting services, and other Web
hosting-related products and services. Revenues are recognized as the services
are provided. Hosting contracts generally are for service periods ranging from
one to 24 months and typically require up-front fees. These fees, including
set-up fees for hosting services, are deferred and recognized ratably over the
customers' expected service period.
Cost of revenues is mainly comprised of compensation and other expenses for data
center and provisioning operations, Internet connectivity and other related
telecommunications expense, and depreciation and amortization of capital and
intangibles related to data center equipment and operations.
Interland's operating expenses consist of:
- Sales, marketing and technical support, which is mainly comprised
of compensation costs and costs associated with technical support
and marketing the Company's products and services. Compensation
costs include salaries and related benefits, commissions and
bonuses. Marketing expenses include the costs of direct mail,
advertising and other mass market programs; and
- General and administrative, which is mainly comprised of
compensation and related expenses, occupancy costs, and
depreciation and amortization of capital and intangible assets
related to the engineering, development and administrative
functions.
The Company intends to invest heavily in sales and marketing to expand its
customer base, enhance the efficiency of its infrastructure to accommodate
additional customers and in development of future services. In addition, the
Company intends to continue to expand and develop new sales channels and
relationships. The Company's future success is dependent upon its ability to
achieve profitability prior to depletion of cash reserves and to raise funds
thereafter, if needed. While management currently believes that they have
adequate resources to maintain planned operations for at least one year from the
balance sheet date, they cannot assure you that the Company will be profitable
in the future under its current Web and applications hosting model or that
adequate funding will be available to allow it to continue operations subsequent
to the one-year time period. The Company does not expect to generate positive
cash flows from ongoing operations until the end of fiscal 2002. However, the
Company's current financial forecast indicates that there are sufficient cash
reserves on hand until the Company reaches positive cash flows from ongoing
operations.
DISCONTINUED OPERATIONS
PC SYSTEMS
The Company has discontinued the operations of its PC Systems business segment,
which has been accounted for as discontinued operations in accordance with
Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." On
May 31, 2001, the Company sold its PC Systems business to GTG PC Holdings, LLC,
("GTG PC") an affiliate of the Gores Technology Group. Under the terms of the
agreement, GTG PC received assets, which included $76.5 million in cash, and
assumed specified liabilities of the PC Systems business. The Company retained
all liabilities of the PC Systems business not assumed by GTG PC, including, for
example, liabilities for taxes arising prior to the closing of the transaction,
employee termination and related expenses and any contingent liabilities arising
prior to the closing date. In addition, the Company has agreed for a period of
three years not to compete with the PC Systems business, and for two years, to
not solicit or hire prior employees of the PC Systems business. For a transition
period after the closing of the purchase, the purchaser agreed to provide
certain information technology, financial, telecommunications and human
resources services to the Company at GTG PC's cost plus 10% during the first
four months after the closing, and at its cost plus 25% for the following two
months.
Through May 31, 2003, or for the applicable statute of limitations with respect
to taxes and government contracts, the Company is obligated to indemnify the
purchaser and affiliated entities for any breaches of the representations and
warranties contained in the agreement. In addition, the Company is obligated for
an indefinite period of time to indemnify the purchaser and affiliated entities
for any breaches in covenants. The agreement provides that the maximum aggregate
liability of the Company for indemnification under the agreement is $10.0
million.
13
The agreement also provides that the Company would potentially be entitled to
receive, through May 31, 2003, a percentage of any proceeds in the event the PC
Systems business is sold or has an initial public offering of its securities.
The Company would receive a payment only after the repayment of transaction
costs, repayment of debt and capital contributions, payment of specified amount
of cash to GTG PC and obligations under employee incentive programs.
In fiscal 2001, the Company recognized an estimated loss on disposal of the PC
Systems business of $212.2 million. Included in the loss on disposal are
employee termination costs of approximately $15.4 million, of which $0.3 million
is included in the accompanying consolidated Balance Sheets under "Accrued
liabilities" at August 31, 2001.
SPECTEK
The Company has discontinued the operations of its SpecTek business segment,
which has been accounted for as discontinued operations in accordance with APB
No. 30. Pursuant to the Amended and Restated Component Recovery Agreement (as
amended, the "Component Recovery Agreement"), dated effective September 2, 1999,
MTI exercised its rights to purchase the assets of the SpecTek business. On
March 22, 2001, the Company entered into a Purchase Agreement (the "Purchase
Agreement") to sell all assets primarily used by SpecTek and certain land,
buildings and intellectual property assets to MTI. Pursuant to the terms of the
Purchase Agreement, the Company transferred the land, buildings and intellectual
property to MTI on March 22, 2001 and received $18 million of cash in excess of
the historical cost from MTI. This amount has been recorded, net of tax, as an
increase in additional paid in capital. The Company has leased back a portion of
the land and buildings from MTI and has also been granted a license to use
certain of the intellectual property. In addition, MTI agreed to pay the Company
for the March 1, 2001 net book value of the assets used by SpecTek, less any
outstanding intercompany payables. Net proceeds from the sale of the SpecTek
assets under the Purchase Agreement were $39.6 million.
RESULTS OF CONTINUING OPERATIONS
The Company's consolidated financial information presents the net effect of
discontinued operations separate from the results of the Company's continuing
operations. Historical financial information has been reclassified to present
consistently the discontinued operations, and the discussion and analysis that
follows generally focuses on continuing operations. The following table sets
forth, for the periods indicated, certain data derived from the Company's
consolidated statements of operations:
Fiscal year ended
AUGUST 31, August 31, September 2,
2001 2000 1999
------------ ------------ ------------
Revenues 100.0% 100.0% 100.0%
Cost of revenues 64.9 74.1 22.2
------------ ------------ ------------
Gross margin 35.1 25.9 77.8
------------ ------------ ------------
Operating expenses:
Sales, marketing and technical support 61.2 79.6 30.8
General and administrative 63.0 71.9 839.2
Goodwill amortization 11.2 15.0 26.1
Other expense (income), net (2.6) 1.9 310.8
Merger, integration and restructuring costs 184.3 -- --
------------ ------------ ------------
Total operating expenses 317.1 168.4 1206.9
Operating loss (282.0) (142.5) (1129.1)
Loss on investments, net (8.9) (1.8) --
Interest income, net 13.7 34.9 2723.1
------------ ------------ ------------
Income (loss) from continuing operations before taxes (277.2) (109.4) 1594.0
Income tax benefit (provision) 37.3 29.7 (476.1)
------------ ------------ ------------
Income (loss) from continuing operations (239.9)% (79.7)% 1117.9%
============ ============ ============
The loss from continuing operations for the fiscal year ended 2001 was $145.7
million, or $(1.46) per basic and diluted share, on revenues of $60.8 million,
compared to a loss from continuing operations of $26.2 million, or $(0.27) per
basic and diluted share, and
14
income from continuing operations of $5.2 million, or $0.05 per basic and
diluted share, for the fiscal years ended 2000 and 1999, respectively. The
results of continuing operations in fiscal 2001 include the operating activities
of Interland-Georgia from August 6, 2001, and fiscal 1999 include the operating
activities of NetLimited, Inc. for one month, the period from the date of
acquisition to the end of the fiscal year. Additionally, in fiscal 1999, net
income from continuing operations resulted primarily from the interest income
from corporate cash, cash equivalents and liquid investments, partially offset
by general corporate expenses not directly attributable to the discontinued
operations.
REVENUES
Fiscal year ended
August 31, August 31, September 2,
2001 2000 1999
------------ ------------ ------------
(Amounts in thousands)
Hosting revenue $ 42,576 $ 18,555 $ 464
Other revenue 18,176 14,307 --
------------ ------------ ------------
Total revenues $ 60,752 $ 32,862 $ 464
============ ============ ============
COMPARISON OF THE YEARS ENDED AUGUST 31, 2001, AUGUST 31, 2000 AND
SEPTEMBER 2, 1999
REVENUES
Total revenues increased 84.9% to $60.8 million during fiscal 2001 from $32.9
million in fiscal 2000 and $0.4 million in fiscal 1999. In addition, the
Company's financial results for fiscal 2001 only reflect the integration of
Interland-Georgia for 25 days.
Hosting revenues increased 129.5% to $42.6 million during fiscal 2001 from $18.6
million in fiscal 2000 and $.4 million in fiscal 1999. Hosting revenues are
comprised of shared and dedicated hosting services and domain name
registrations. The growth in hosting revenues has been driven by new customer
growth, acquisitions, and upgrading existing customers.
Other revenues increased 27.0% to $18.2 million during fiscal 2001 from $14.3
million in fiscal 2000 and $0.0 million in fiscal 1999. Other revenues are
comprised of e-commerce and other applications hosting services, other Web
hosting-related products and services, internet connectivity fees and equipment
sales to customers. In June 2001, substantially all of the consumer dial-up
accounts were sold, and the Company's strategy moved away from the sale of
hardware. The sale of these accounts and the change in strategy is not expected
to have a substantial impact on future operating income.
The Company maintained over 300,000 paid hosted Web sites at the end of fiscal
2001, compared to 114,000 paid hosted Web sites at the end of fiscal 2000.
COST OF REVENUES
Cost of revenues increased 62.0% to $39.4 million during 2001 from $24.3 million
in fiscal 2000 and $.1 million in fiscal 1999. During fiscal 2001, the increase
in cost of revenues was primarily related to depreciation relating to data
center build-outs and equipment purchases, telecommunications and Internet
access costs, the cost of equipment sold to customers, technical personnel costs
and rent. The Company's cost of revenues as a percentage of revenues decreased
to 64.9% during fiscal 2001 from 74.1% in fiscal 2000 and 22.2% in fiscal 1999.
The Company anticipates that costs of revenues will increase in absolute
dollars, but decline as a percentage of revenues as the Company continues to
grow, and execute its strategy to achieve a more cost-effective scale of
operations.
OPERATING EXPENSES
SALES, MARKETING AND TECHNICAL SUPPORT
Sales, marketing and technical support expenses increased 42.2% to $37.2 million
during fiscal 2001 from $26.2 million in fiscal 2000 and $.1 million in fiscal
1999. The increase in sales, marketing and technical support expenses during
fiscal 2001 was primarily related to increased outsourced telemarketing costs
and sales and technical support personnel costs, offset partially by a reduction
in advertising costs. Technical support costs were $11.3 million, $4.9 million
and $0.1 million during fiscal 2001, 2000, and 1999, respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 62.0% to $38.3 million during
fiscal 2001 from $23.6 million in fiscal 2000 and $3.9 million in fiscal 1999.
The increase in general and administrative expenses during fiscal 2001 was
primarily related to engineering, development, general and administrative
personnel costs, depreciation, bad debt expenses, consulting fees, rent and
intangible amortization.
15
GOODWILL AMORTIZATION
Goodwill amortization increased during fiscal 2001 and 2000 as a result of the
acquisitions of the Web and applications hosting companies that occurred
starting in August 1999. SFAS No. 142 requires the Company to adopt certain
provisions as part of the Interland-Georgia business combination, and as a
result, the goodwill and intangible assets acquired as part of the combination
were accounted for in accordance with the "amortization and nonamortization"
provisions of SFAS 142. The Company will fully adopt SFAS No. 142 effective
September 1, 2001, which will eliminate goodwill amortization starting in fiscal
2002.
OTHER EXPENSE (INCOME), NET
In June 2001, the Company sold substantially all of its consumer dial-up
accounts for $3.8 million. The sale resulted in a gain of $2.5 million in fiscal
2001. In fiscal 1999, other expense includes a $1.0 million charge for the
write-off of purchased in-process research and development, which resulted from
the acquisition of HostPro.
MERGER, INTEGRATION AND RESTRUCTURING COSTS
In connection with the acquisition of Interland-Georgia in August 2001, the
Company adopted a restructuring plan to close certain offices and data centers,
discontinue the use and development of certain software and eliminate other
redundant assets. As a result, the Company recorded a restructuring charge of
$110.3 million. The restructuring charge included $9.4 million related to the
closure of offices and data centers, the write-off of $69.7 million of goodwill
and intangible assets relating to prior acquisitions, $26.9 million for asset
write-downs, $0.7 million related to personnel termination costs and $3.6
million related to other costs. In addition, the Company incurred $1.7 million
in merger and integration costs. The Company expects to achieve cost synergies
of $27 million to $40 million as a result of the integration.
ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA)
The Company's adjusted EBITDA loss (loss from continuing operations, excluding
interest, income taxes, depreciation, amortization and other non-cash charges),
excluding one-time merger, restructuring and integration costs, was a loss of
$39.8 million during 2001 compared to a loss of $31.7 million in the prior year.
The increase in the adjusted EBITDA loss was primarily due to increased
expenditures needed to support the growth in operations, including salaries and
benefits for additional employees, network costs, rent, and other costs related
to the increase in the number of data centers as well as increased and general
and administrative expenses. Adjusted EBITDA is not intended to represent cash
flow from operations as measured under generally accepted accounting principles,
and should not be considered as an alternative to net loss or net cash used in
operating activities, but may be useful as an indication of operating
performance.
LOSS ON INVESTMENTS, NET
The loss on investments, net for the fiscal year ended 2001 increased to $5.4
million from $.6 million. The loss consists of a loss on investments of $9.9
million and a gain on the sale of an investment of $4.5 million. The Company
incurred a loss on its equity share of the losses of Bird on a Wire, Inc.
("BOAW"), as well as the Company's loss on disposal of its investment therein
($4.9 million) and write-off of investment in Innuity, Inc. ($5.0 million). On
May 28, 2001, BOAW entered into a definitive agreement to sell its assets. After
settling BOAW liabilities, the Company received net proceeds of $1.5 million.
On September 29, 2000, the Company sold its remaining 10% interest in MCMS, Inc.
("MCMS") for a net gain of $4.5 million.
INTEREST INCOME, NET
Interest income, net decreased 27.5% to $8.3 million from $11.5 million in
fiscal 2000 and $12.6 million in fiscal 1999. Interest income, net consists of
interest income earned on the Company's invested cash and liquid investments,
less interest expense on debt. The reduction in interest income, net is
primarily due to the lower levels of cash and liquid investments that were
available for investment and lower interest rates during fiscal 2001.
INCOME TAX PROVISION
The effective income tax rate on continuing operations was approximately 13% for
fiscal 2001 compared to 27% for fiscal 2000 and 30% for fiscal 1999. The rate
principally reflects the federal statutory rate, net of the effect of state
taxes, tax-exempt securities and non-deductible goodwill amortization. The
change in the effective income tax rates primarily reflects tax benefits and tax
sharing arrangements that are no longer available due to the disposal of the
discontinued operations, as well as a valuation allowance on certain tax assets.
16
LIQUIDITY AND CAPITAL RESOURCES
As of August 31, 2001, the Company had $208.1 million in cash and cash
equivalents and short-term and restricted investments. This represents a
decrease of $117.9 million compared to the prior year. Principal sources of
liquidity in fiscal 2001 were $20.0 million from the proceeds of issuance of
debt and $61.5 million from investing activities, including $211.1 million of
proceeds from maturing investments, $14.4 million of cash acquired in the
acquisition of Interland-Georgia, $4.5 million of proceeds from the sale MCMS
common stock and $1.5 million of proceeds from the sale of consumer dial-up
accounts, offset by $119.3 million of purchases of held to maturity investments,
$85.8 used in the Company's discontinued operations, $20.1 million for purchases
of property, plant and equipment and $5.0 million for the purchase of an equity
investment. The Company used $47.5 million of cash in operating activities
primarily due to increased operating expenses to position it for future growth.
The SpecTek and PC Systems dispositions had a material impact on the Company's
liquidity in the third quarter of 2001. Pursuant to the Component Recovery
Agreement, on March 22, 2001, MTI exercised its rights to purchase the assets of
the SpecTek business. The proceeds from this transaction, net of existing
intercompany payables, were approximately $39.6 million. In addition, the
Company agreed to sell to MTI certain land, buildings and intellectual property
assets. SpecTek has been the Company's only profitable segment and its only
source of positive cash flows, excluding interest income. The discontinuance of
the SpecTek segment will have a material adverse effect on the Company's
financial position, results of operations and cash flows.
On May 31, 2001, the Company sold its PC Systems business to GTG PC Holdings,
LLC, ("GTG PC") an affiliate of the Gores Technology Group. Under the terms of
the agreement, GTG PC received assets, which included $76.5 million in cash, and
assumed specified liabilities of the PC Systems business. Through May 31, 2003,
or for the applicable statute of limitations with respect to taxes and
government contracts, the Company is obligated to indemnify GTG PC and
affiliated entities for any breaches of the representations and warranties
contained in the agreement. In addition, the Company is obligated for an
indefinite period of time to indemnify GTG PC and affiliated entities for any
breaches in covenants. The agreement provides that the maximum aggregate
liability of the Company for indemnification under the agreement is $10.0
million. Claims related to this indemnification could result in an additional
cash payment by the Company to GTG PC and a corresponding increase to the loss
on disposal of discontinued operations.
On March 28, 2001, the Company terminated its unsecured credit agreement with a
group of financial institutions, which provided borrowings up to $100.0 million.
On July 20, 2001, the Company entered into a financing arrangement with a
financial institution, under which the Company executed a $5.3 million credit
agreement and entered into a sale leaseback arrangement for certain equipment,
primarily computer hardware, for which the Company may borrow up to $14.6
million. The Company pledged $24.9 million of cash and equivalents as security
for these lines.
The Company anticipates making capital expenditures in excess of $12.0 million
during the fiscal 2002.
The Company does not expect to generate positive cash flow from ongoing
operations until the end of fiscal 2002. However, the Company expects to have
adequate cash reserves to fund operations during this period. The Company's
future success is dependent upon its ability to achieve profitability prior to
the depletion of cash reserves and to raise funds, thereafter, if needed.
Management cannot assure that the Company will be profitable in the future under
its current Web and applications hosting business model or that adequate funding
will be available to allow it to continue operations subsequent to the one-year
time period. However, the Company's current financial forecast indicates that
there are sufficient cash reserves on hand until the Company reaches positive
cash flows from ongoing operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that all derivatives
be recorded as either assets or liabilities in the balance sheet and
marked-to-market on an ongoing basis. SFAS No. 133 applies to all derivatives
including stand-alone instruments, such as forward currency exchange contracts
and interest rate swaps, or embedded derivatives, such as call options contained
in convertible debt instruments. The Company implemented SFAS No. 133 in the
first quarter of 2001 and it did not have a material impact on the Company's
results of operations, financial condition or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulleting (SAB) No. 101 "Revenue Recognition in Financial Statements". The SAB
summarizes certain staff views in applying generally accepted accounting
principles to revenue recognition in financial statements. The provisions of SAB
No. 101 became effective in fiscal 2001 and did not have a material impact on
the Company's results of operations, financial condition or cash flows.
In July 2001, the FASB issued SFAS No. 141 "Business Combinations". SFAS 141
requires that all business combinations be accounted for using the purchase
method of accounting; therefore, the pooling-of-interests method of accounting
is prohibited. SFAS
17
141 also requires that an intangible asset acquired in a business combination be
recognized apart from goodwill if the intangible asset arises from contractual
or other legal rights or the acquired intangible asset is capable of being
separated from the acquired enterprise, as defined in SFAS 141. SFAS 141 is
effective for all business combinations completed after June 30, 2001 and
accounted for as a purchase and for all business combinations "initiated" after
June 30, 2001, as defined.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the financial accounting and reporting for
goodwill and other intangible assets subsequent to their acquisition. SFAS No.
142 requires that intangible assets be amortized over their useful lives unless
that life is determined to be indefinite. Intangible assets shall be evaluated
annually to determine whether events and circumstances continue to support an
indefinite useful life. An intangible asset that is not subject to amortization
shall be tested for impairment annually or more frequently if events or changes
in circumstances indicate that the asset might be impaired. Adoption of SFAS No.
142 is required during the Company's fiscal 2003, and early adoption is
permitted. The goodwill and intangible assets acquired as part of the
Interland-Georgia purchase business combination were required to be accounted
for in accordance with the "amortization and nonamortization" provisions of SFAS
142. The Company will adopt SFAS No. 142 effective September 1, 2001, which will
eliminate goodwill amortization in fiscal 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The statement provides accounting and reporting standards for
recognizing obligations related to asset retirement costs associated with the
retirement of tangible long-lived assets. Under this statement, legal
obligations associated with the retirement of long-lived assets are to be
recognized at their fair value in the period in which they are incurred if a
reasonable estimate of fair value can be made. The fair value of the asset
retirement costs is capitalized as part of the carrying amount of the long-lived
asset and subsequently allocated to expense using a systematic and rational
method over the assets' useful life. Any subsequent changes to the fair value of
the liability due to passage of time or changes in the amount or timing of
estimated cash flows is recognized as an accretion expense. The Company will be
required to adopt this statement no later than September 1, 2002. The Company is
currently analyzing the impact the adoption of this pronouncement may have on
its consolidated financial position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which is effective for fiscal years beginning
after Dec 15, 2001. This statement supercedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." However, it retains the fundamental provisions of SFAS No. 121
for the recognition and measurement of the impairment of long-lived assets to be
held and used and the measurement of long-lived assets to be disposed of by
sale. Impairment of Goodwill is not included in the scope of SFAS No. 144 and
will be treated in accordance with the accounting standards established in SFAS
No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 144, long-lived
assets are to be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing or discontinued operations. The
statement applies to all long-lived assets, including discontinued operations,
and replaces the provisions of APB Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for
the disposal of segments of a business. The Company will be required to adopt
this statement no later than September 1, 2002. The Company is currently
analyzing the impact the adoption of this pronouncement may have on its
consolidated financial position, results of operations, or cash flows.
CERTAIN FACTORS
You should carefully consider the following factors and all other information
contained in this Form 10-K before you make any investment decisions with
respect to the Company's securities. The risks and uncertainties described below
are not the only risks the Company faces.
If any of the adverse events described in the following factors actually occur
or Interland does not accomplish necessary events or objectives described in the
factors, its business, financial condition and operating results could be
materially and adversely affected, the trading price of the Company's common
stock could decline and you could lose all or part of your investment.
INTERLAND HAS INCURRED LOSSES SINCE INCEPTION, AND IT EXPECTS TO INCUR LOSSES
FOR AT LEAST THE NEXT SEVEN QUARTERS. The Company has incurred net losses and
losses from operations for each period from inception through fiscal 2001.
Interland does not expect to generate positive cash flow from ongoing operations
until the end of fiscal 2002. Operating expenses could increase as a result of
adapting network infrastructure to accommodate additional customers, increasing
sales and marketing efforts, broadening customer support capabilities,
integrating the Interland-Georgia and HostPro businesses and expanding
administrative resources in anticipation of future growth. To the extent that
increases in expenses are not offset by increased revenues, the Company's
results of operations and financial condition would be materially affected. Even
if Interland achieves profitability, it may not be able to sustain or increase
profitability on a quarterly or annual basis in the future.
18
INTERLAND'S HISTORICAL FINANCIAL INFORMATION WILL NOT BE REPRESENTATIVE OF ITS
FUTURE RESULTS. Since the Company has sold its non-hosting businesses, its
historical financial information, contained in previous filings with the
Securities and Exchange Commission, will not be representative of its future
operating results. Including the operations of the non-hosting businesses--which
are classified as discontinued operations in the Company's financial
statements--Web hosting revenues represented less than 7% and 3% of the
Company's total revenues for fiscal 2001 and 2000, respectively. In addition,
the Company's financial results for fiscal 2001 only reflect the integration of
Interland-Georgia for 25 days.
INTERLAND HAS A LIMITED OPERATING HISTORY AND ITS BUSINESS MODEL IS STILL
EVOLVING, WHICH MAKES IT DIFFICULT TO EVALUATE ITS PROSPECTS. The Company's
limited operating history makes evaluating its business operations and prospects
difficult. The Company's range of service offerings has changed since its
inception and its business model is still new and developing. Because some of
Interland's services are new, the market for them is uncertain. As a result, the
revenues and income potential of the Company's business, as well as the
potential benefits of the merger with Interland-Georgia, may be difficult to
evaluate.
INTERLAND'S QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND ITS FUTURE REVENUES
AND PROFITABILITY ARE UNCERTAIN. The Company's past operating results have been
subject to fluctuations, on a quarterly and an annual basis. Interland may also
experience significant fluctuations in quarterly and annual operating results
due to a wide variety of factors. Because of these fluctuations, comparisons of
operating results from period to period are not necessarily meaningful and
should not be relied upon as an indicator of future performance. Factors that
may cause operating results to fluctuate include, but are not limited to:
- demand for and market acceptance of the Company's services;
- introductions of new services or enhancements by Interland and its
competitors;
- technical difficulties or system downtime affecting the Internet
generally or the Company's hosting operations specifically;
- the mix of services delivered by Interland or its competitors;
- customer retention;
- the timing and success of the Company's advertising and marketing
efforts and introductions of new services to customers and the
timing and success of the marketing efforts and introductions of new
services to customers of its resellers;
- increased competition and consolidation within the Web hosting and
applications hosting markets;
- changes in the Company's pricing policies and the pricing policies
of its competitors;
- gains or losses of key strategic relationships; and
- other general and industry-specific economic factors.
The Company cannot provide any assurances about the extent to which it will be
successful in achieving any plans to increase the size of its customer base, the
amount of services it offers or the amount, if any, of increase in revenues it
will experience during the next fiscal year, or beyond. In addition, relatively
large portions of Interland's expenses are fixed in the short-term, and
therefore its results of operations are particularly sensitive to fluctuations
in revenues. Also, if the Company were unable to continue using third-party
products in its service offerings, its service development costs could increase
significantly.
In addition, the terrorist acts of September 11, 2001 have created an uncertain
economic environment and the Company cannot predict the impact of these events,
any subsequent terrorist acts or of any related military action, on its
customers or business. The Company believes that, in light of these events, some
businesses may curtail spending on information technology, which could also
affect its quarterly results in the future.
INTERLAND'S STOCK PRICE MAY BE VOLATILE. The market price of the Company's
common stock has experienced a significant decline in the last year. The price
has been and is likely to continue to be highly volatile due to several factors,
such as:
- the Company's failure to experience the benefits of the merger as
quickly as anticipated, or at all, or an increase over estimates of
the costs of or operational difficulties arising from the merger;
- the failure of the impact of the merger on the Company's financial
results to be in line with the expectations of financial analysts;
- variations in actual and anticipated operating results;
19
- changes in earnings estimates by analysts;
- variations in actual and anticipated operating results of customers
or competitors;
- material reductions in spending by customers;
- announcements by Interland or its competitors regarding new service
introductions;
- the volatility inherent in stock within the sectors within which the
Company conducts business;
- any subsequent terrorist acts or of any related military action;
- general decline in economic conditions; and
- reductions in the volume of trading in the Company's common stock.
INTERLAND OPERATES IN A NEW AND EVOLVING MARKET WITH UNCERTAIN PROSPECTS FOR
GROWTH AND MAY NOT BE ABLE TO SUSTAIN GROWTH IN ITS CUSTOMER BASE. 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. The
Company's future growth, if any, will depend upon the willingness of small- and
medium-sized businesses to outsource Web and applications hosting services, the
Company's ability to increase its average revenues per customer, and its ability
to retain customers. The market for Interland's services may not develop
further, consumers may not widely adopt its services and significant numbers of
businesses or organizations may not use the Internet for commerce and
communication. If this market fails to develop further or develops more slowly
than expected, or if the Company's services do not achieve broader market
acceptance, the Company will not be able to grow its customer base. In addition,
the Company must be able to differentiate itself from its competition through
its service offerings and brand recognition. These activities may be more
expensive than the Company anticipates, and it may not be successful in
differentiating itself, achieving market acceptance of its services or selling
additional services to its existing customer base.
INTERLAND'S TARGET MARKET PRESENTS SUBSTANTIAL RISKS. The Company intends to
concentrate on serving small- and medium-sized businesses ("SMB"). The SMB
market contains many businesses that will not be successful, and are
consequently at substantially greater risk for non-collectible accounts
receivable, and for non-renewal. Moreover, a significant portion of this target
market is highly sensitive to price, and may be lost to a low-cost competitor.
Because few businesses in this target market employ trained technologists, they
tend to generate a high number of customer service and technical support calls.
The expense of responding to these calls is considerable, and the expense is
likely to increase in direct proportion to revenue, potentially limiting the
scalability of the business. Additionally, if the customer becomes dissatisfied
with the Company's response to such calls, cancellation, non-payment, or
non-renewal becomes more likely. Interland's strategy for minimizing the
negative aspects of its target market include:
- continued expenditures on sales and marketing to replace failing
customers;
- capitalizing on planned efficiencies to become a profitable provider
at the lowest sustainable price;
- automating customer care and technical support to reduce the cost
per call, and to minimize the time spent by Company personnel;
- intensive training and supervision of customer care and technical
support personnel to maximize customer satisfaction;
- minimizing the Company's concentration of credit risk which
consists principally of cash and cash equivalents, short and
long-term investments and trade and other receivables. The Company
invests its cash in credit instruments of highly rated financial
institutions and performs periodic evaluations of the credit
standing of these financial institutions.
No assurance can be given, however, that any of these measures will be
successful, and the Company's failure to manage these risks could have a
material negative effect on the Company's revenues, costs, and prospects.
INTERLAND'S CUSTOMER BASE INCLUDES A SIGNIFICANT NUMBER OF BUSINESSES THAT
CURRENTLY FACE INCREASING DIFFICULTY IN OBTAINING FUNDING TO SUPPORT THEIR
OPERATIONS. Many of the Company's customers are businesses, including
Internet-based businesses that have traditionally been initially funded by
venture capital firms and then through public securities offerings. Funding
alternatives for these businesses have become more limited than in the past.
Many of these customers have ceased or reduced their operations, and it has
become increasingly difficult for the Company to collect revenues from these
businesses. If the market for technology and Internet-based businesses is not
supported by the private and public investors who have funded these customers,
the Company faces the risk that these customers may cease, curtail or limit Web
site operations. If this continues to occur, the Company could experience a loss
of revenues associated with these customers and will then have to increase sales
to other businesses using the Internet in order to preserve and grow revenue. If
the Company is successful in increasing sales to other businesses, it will incur
the expenses associated with these new customers, such as sales and marketing
expenses, including commissions, and implementation costs. As a result, to
preserve and grow revenue, the Company will have to increase sales by
substantially more than the amount of lost revenue.
20
IF THE COMPANY DOES NOT SUCCESSFULLY INTEGRATE THE OPERATIONS AND PERSONNEL OF
INTERLAND-GEORGIA IN A TIMELY MANNER, THIS WILL DISRUPT ITS BUSINESS AND COULD
NEGATIVELY AFFECT ITS OPERATING RESULTS. The Company's acquisition of
Interland-Georgia involves risks related to the integration and management of
Interland-Georgia's operations and personnel. The integration will be a complex,
time consuming and expensive process and may disrupt the Company's business if
not completed in a timely and efficient manner. The Company must operate as a
combined organization utilizing common information and telecommunications
systems, operating procedures, financial controls and human resources practices.
The Company may encounter substantial difficulties, costs and delays involved in
integrating the operations of both companies, including:
- potential incompatibility of business cultures;
- perceived adverse changes in business focus;
- potential conflicts in marketing or other important relationships;
- potential operating inefficiencies and increased costs associated
with having and integrating different information and
telecommunications systems currently used by each of HostPro and
Interland-Georgia;
- potential decline in the level of customer service and customer
satisfaction; and
- the loss of key employees and diversion of the attention of
management from other ongoing business concerns.
The Company's headquarters were located in Boise, Idaho, while
Interland-Georgia's headquarters were located in Atlanta, Georgia. In
conjunction with the merger, the Company moved its headquarters to Atlanta,
Georgia. The integration of Interland-Georgia's operations and personnel may be
difficult due to the geographic distance between the Company's previous and
current headquarters. In addition, the Company has completed a number of other
acquisitions of hosting companies and is still in the process of completing the
integration of these businesses. This could make the integration of
Interland-Georgia more difficult. If this integration effort is not successful,
the results of operations could be adversely affected, employee morale could
decline, key employees could leave and customers could cancel existing orders or
choose not to place new ones. In addition, the attention and effort devoted to
the integration of the two companies will significantly divert management's
attention from other important issues, such as expansion of the combined
customer base, which could negatively affect the Company's business and
operating results.
THE BENEFITS OF THE MERGER WITH INTERLAND-GEORGIA MAY BE LOWER THAN EXPECTED AND
THE COSTS ASSOCIATED WITH THE MERGER COULD BE HIGHER THAN EXPECTED, WHICH COULD
HARM THE COMPANY'S FINANCIAL RESULTS AND CAUSE A DECLINE IN THE VALUE OF ITS
COMMON STOCK. The Company expects to realize cost reductions due to synergies
created by the merger with Interland-Georgia in areas such as integration and
expansion of nationwide technical support capabilities over a larger customer
base, integration of information and telecommunications systems, marketing the
larger combined business, elimination of excess data center capacity and
economies of scale for the combined company's telecommunications costs. Although
the Company expects that it will realize cost synergies with the merger, it
cannot guarantee that it will realize these cost synergies or state the amount
of any cost synergies with any certainty. The Company expects to incur costs
associated with the consolidation and integration of the companies' services and
operations. If the total costs of the merger and related consolidation and
integration exceed estimates, or if the cost synergies of the merger are less
than expected, the Company's financial results would suffer. Any shortfall in
anticipated operating results could cause the market price of the Company's
common stock to decline. In addition, the market price of Interland's common
stock could decline significantly if it does not experience the business
benefits of the merger as quickly or in as great amounts as security analysts
expect.
THE COMPANY HAS INCURRED SIGNIFICANT ACCOUNTING CHARGES RELATING TO THE
ACQUISITION OF INTERLAND-GEORGIA, WHICH WILL DELAY PROJECTED ACHIEVEMENT OF
PROFITABILITY FOR THE WEB HOSTING BUSINESS. The Company has accounted for the
acquisition of Interland-Georgia using the purchase method of accounting. Under
the purchase method, the purchase price of Interland-Georgia has been allocated
to the assets acquired and liabilities assumed. As a result, based upon the
purchase price of $127.2 million, the Company has recorded $17.5 million of
intangible assets and $104.4 million of goodwill on its balance sheet, which
will result in annual amortization expense of the intangible assets of
approximately $3.3 million in fiscal 2002 under accounting standards existing at
August 31, 2001. Goodwill will be evaluated annually for impairment and any
potential impairment will affect the Company's financial results in the future.
IF THE COMPANY ACQUIRES ADDITIONAL COMPANIES, CUSTOMER ACCOUNTS OR TECHNOLOGIES,
IT MAY FACE RISKS SIMILAR TO THOSE IT CURRENTLY FACES IN CONNECTION WITH THE
MERGER WITH INTERLAND-GEORGIA. As part of its strategy to grow the Web hosting
business, the Company has made a number of acquisitions and investments, and it
may continue to pursue acquisitions of businesses or assets that it believes are
complementary to its business. The Company will be required to record material
goodwill and other intangible assets in the likely event the purchase price of
the acquired businesses exceeds the fair value of the net assets acquired. In
the past, this has resulted in significant amortization charges, and these
charges may increase in future periods as the Company continues its acquisition
strategy.
21
The acquired businesses may not achieve the revenues and earnings anticipated to
be achieved. If the Company acquires another company, it will likely raise the
same risks, uncertainties and disruptions as discussed above with respect to its
merger with Interland-Georgia. For example, the Company may not be able to
successfully assimilate the additional personnel, operations, acquired
technology and customer accounts into its business. Furthermore, the Company may
have to incur debt or issue equity securities to pay for any additional future
acquisitions or investments, the issuance of which could be dilutive to existing
shareholders. As a result, there could be a material adverse effect on the
Company's future financial condition and results of operations. The Company
cannot assure you of the timing or size of future acquisitions, or the effect
future acquisitions may have on its operating results.
INTERLAND COULD INCUR LIABILITIES IN THE FUTURE RELATING TO ITS PC SYSTEMS
BUSINESS. The Company could incur liabilities arising from the sale of the PC
Systems business to GTG PC. According to the terms of the agreement with GTG PC,
the Company agreed to retain liabilities relating to the operation of the PC
systems business arising prior to the closing of the transaction, including
liabilities for taxes, contingent liabilities and liabilities for accounts
payable accrued prior to the closing. The Company also agreed to indemnify GTG
PC and its affiliates for any breach of the Company's representations and
warranties contained in the agreement for a period of two years, or for the
applicable statute of limitations for matters related to taxes. This
indemnification obligation is capped at $10.0 million. Except for claims for
fraud or injunctive relief, this indemnity is the exclusive remedy for any
breach of the Company's representations, warranties and covenants contained in
the agreement with GTG PC. Accordingly, in the future, Interland could be
required to make payments to GTG PC and its affiliates in accordance with the
agreement in which it sold the PC Systems business, which could adversely affect
its future results of operations.
THE MICRON TECHNOLOGY FOUNDATION IS A SIGNIFICANT SHAREHOLDER AND IS THEREFORE
ABLE TO EXERT SIGNIFICANT INFLUENCE OVER MATTERS REQUIRING SHAREHOLDER APPROVAL.
As of October 30, 2001, the Micron Technology Foundation owned approximately 43%
of Interland's outstanding common stock, although Minnesota law limits its right
to vote any shares in excess of 20% of the Company's outstanding common stock.
Under the terms of an agreement with the Company, the Micron Technology
Foundation has agreed, among other things, not to sell any of its shares for a
period of nine months following the Interland-Georgia merger, subject to limited
exceptions. So long as the Micron Technology Foundation continues to own a
substantial portion of Interland's outstanding common stock, the Micron
Technology Foundation will have the ability to exert significant influence over
matters requiring shareholder approval, including the election of directors, and
potentially could affect the Company's management and corporate policies. The
level of the Micron Technology Foundation's ownership of Interland's common
stock may limit the Company's ability to complete future equity financing.
INTERLAND MAY BE REQUIRED TO PAY SALES AND USE TAXES RELATED TO ITS DISCONTINUED
OPERATIONS. During the third quarter of 1997, the Company began to collect and
remit applicable sales or use taxes in nearly all states. The Company is a party
to agreements with nearly all states, which generally limit its liability, if
any, for non-remittance of sales and use taxes prior to such agreements'
effective dates. The Company has previously accrued a liability for the
estimated settlement cost of issues related to sales and use taxes not covered
by such agreements. Management believes the resolution of any matters relating
to the non-remittance of sales or use taxes will not materially affect the
Company's business, financial position, results of operations and cash flows.
This potential liability will remain with Interland even though it sold the PC
Systems business.
INTERLAND MAY NOT EFFECTIVELY EXECUTE ITS WEB HOSTING STRATEGY AND, AS A RESULT,
OTHERS MAY SEIZE THE MARKET OPPORTUNITY THAT IT HAS IDENTIFIED. If Interland
fails to execute its Web hosting strategy in a timely or effective manner, its
competitors may be able to seize the opportunity it has identified to address
the Web hosting needs of small- and medium-sized businesses. Interland's
business strategy is complex and requires that it successfully and
simultaneously complete many tasks, and the failure to complete any one of these
may jeopardize its strategy as a whole. Execution of this strategy may be more
difficult in light of the merger with Interland-Georgia because the management
team for the combined company have not have worked together for any significant
period of time. In order to be successful, the Company will need to:
- market its services and build its brand name effectively;
- provide reliable and cost-effective services that can be expanded to
meet the demands of its customers;
- develop new products and services;
- continue to enhance the efficiency of its infrastructure to
accommodate additional customers;
- continue to expand its customer base;
- continue to respond to competitive developments;
- influence and respond to emerging industry standards and other
changes; and
- attract, retain and motivate qualified personnel.
22
INTERLAND FACES INTENSE COMPETITION. The Web hosting and applications hosting
markets are highly competitive and are becoming more so. There are few
substantial barriers to entry, and the Company expects that it will face
additional competition from existing competitors and new market entrants in the
future. The Company may not have the resources, expertise or other competitive
factors to compete successfully in the future. Many of Interland's competitors
have greater name recognition and more established relationships in the
industry. As a result, 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 the Company can.
In an effort to gain market share, some of Interland's competitors have offered,
and may in the future offer, Web hosting services similar to Interland at lower
prices or with incentives not matched by Interland, including free start-up and
domain name registration, periods of free service, low-priced Internet access or
free software. In addition, some of its competitors may be able to provide
customers with additional benefits, including reduced communications costs,
which could reduce the overall cost of their services relative to the Company.
Interland may not be able to reduce the pricing of its services or offer
incentives in response to the actions of its competitors without harming its
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. The Company
also believes that the market in which it competes is likely to consolidate
further in the near future, which could result in increased price and other
competition that could damage its business.
Current and potential competitors in the market include Web hosting service
providers, applications hosting providers, Internet service providers,
telecommunications companies, large information technology firms that provide a
wide array of information technology services and computer hardware suppliers.
These competitors may operate in one or more of these areas and include
companies such as XO Communications and Verio. In addition, large companies such
as AT&T, Sprint and WorldCom have entered or indicated their intent to enter
into one of more of these markets.
INTERLAND'S ABILITY TO SUCCESSFULLY MARKET ITS SERVICES COULD BE SUBSTANTIALLY
IMPAIRED IF IT IS UNABLE TO DEPLOY NEW INTERNET APPLICATIONS OR IF NEW INTERNET
APPLICATIONS IT DEPLOYS PROVE TO BE UNRELIABLE, DEFECTIVE OR INCOMPATIBLE. The
Company cannot assure you that it will not experience difficulties that could
delay or prevent the successful development, introduction or marketing of
Internet application services in the future. If any newly introduced Internet
applications suffer from reliability, quality or compatibility problems, market
acceptance of its services could be greatly hindered and its ability to attract
new customers could be adversely affected. The Company cannot assure you that
new applications it deploys will be free from any reliability, quality or
compatibility problems. If the Company incurs increased costs or is unable, for
technical or other reasons, to host and manage new Internet applications or
enhancements of existing applications, its ability to successfully market its
services could be substantially impaired. In addition, the Company cannot assure
you that any new services or applications will be accepted by its customers.
IMPAIRMENT OF INTERLAND'S INTELLECTUAL PROPERTY RIGHTS COULD NEGATIVELY AFFECT
ITS BUSINESS OR COULD ALLOW COMPETITORS TO MINIMIZE ANY ADVANTAGE THAT
INTERLAND'S PROPRIETARY TECHNOLOGY MAY GIVE IT. The Company relies on a
combination of patent, copyright, trademark, service mark and trade secret laws
and contractual restrictions to establish and protect proprietary rights in its
services. At this point, Interland has no patented technology that would
preclude or inhibit competitors from entering the Web hosting market that it
serves. While the Company may file patent applications on particular aspects of
its technology, it cannot be sure that it will receive any patents. While it is
the Company's practice to require all of its employees to enter into agreements
containing non-disclosure, non-competition and non-solicitation restrictions and
covenants, and while its agreements with some of its customers and suppliers
include provisions prohibiting or restricting the disclosure of proprietary
information, the Company cannot be sure that these contractual arrangements or
the other steps it takes to protect its proprietary rights will prove sufficient
to prevent illegal use of its proprietary rights or to deter independent,
third-party development of similar proprietary assets.
Policing unauthorized use of products or methods of operation and fully
protecting the Company's proprietary rights is difficult, and it cannot
guarantee that the steps it has taken to protect its proprietary rights will be
adequate. In addition, effective copyright, trademark, trade secret and patent
protection may not be available in every country in which the Company's products
and services are offered. Further, the Company is currently, and may in the
future, be involved in legal disputes relating to the validity or alleged
infringement of its, or of a third party's, intellectual property rights. The
Company expects that participants in the Web hosting market will be increasingly
subject to infringement claims as the number of services and competitors in its
industry segment grows. Intellectual property litigation is typically extremely
costly and can be disruptive to business operations by diverting the attention
and energies of management and key technical personnel. In addition, any adverse
decisions could subject the Company to significant liabilities,
23
require it to seek licenses from others, prevent it from using, licensing or
selling certain of its products and services, or cause severe disruptions to its
operations or the markets in which it competes, any one of which could
dramatically impact its business and results of operations.
Periodically, the Company is made aware that technology it uses may infringe on
intellectual property rights held by others. The Company has accrued a liability
and charged operations for the estimated costs of settlement or adjudication of
certain asserted and unasserted claims for alleged infringement relating to its
discontinued operations prior to the balance sheet date. Resolution of these
claims could have a material adverse effect on future results of operations and
cash flows.
INTERLAND FACES RISKS RELATING TO EXISTING LITIGATION. Interland is defending a
contract dispute lawsuit filed on October 2, 2001 in Dallas County, Texas Court
seeking damages of approximately $2.1 million for goods purchased by our PC
Systems business. The Company removed the case to federal court, and
counterclaimed for legal fees owed by the plaintiff for legal fees they had
agreed to indemnify the Company for that were incurred on an unrelated patent
lawsuit. These legal fees amounted to approximately $1.3 million. This claim is
currently in the early stages of discovery, and the Company is therefore unable
to estimate total expenses, or possible loss that may ultimately be connected
with the matter. This potential liability will remain with Interland even though
it sold the PC Systems business.
The Company is defending a consumer class action lawsuit filed in the Federal
District Court of Minnesota based on the alleged sale of defective computers. No
class has been certified in the case. The case involves a claim that the Company
sold computer products with a defect that may cause errors when information is
written to a floppy disk. Substantially similar lawsuits have been filed against
other major computer manufacturers. The case is currently in the early stages of
discovery, and the Company is therefore unable to estimate total expenses,
possible loss or range of loss that may ultimately be connected with the matter.
This potential liability will remain with Interland even though it sold the PC
Systems business.
The Company is defending an employee class action lawsuit claim filed in the
U.S. District Court for Idaho. The case involves alleged violations of the Fair
Labor Standards Act, particularly failures to pay non-exempt employees overtime
for hours worked in excess of 40 in a week as well as other alleged violations
of the FLSA and state wage and hour laws. No class has been certified in the
case. The case is currently in the early stages of discovery, and the Company is
therefore unable to estimate total expenses, possible loss or range of loss that
may ultimately be connected with the matter. This potential liability will
remain with Interland even though it sold the PC Systems business.
Periodically, the Company is made aware that technology it used in its
discontinued operations may have infringed on intellectual property rights held
by others. The Company has evaluated all such claims and, if necessary and
appropriate, sought to obtain licenses for the use of such technology. If the
Company or its suppliers were unable to obtain licenses necessary to use
intellectual property in its discontinued operation's products or processes, it
may be forced to defend legal actions taken against it relating to allegedly
protected technology. The Company evaluates all such claims and has accrued a
liability and charged operations for the estimated costs of settlement or
adjudication of claims for alleged infringement as of the respective dates of
the balance sheets included in this report. Resolution of these claims could
have a material adverse effect on future results of operations and cash flows.
INTERLAND WILL RELY HEAVILY ON ITS KEY PERSONNEL. The future success of
Interland will depend, in part, on its ability to attract and retain key
management, technical and sales and marketing personnel. The Company attempts to
enhance its management and technical expertise by recruiting qualified
individuals who possess desired skills and experience in certain targeted areas.
The Company experiences strong competition for such personnel in the Web hosting
industry. The Company's inability to retain employees and attract and retain
sufficient additional employees, and information technology, engineering and
technical support resources, could have a material adverse effect on its
business, financial condition, results of operations and cash flows. The Company
cannot assure you that it will not lose key personnel or that the loss of any
key personnel will not have a material adverse effect on its business, financial
position, results of operations and cash flows.
IF THE COMPANY IS UNABLE TO OBTAIN SUFFICIENT TELECOMMUNICATIONS NETWORK
CAPACITY AT REASONABLE COSTS, IT MAY NOT BE ABLE TO PROVIDE SERVICES AT PRICES
ACCEPTABLE TO ITS CUSTOMERS, THEREBY REDUCING DEMAND FOR ITS SERVICES. The
success of Interland will depend upon the capacity, reliability and security of
its network infrastructure, including the capacity leased from its
telecommunications network suppliers. Interland's network currently delivers
service through Cable & Wireless, McLeod, Qwest, Electric Lightwave, Genuity,
WorldCom, Level 3, XO, Sprint and Touch America. Some of these suppliers are
also competitors. The Company's operating results depend, in part, upon the
pricing and availability of telecommunications network capacity from a limited
number of providers. If capacity is not available as the Company's customers'
usage increases, the Company's network may not be able to achieve or maintain
sufficiently high data transmission capacity, reliability or performance. In
addition, the Company's business would suffer if its network suppliers increased
the prices for their services and it were unable to pass along any increased
costs to its customers. Any failure on the part of the Company or the part of
its third-party suppliers to achieve or maintain high data transmission
24
capacity, reliability or performance could significantly reduce customer demand
for its services, damage its business reputation and increase its costs.
INTERLAND DEPENDS ON ITS RESELLER SALES CHANNEL TO MARKET AND SELL MANY OF ITS
SERVICES. INTERLAND DOES NOT CONTROL ITS RESELLERS, AND IF IT FAILS TO DEVELOP
OR MAINTAIN GOOD RELATIONS WITH RESELLERS, IT MAY NOT ACHIEVE THE GROWTH IN
CUSTOMERS AND REVENUES THAT IT EXPECTS. An element of the strategy for the
Company's growth is to further develop the use of third parties that resell its
services. Many of these resellers are Web development or Web consulting
companies that also sell Interland's Web hosting services, but that generally do
not have established customer bases to which they can market these services. The
Company is not currently dependent on any one reseller to generate a significant
level of business, but it has benefited from business generated by the reseller
channel. Although Interland attempts to provide its resellers with incentives
such as price discounts on its services that the resellers seek to resell at a
profit, the failure of its services to be commercially accepted in some markets,
whether as a result of a reseller's performance or otherwise, could cause its
current resellers to discontinue their relationships with us, and it may not be
successful in establishing additional reseller relationships as needed.
INTERLAND WILL BE SUBJECT TO CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS. In
the Web and applications hosting industry, service providers must keep pace with
evolving technologies in order to offer relevant, sophisticated services on a
timely basis to meet rapidly changing customer demands. The future success of
Interland will depend, in part, upon its ability to offer services that
incorporate leading technologies, address the increasingly sophisticated and
varied needs of its current and prospective Web and applications hosting
customers and respond to technological advances and emerging industry standards
and practices on a timely and cost-effective basis. The market for Web hosting
services is characterized by rapidly changing and unproven technologies,
evolving industry standards, changes in customer needs, emerging competition and
frequent introductions of new services. To be successful, the Company must
continually improve the performance, features and reliability of its services,
including its proprietary technologies, and modify its business strategies
accordingly. Interland could also incur substantial costs if it needs to modify
its services or infrastructure in order to adapt to these changes. Technological
advances may have the effect of encouraging some of the Company's current or
future customers to rely on in-house personnel and equipment to furnish the
services that it currently provides. If the Company is unable to maintain the
compatibility of its services with products offered by its vendors, it could
lose or fail to attract customers.
Interland believes that its ability to compete successfully also depends upon
the continued compatibility of its services with products offered by various
vendors. Enhanced or newly developed third-party products may not be compatible
with its infrastructure, and such products may not adequately address the needs
of its customers. Although Interland currently intends to support emerging
standards, industry standards may not be established, and, even if they are
established, the Company may not be able to conform to these new standards in a
timely fashion in order to maintain a competitive position in the market. The
Company's failure to conform to the prevailing standard, or the failure of a
common standard to emerge, could cause it to lose customers or fail to attract
new customers. In addition, products, services or technologies developed by
others could render the Company's services noncompetitive or obsolete.
INTERLAND'S ABILITY TO ATTRACT CUSTOMERS IS DEPENDENT ON THE RELIABLE
PERFORMANCE AND GROWTH OF USE OF THE INTERNET. 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 communication,
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, the Company would not be able to grow its
customer base as quickly as desired and its customers would be less likely to
require more complex, higher services from it.
As a Web and applications hosting company, Interland's success will depend in
large part on continued growth in the use of the Internet. The lack of continued
growth in the usage of the Internet would adversely affect its business because
it would not gain additional customers and its existing customers might not have
any further use for its services. 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.
25
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.
INTERLAND IS VULNERABLE TO SYSTEM FAILURES, WHICH COULD HARM ITS REPUTATION,
CAUSE ITS CUSTOMERS TO SEEK REIMBURSEMENT FOR SERVICES AND CAUSE ITS CUSTOMERS
TO SEEK ANOTHER PROVIDER FOR SERVICES. The Company must be able to operate the
systems that manage its network around the clock without interruption. Its
operations will depend upon its ability to protect its network infrastructure,
equipment and customer files against damage from human error, fire, earthquakes,
hurricanes, floods, power loss, telecommunications failures, sabotage,
intentional acts of vandalism and similar events. Although the Company has
attempted to build redundancy into its networks, its networks are currently
subject to various points of failure. For example, a problem with one of its
routers (devices that move information from one computer network to another) or
switches could cause an interruption in the services the Company provides to a
portion of its customers. In the past, the Company has experienced periodic
interruptions in service. In addition, failure of any of its telecommunications
providers to provide the data communications capacity that the Company requires,
as a result of human error, a natural disaster or other operational disruption,
could result in interruptions in services. Any future interruptions could:
- cause customers or end users to seek damages for losses incurred;
- require the Company to replace existing equipment or add redundant
facilities;
- damage the Company's reputation for reliable service;
- cause existing customers to cancel their contracts; or
- make it more difficult for the Company to attract new customers.
Interland offers some customers a 99.9% service level warranty. Under these
policies, it guarantees that those customers' Web sites will be available at
least 99.9% of the time in each calendar month for as long as the customer is
using its Web hosting services. If the Company were to experience widespread
system failure, it could incur significant costs under those warranties.
INTERLAND'S 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
the Company's services rely on security technology licensed from third parties
that provides the encryption and authentication necessary to effect the secure
transmission of confidential information. Despite the design and implementation
of a variety of network security measures by the Company, unauthorized access,
computer viruses, accidental or intentional actions and other disruptions could
occur. In the past, the Company has experienced, and in the future it may
experience, delays or interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
In addition, inappropriate use of the network by third parties could also
potentially jeopardize the security of confidential information, such as credit
card and bank account numbers stored in the Company's computer systems. These
security problems could result in the Company's liability and could also cause
the loss of existing customers and potential customers. In addition, third
parties could interfere with the operation of customers' Web sites through
intentional attacks including causing an overload of traffic to these Web sites.
Although the Company intends to continue to implement industry-standard security
measures, third parties may be able to overcome any measures that it implements.
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
customers, and harm the Company's reputation and growth. 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 INTERLAND'S SERVICES CAUSED BY UNKNOWN SOFTWARE DEFECTS COULD HARM
ITS BUSINESS AND REPUTATION. The Company's service offerings depend on complex
software, including proprietary software tools and software licensed from third
parties. Complex software often contains defects, particularly when first
introduced or when new versions are released. The Company may not discover
software defects that affect its new or current services or enhancements until
after they are deployed. Although Interland has 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 its
reputation or increase its service costs, cause it to lose revenue, delay market
acceptance or divert its development resources.
PROVIDING SERVICES TO CUSTOMERS WITH CRITICAL WEB SITES AND WEB-BASED
APPLICATIONS COULD POTENTIALLY EXPOSE INTERLAND TO LAWSUITS FOR CUSTOMERS' LOST
PROFITS OR OTHER DAMAGES. Because the Company's Web hosting and applications
hosting services are critical to many of its customers' businesses, any
significant interruption in those services could result in lost profits or other
indirect or consequential damages to its customers as well as negative publicity
and additional expenditures for it to correct the problem. Although the standard
terms and conditions of the Company's customer contracts disclaim liability for
any such damages, a customer could still bring a lawsuit against it claiming
lost profits or other consequential damages as the result of a service
interruption or other
26
Web site or application problems that the customer may ascribe to it. A court
might not enforce any limitations on its liability, and the outcome of any
lawsuit would depend on the specific facts of the case and legal and policy
considerations even if the Company believes it would have meritorious defenses
to any such claims. In such cases, it could be liable for substantial damage
awards. Such damage awards might exceed its liability insurance by unknown but
significant amounts, which would seriously harm its business.
INTERLAND COULD FACE LIABILITY FOR INFORMATION DISTRIBUTED THROUGH ITS NETWORK.
The law relating to the liability of online services companies for information
carried on or distributed through their networks is currently unsettled. Online
services companies could be subject to claims under both United States and
foreign law for defamation, negligence, copyright or trademark infringement,
violation of securities laws or other theories based on the nature and content
of the materials distributed through their networks. Several private lawsuits
seeking to impose such liability upon other entities are currently pending
against other companies. In addition, organizations and individuals have sent
unsolicited commercial e-mails from servers hosted by service providers to
massive numbers of people, typically to advertise products or services. This
practice, known as "spamming," can lead to complaints against service providers
that enable such activities, particularly where recipients view the materials
received as offensive. The Company may, in the future, receive letters from
recipients of information transmitted by its customers objecting to such
transmission. Although the Company prohibits its customers by contract from
spamming, it cannot assure you that its customers will not engage in this
practice, which could subject it to claims for damages.
In addition, the Company may become subject to proposed legislation that would
impose liability for or prohibit the transmission over the Internet of some
types of information. Other countries may also enact legislation or take action
that could impose liability on the Company or cause it not to be able to operate
in those countries. The imposition upon the Company and other online services of
potential liability for information carried on or distributed through its
systems could require it to implement measures to reduce its exposure to this
liability, which may require it to expend substantial resources, or to
discontinue 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.
INTERLAND'S BUSINESS MAY BE IMPACTED BY GOVERNMENT REGULATION AND LEGAL
UNCERTAINTIES. 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 Company cannot
fully predict the nature of future legislation and the manner in which
government authorities may interpret and enforce. As a result, Interland and its
customers could be subject to potential liability under future legislation,
which in turn could have a material adverse effect on the Company's business.
For example, if legislation were adopted in the U.S. or internationally that
makes transacting business over the Internet less favorable or otherwise
curtails the growth of the Internet, the Company's 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 the Company's services or
increase the cost of doing business or in some other manner harm its 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. These laws
generally pre-date the advent of the Internet and related technologies and, as a
result, do not consider or address the unique issues of the Internet and related
technologies. Changes to laws intended to address these issues could create
uncertainty in the marketplace that could reduce demand for the Company's
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 on its business.
In addition, because its services are available over the Internet virtually
worldwide, and because the Company facilitates sales by its customers to end
users located in multiple states and foreign countries, such jurisdictions may
claim that the Company is required to qualify to do business as a foreign
corporation in those states or that it have a permanent establishment in the
foreign country.
INTERLAND'S INTERNATIONAL OPERATIONS ARE SUBJECT TO RISKS. The Company derived
approximately 17% of its revenues from international sales for the year ended
August 31, 2001. International business is subject to a number of special risks,
including:
- different regulatory requirements;
- different privacy, censorship and liability standards and
regulations;
- less protective intellectual property laws;
- different technology standards;
- unexpected changes in, or imposition of, regulatory requirements;
- tariffs and other barriers and restrictions;
27
- general geopolitical risks such as political and economic
instability;
- hostilities among countries and changes in diplomatic and trade
relationships; and
- other factors beyond the control of the Company.
SUBSTANTIAL FUTURE SALES OF SHARES BY SHAREHOLDERS COULD NEGATIVELY AFFECT
INTERLAND'S STOCK PRICE. If Interland's shareholders sell substantial amounts of
the Company's common stock in the public market, the market price of the
Company's common stock could decline. Under a shareholder agreement, Mr. Kocher
and some Interland-Georgia shareholders have agreed not to sell their shares of
Interland common stock, representing approximately 12% of the Company's
outstanding common stock for a period of nine months after the closing of the
Interland-Georgia merger, subject to limited exceptions. Additionally, the
Micron Technology Foundation, which owns approximately 43% of the Company's
outstanding common stock, agreed not to sell any shares of Interland's common
stock beneficially held by it for a period of nine months after the closing of
the Interland-Georgia merger, subject to limited exceptions. As a result, after
these lockup provisions expire, approximately 55% of the Company's outstanding
common stock will be eligible for sale in the public market subject to volume
limitations under Rule 144 of the Securities Act. Furthermore, these
shareholders will have the right to require Interland to register their shares
for sale pursuant to an existing registration rights agreement.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Substantially all of the Company's liquid investments and a majority of its debt
are at fixed interest rates, and therefore the fair value of these instruments
is affected by changes in market interest rates. As of August 31, 2001,
approximately 84% of the Company's liquid investments mature within three months
and 84% mature within one year. As of August 31, 2001, management believes the
reported amounts of liquid investments and debt to be reasonable approximations
of their fair values and has the ability and intent to hold these instruments to
maturity. As a result, management believes that the market risk arising from its
holdings of financial instruments is minimal. The Company uses the U.S. Dollar
as its functional currency. Aggregate transaction gains and losses included in
the determination of net income have not been material.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Financial Statements:
Consolidated Statements of Operations for the Fiscal Years Ended August 31, 2001,
August 31, 2000 and September 2, 1999 30
Consolidated Balance Sheets as of August 31, 2001 and August 31, 2000 31
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the
Fiscal Years Ended August 31, 2001, August 31, 2000 and September 2, 1999 32
Consolidated Statements of Cash Flows for the Fiscal Years Ended August 31, 2001,
August 31, 2000 and September 2, 1999 33
Notes to Consolidated Financial Statements 35
Quarterly Financial Information (Unaudited) 55
Report of Independent Accountants 56
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts for the Fiscal Years Ended
August 31, 2001, August 31, 2000 and September 2, 1999 62
29
INTERLAND, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
- ----------------- --------------- --------------- -----------------
Revenues $ 60,752 $ 32,862 $ 464
Cost of revenues 39,420 24,335 103
------------ ------------ ------------
Gross margin 21,332 8,527 361
Operating expenses:
Sales, marketing and technical support 37,181 26,157 143
General and administrative 38,299 23,640 3,894
Goodwill amortization 6,809 4,920 121
Other expense (income), net (1,637) 634 1,442
Merger, integration and restructuring costs 111,989 -- --
------------ ------------ ------------
Total operating expenses 192,641 55,351 5,600
------------ ------------ ------------
Operating loss (171,309) (46,824) (5,239)
Loss on investments, net (5,419) (592) --
Interest income, net 8,317 11,476 12,635
------------ ------------ ------------
Income (loss) from continuing operations before taxes (168,411) (35,940) 7,396
Income tax benefit (provision) 22,694 9,748 (2,209)
------------ ------------ ------------
Income (loss) from continuing operations (145,717) (26,192) 5,187
Discontinued operations, net of tax
Income (loss) from discontinued operations (2,239) 67,735 31,337
Loss on disposal of discontinued operations (209,238) -- --
------------ ------------ ------------
Total income (loss) from discontinued operations (211,477) 67,735 31,337
------------ ------------ ------------
Net income (loss) $ (357,194) $ 41,543 $ 36,524
============ ============ ============
Income (loss) per share, basic:
Continuing operations $ (1.46) $ (0.27) $ 0.05
Discontinued operations (2.12) 0.70 0.33
------------ ------------ ------------
$ (3.58) $ 0.43 $ 0.38
============ ============ ============
Income (loss) per share, diluted:
Continuing operations $ (1.46) $ (0.27) $ 0.05
Discontinued operations (2.12) 0.70 0.33
------------ ------------ ------------
$ (3.58) $ 0.43 $ 0.38
============ ============ ============
Number of shares used in per share calculation:
Basic 99,596 96,447 96,127
Diluted 99,596 96,447 96,633
The accompanying notes are an integral part of these consolidated financial
statements.
30
INTERLAND, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
AS OF AUGUST 31, 2001 AUGUST 31, 2000
--------------- ---------------
ASSETS
Cash and cash equivalents $ 142,675 $ 200,002
Short-term investments 31,468 126,032
Receivables, net 11,576 4,404
Income taxes recoverable 23,847 --
Deferred income taxes -- 13,152
Other current assets 4,223 2,847
------------ ------------
Total current assets 213,789 346,437
Restricted investments 27,944 --
Property plant and equipment, net 59,849 37,673
Goodwill, net 104,406 60,321
Intangibles, net 17,216 21,500
Investments held to maturity 6,000 --
Equity investment -- 6,408
Other assets 76 3,353
Net assets of discontinued operations -- 88,228
------------ ------------
Total assets $ 429,280 $ 563,920
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 5,751 $ 7,670
Accrued expenses 57,676 17,136
Current portion of long-term debt 14,875 1,971
Deferred revenue 15,859 3,198
------------ ------------
Total current liabilities 94,161 29,975
Long-term debt 24,231 --
Deferred revenue, long-term 1,563 --
Deferred income taxes -- 16,082
Other liabilities 12,895 11,283
------------ ------------
Total liabilities 132,850 57,340
------------ ------------
Commitments and contingencies
Common stock, $.01 par value, authorized 200 million and
150 million shares; issued and outstanding 137.8 million
and 96.7 million shares, respectively 1,378 967
Additional capital 282,738 134,485
Warrants 1,690 --
Deferred compensation (3,310) --
Retained earnings 13,934 371,128
------------ ------------
Total shareholders' equity 296,430 506,580
------------ ------------
Total liabilities and shareholders' equity $ 429,280 $ 563,920
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
31
INTERLAND, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(In thousands)
AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
------------------------ ------------------------ ------------------------
FISCAL YEAR ENDED SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
- ----------------- ---------- ---------- ---------- ---------- ---------- ----------
COMMON STOCK
Balance at beginning of year 96,663 $ 967 96,272 $ 963 95,863 $ 959
Stock issued to purchase Interland-Georgia 40,900 409 -- -- -- --
Stock sold 183 2 169 2 184 2
Stock options exercised 10 -- 222 2 225 2
---------- ---------- ---------- ---------- ---------- ----------
Balance at end of year 137,756 $ 1,378 96,663 $ 967 96,272 $ 963
========== ========== ========== ========== ========== ==========
ADDITIONAL CAPITAL
Balance at beginning of year $ 134,485 $ 127,951 $ 122,837
Stock and options issued to purchase
Interland-Georgia 120,885 -- --
Stock sold 607 1,518 1,412
Stock options 8,081 2,680 3,295
Sale of property and patents to MTI 18,680 2,285 --
Tax effect of stock options -- 51 407
---------- ---------- ----------
Balance at end of year $ 282,738 $ 134,485 $ 127,951
========== ========== ==========
WARRANTS
Balance at beginning of year $ -- $ -- $ --
Warrants issued to purchase Interland-Georgia 1,690 -- --
---------- ---------- ----------
Balance at end of year $ 1,690 $ -- $ --
========== ========== ==========
DEFERRED COMPENSATION
Balance at beginning of year $ -- $ -- $ --
Issuance of stock options (3,657) -- --
Amortization of deferred compensation 347 -- --
---------- ---------- ----------
Balance at end of year $ (3,310) $ -- $ --
========== ========== ==========
RETAINED EARNINGS
Balance at beginning of year $ 371,128 $ 329,585 $ 293,061
Net income (loss) (357,194) 41,543 36,524
---------- ---------- ----------
Balance at end of year $ 13,934 $ 371,128 $ 329,585
========== ========== ==========
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year $ -- $ -- $ 37
Other comprehensive income -- -- (37)
---------- ---------- ----------
Balance at end of year $ -- $ -- $ --
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
32
INTERLAND, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
- ----------------- --------------- --------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (357,194) $ 41,543 $ 36,524
Adjustments to reconcile net income (loss) to net cash (used in) provided
by operating activities from continuing operations:
Loss (income) from discontinued operations 211,477 (67,735) (31,337)
Non-cash merger, integration and restructuring costs 108,528 -- --
Depreciation and amortization 24,585 12,257 278
Write-off of purchased in-process research and development -- -- 1,000
Loss (gain) on investments, net 5,419 592 --
Provision for doubtful accounts 2,232 570 6
Other non-cash adjustments (995) (2,023) (411)
Changes in operating assets and liabilities net of the effect
of the acquisition transactions and discontinued operations:
Receivables (30,785) 2,121 1,550
Other current assets 2,261 (1,732) (788)
Deferred income taxes (9,426) 142 (29)
Accounts payable and accrued expenses (3,448) 13,292 (2,746)
Other (121) 1,354 100
------------ ------------ ------------
Cash provided by (used in) operating activities of continuing operations (47,467) 381 4,147
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (20,090) (36,904) (92)
Purchases of held-to-maturity investments (119,344) (245,949) (205,294)
Proceeds from maturities of investment securities 211,066 260,700 98,391
Deposits of restricted cash (25,086) -- --
Proceeds from sale of investments 5,989 -- --
Equity investment (5,000) (7,000) --
Acquisitions, net of cash acquired 14,413 (58,297) (21,348)
Other (480) (2,351) (1,250)
------------ ------------ ------------
Cash provided by (used in) investing activities of continuing operations 61,468 (89,801) (129,593)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of debt (6,456) (10,016) (4,475)
Proceeds from issuance of debt 20,000 -- --
Proceeds from issuance of common stock 915 4,202 4,836
Other -- 52 --
------------ ------------ ------------
Cash provided by (used in) financing activities of continuing operations 14,459 (5,762) 361
------------ ------------ ------------
Net cash provided by (used in) continuing operations 28,460 (95,182) (125,085)
Net cash provided by (used in) discontinued operations (85,787) 94,234 (2,502)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (57,327) (948) (127,587)
Cash and cash equivalents at beginning of year 200,002 200,950 328,537
------------ ------------ ------------
Cash and cash equivalents at end of year $ 142,675 $ 200,002 $ 200,950
============ ============ ============
SUPPLEMENTAL DISCLOSURES
Income taxes paid, net of amounts recovered $ 9,356 $ 652 $ 5,237
Interest paid, net of amounts capitalized 91 495 334
Equipment under capital lease 24,510 -- --
The accompanying notes are an integral part of these consolidated financial
statements.
33
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
GENERAL
BUSINESS -- Interland, Inc. (formerly Micron Electronics, Inc.) and its
subsidiaries (collectively the "Company") is a Web hosting company that offers a
broad range of business-to-business Internet products and services, including
managed dedicated hosting services, co-location and connectivity services,
electronic commerce services, applications hosting and other Web hosting
products.
Historically, the Company provided a variety of computer products and related
services through its PC Systems, SpecTek, and Web hosting business segments. The
Company has disposed of its PC Systems and SpecTek business segments, which are
reported as discontinued operations - See Footnote on Discontinued Operations.
The Company's Web hosting business remains as the Company's sole continuing
operations. Prior to its disposal, the PC Systems business consisted of
developing, marketing, manufacturing, selling and supporting a wide range of
desktop and notebook systems and network servers under the micronpc.com brand
name and selling, reselling, and supporting a variety of additional peripherals,
software and services. Prior to its disposal, the SpecTek business consisted of
processing and marketing various grades of memory products in either component
or module form for specific applications.
HISTORY OF OPERATING LOSSES -- The Web hosting business has incurred losses from
operations for each period from inception through August 31, 2001, and
anticipates incurring losses for at least the next two years. The Company does
not expect to generate positive cash flow from operations until the end of
fiscal 2002. However, the Company expects to have adequate cash reserves to fund
operations during this period. The Company's future success is dependent upon
its ability to achieve profitability prior to the depletion of cash reserves and
to raise funds thereafter, if needed. Management cannot assure that the Company
will be profitable in the future under its current Web and applications hosting
model or that adequate funding will be available to allow it to continue
operations subsequent to the one-year time period.
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The financial statements include the accounts of
Interland, Inc. and its wholly owned subsidiaries. Investments in companies in
which the Company has significant influence over operating and financial
policies are accounted for using the equity method. Other investments are
accounted for using the cost method. All significant intercompany balances and
transactions have been eliminated. During fiscal year 2001, the Company changed
its year-end from a 52 or 53-week period ending on the Thursday closest to
August 31, to a fiscal year ending on the calendar month-end of August 31. The
years ended August 31, 2000 and September 2, 1999 contained 52 weeks. All
references to periods including annual and quarterly are on a fiscal basis. On
August 30, 2001, Micron Technology Inc. ("MTI") sold all of its shares of
Interland common stock, representing approximately 43% of the Company's
outstanding common stock, to Micron Semiconductor Products, Inc. ("MSP"), a
wholly subsidiary of MTI. Also on August 30, 2001, MSP donated all of the
Securities to Micron Technology Foundation, Inc. (the "Foundation"). As of
August 31, 2001, the Foundation owned approximately 43% of the Company's
outstanding common stock.
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 amounts reported in the financial statements.
The amounts that the Company will ultimately incur or recover could differ
materially from its current estimates. The underlying estimates and facts
supporting these estimates could change in 2002 and thereafter.
REVENUE RECOGNITION -- Revenues from continuing operations are primarily
generated from shared and dedicated hosting, managed services, e-commerce
services, applications hosting and domain name registrations. Revenues are
recognized as the services are provided. Hosting contracts generally are for
service periods ranging from one to 24 months and typically require up-front
fees. These fees, including set-up fees for hosting services, are deferred and
recognized ratably over the customers' expected service period. Deferred
revenues represent the liability for advance billings to customers for services
not yet provided.
BASIC AND DILUTED INCOME (LOSS) PER SHARE -- Basic earnings per share are
computed using the weighted average number of common shares outstanding. Diluted
earnings per share are computed using the weighted average number of common
shares outstanding and potential common shares outstanding when their effect is
dilutive. Potential common shares result from the assumed exercise of
outstanding stock options and warrants. Basic and diluted income (loss) per
share for all periods presented have been restated to reflect results from both
continuing and discontinued operations.
35
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In addition to net income (loss) per share, the Company has also reported per
share amounts on the separate income statement components required by Accounting
Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions", as amended. Because
the Company has reported a loss from continuing operations during fiscal years
2001 and 2000, the effect of dilutive securities is excluded from the
calculation of per share amounts for those years.
COMPREHENSIVE INCOME -- The Company reports comprehensive income in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." This statement requires the disclosure of accumulated
other comprehensive income or loss (excluding net income or loss) as a separate
component of shareholders' equity.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK -- Cash equivalents
include highly liquid short-term investments with original maturities of three
months or less, readily convertible to known amounts of cash. The amounts
reported as cash equivalents, short-term investments, receivables, other assets,
accounts payable and accrued expenses and long-term debt are considered by
management to be reasonable approximations of their fair values, based on
information available as of August 31, 2001. The use of different assumptions
could have a material effect on the estimated fair value amounts. The reported
fair values do not take into consideration potential taxes or other expenses
that would be incurred in an actual settlement.
Financial instruments that potentially subject the Company to concentration of
credit risk consist principally of cash and cash equivalents, short and
long-term investments and trade and other receivables. The Company invests its
cash in credit instruments of highly rated financial institutions and performs
periodic evaluations of the credit standing of these financial institutions. The
Company's policies limit the concentration of credit exposure by restricting
investments with any single obligor, instrument or geographic area.
RESTRICTED INVESTMENTS -- Restricted investments consist primarily of commercial
paper and money market securities with maturities of less than one year, and are
carried at cost which approximates fair market value. These investments are
restricted to use by certain vendors and creditors for rent, credit card
processing, lease payments and other items. These investments are classified
based upon the term of the restriction, not necessarily the underlying security.
GOODWILL AND OTHER INTANGIBLES -- The Company accounted for goodwill and other
intangible assets acquired as part of the Interland-Georgia merger under the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets", and is
planning on adopting the provisions of SFAS No. 142 for all other intangibles in
the first fiscal quarter of 2002. Goodwill acquired as part of previous
acquisitions and other intangibles are amortized on a straight-line basis over
their expected useful lives, not exceeding 10 years. In connection with the
Company's restructuring program (see Restructuring, Merger and Other Charges
footnote) the Company wrote off goodwill and other intangible assets acquired as
part of previous acquisitions.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment, including
software, are stated at cost less accumulated depreciation and amortization.
Depreciation is computed using the straight-line method over the estimated
useful lives of 5 to 10 years for leasehold improvements and 2 to 5 years for
equipment and software. The Company leases certain equipment under capital
leases. Equipment under capital leases is depreciated using the straight-line
method over the lease term.
ADVERTISING -- Advertising costs are charged to operations as incurred.
INCOME TAXES -- The Company accounts for income taxes under the provisions of
SFAS No. 109, "Accounting for Income Taxes". SFAS 109 requires recognition of
deferred tax liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax returns. Under
this method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
difference is expected to reverse.
STOCK-BASED COMPENSATION -- Employee stock awards under the Company's
compensation plans are accounted for in accordance with APB No. 25, "Accounting
for Stock Issued to Employees" and related interpretations. The Company provides
the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation", and related interpretations. Stock-based awards to non-employees
are accounted for under the provisions of SFAS No. 123.
RECENTLY ISSUED ACCOUNTING STANDARDS -- In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires that all derivatives
be recorded as either
36
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
assets or liabilities in the balance sheet and be marked-to-market on an ongoing
basis. SFAS No. 133 applies to all derivatives including stand-alone
instruments, such as forward currency exchange contracts and interest rate
swaps, or embedded derivatives, such as call options contained in convertible
debt instruments. The Company implemented SFAS No. 133 in the first quarter of
2001 and it did not have a material impact on our results of operations,
financial condition or cash flows.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements." The SAB
summarizes certain staff views in applying generally accepted accounting
principles to revenue recognition in financial statements. The provisions of SAB
No. 101 became effective in fiscal 2001 and did not have a material impact on
our results of operations, financial condition or cash flows.
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations." SFAS 141 requires that all business combinations be
accounted for using the purchase method of accounting; therefore, the
pooling-of-interests method of accounting is prohibited. SFAS 141 also requires
that an intangible asset acquired in a business combination be recognized apart
from goodwill if the intangible asset arises from contractual or other legal
rights or the acquired intangible asset is capable of being separated from the
acquired enterprise, as defined in SFAS 141. SFAS 141 is effective for all
business combinations completed after June 30, 2001 and accounted for as a
purchase and for all business combinations "initiated" after June 30, 2001, as
defined.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses the financial accounting and reporting for
goodwill and other intangible assets subsequent to their acquisition. SFAS No.
142 requires that intangible assets be amortized over their useful lives unless
that life is determined to be indefinite. Intangible assets shall be evaluated
annually to determine whether events and circumstances continue to support an
indefinite useful life. An intangible asset that is not subject to amortization
shall be tested for impairment annually or more frequently if events or changes
in circumstances indicate that the asset might be impaired. Adoption of SFAS No.
142 is required during the Company's fiscal 2003, and early adoption is
permitted. The goodwill and intangible assets acquired as part of the
Interland-Georgia purchase business combination were required to be accounted
for in accordance with the "amortization and non-amortization" provisions of
SFAS 142. The Company will adopt SFAS No. 142 effective September 1, 2001, which
will eliminate goodwill amortization starting in fiscal 2002.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." The statement provides accounting and reporting standards for
recognizing obligations related to asset retirement costs associated with the
retirement of tangible long-lived assets. Under this statement, legal
obligations associated with the retirement of long-lived assets are to be
recognized at their fair value in the period in which they are incurred if a
reasonable estimate of fair value can be made. The fair value of the asset
retirement costs is capitalized as part of the carrying amount of the long-lived
asset and subsequently allocated to expense using a systematic and rational
method over the assets' useful life. Any subsequent changes to the fair value of
the liability due to passage of time or changes in the amount or timing of
estimated cash flows is recognized as an accretion expense. The Company will be
required to adopt this statement no later than September 1, 2002. The Company is
currently analyzing the impact the adoption of this pronouncement may have on
its consolidated financial position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which is effective for fiscal years beginning
after Dec 15, 2001. This statement supercedes FASB Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." However, it retains the fundamental provisions of SFAS No. 121
for the recognition and measurement of the impairment of long-lived assets to be
held and used and the measurement of long-lived assets to be disposed of by
sale. Impairment of Goodwill is not included in the scope of SFAS No. 144 and
will be treated in accordance with the accounting standards established in SFAS
No. 142 Under SFAS No. 144, long-lived assets are to be measured at the lower of
carrying amount or fair value less cost to sell, whether reported in continuing
or discontinued operations. The statement applies to all long-lived assets,
including discontinued operations, and replaces the provisions of APB Opinion
No. 30. The Company will be required to adopt this statement no later than
September 1, 2002. The Company is currently analyzing the impact the adoption of
this pronouncement may have on its consolidated financial position, results of
operations, or cash flows.
RECLASSIFICATIONS -- Certain reclassifications have been made, none of which
affected net income, to present the statements on a consistent basis.
37
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In addition to the significant accounting policies outlined above, the Company's
significant accounting policies relating specifically to discontinued operations
are listed below.
REVENUE RECOGNITION -- Revenues from product sales to customers is generally
recognized upon shipment. A provision for estimated sales returns is recorded in
the period in which the sales are recognized. Revenues from service and support
contracts for which we are primarily obligated is recognized over the term of
the contract. Revenues from sales of third party service contracts for which we
are not obligated is recognized at the time of sale.
INVENTORIES -- Inventory balances are stated at the lower of cost or market,
with cost being determined on an average cost basis.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment, including
software, are stated at cost. Depreciation is computed using the straight-line
method over the estimated useful lives of 5 to 30 years for buildings and 2 to
10 years for equipment and software. Effective September 4, 1998, the Company
revised its estimated useful lives of certain information technology assets,
including enterprise software, enterprise hardware and telecommunications
systems. Originally, the estimated lives of these assets were two and three
years. The revision extended the lives to five years, on a prospective basis,
which the Company believes is a more accurate reflection of the assets' actual
useful lives. This revision reduced depreciation and amortization expense in
discontinued operations by $4 million ($2.5 million net of tax) in 1999.
The Company adopted Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" in 1999. SOP
98-1 requires companies to capitalize certain costs of computer software
developed or obtained for internal use, provided that those costs are not
research and development. As a result of the adoption of this statement in 1999,
the Company capitalized $3 million of internal software development costs.
PRODUCT AND PROCESS TECHNOLOGY -- Costs related to the conceptual formulation
and design of products and processes are expensed as research and development.
Costs incurred to establish patents and acquire product and process technology
are capitalized. Capitalized costs are amortized using the straight-line method
over the shorter of the estimated useful life of the technology, the patent term
or the agreement, ranging up to 10 years.
ROYALTIES -- The Company has royalty-bearing license agreements allowing the
Company to sell certain hardware and software products and to use certain
patented technology. Royalty costs are accrued and included in cost of goods
sold when the sale is recognized.
WARRANTY AND SERVICES -- The Company provides for estimated costs to be incurred
under its warranty and other service programs at the time sales are recorded.
38
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
DISCONTINUED OPERATIONS
The Company has discontinued the operations of its PC Systems and SpecTek
business segments. These segments are accounted for as discontinued operations
in accordance with APB No. 30. Amounts in the financial statements and related
notes for all periods shown have been reclassified to reflect the discontinued
operations.
Operating results for the discontinued operations are reported, net of tax,
under "Income (loss) from discontinued operations" on the accompanying
consolidated Statements of Operations. In addition, the loss for the disposal of
the discontinued operations has also been recorded, net of tax, under "Loss on
disposal of discontinued operations" on the accompanying consolidated Statements
of Operations.
For financial reporting purposes, the assets and liabilities of the discontinued
operations are combined and classified in the accompanying consolidated Balance
Sheet as of August 31, 2000, under "Net assets of discontinued operations." Cash
flows from the discontinued operations are also stated separately on the
accompanying consolidated Statements of Cash Flows, under "Net cash provided by
(used in) discontinued operations."
PC SYSTEMS
On May 31, 2001, the Company sold its PC Systems business to GTG PC Holdings,
LLC ("GTG PC"), an affiliate of the Gores Technology Group. Under the terms of
the agreement, GTG PC received assets, which included $76.5 million in cash, and
assumed specified liabilities of the PC Systems business. The loss on disposal
was $212.2 million. Included in the loss on disposal are employee termination
costs of approximately $15.4 million, of which $.3 million is included in the
accompanying consolidated Balance Sheets under "Accounts payable and accrued
liabilities" at August 31, 2001. The Company expects that all remaining
severance liabilities will be settled by the first fiscal quarter of 2002. The
Company retained all liabilities of the PC Systems business not assumed by GTG
PC, including, for example, liabilities for taxes arising prior to the closing
of the transaction, employee termination and related expenses, and any
contingent liabilities arising prior to the closing date. The Company has
recorded an estimate of all retained liabilities of the discontinued PC Systems
business at August 31, 2001, but such amount is subject to final determination
with the purchaser, which could result in a revision in the estimated loss on
disposal of discontinued operations. In addition, the Company has agreed for a
period of three years not to compete with the PC Systems business, and for two
years, not to solicit or hire prior employees of the PC Systems business. For a
transition period after the closing of the purchase, GTG PC agreed to provide
some information technology, financial, telecommunications and human resources
services to the Company at its cost plus 10% during the first four months after
the closing, and at its cost plus 25% for the following two months.
For a period of two years following the closing of the purchase, or for the
applicable statute of limitations with respect to taxes and government
contracts, the Company is obligated to indemnify the purchaser and affiliated
entities for any breaches of the representations and warranties contained in the
agreement. In addition, the Company is obligated for an indefinite period of
time to indemnify the purchaser and affiliated entities for any breaches in
covenants. The agreement provides that the maximum aggregate liability of the
Company for indemnification under the agreement is $10.0 million.
The agreement also provides that the Company would potentially be entitled to
receive a percentage of any proceeds in the event the PC Systems business is
sold or has an initial public offering of its securities within three years of
the closing of the purchase. The Company would receive a payment only after the
repayment of transaction costs, repayment of debt and capital contributions,
payment of a specified amount of cash to GTG PC and obligations under employee
incentive programs.
Summarized below are the operating results for the PC Systems business, which
are included together with SpecTek's operating results in the accompanying
consolidated Statements of Operations, under "Income (loss) from discontinued
operations."
39
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(IN THOUSANDS) FOR THE YEAR ENDED
----------------------------------------------
AUGUST 31, AUGUST 31, SEPTEMBER 2,
2001 2000 1999
------------ ------------ ------------
Net sales $ 602,818 $ 1,031,852 $ 1,237,748
------------ ------------ ------------
Loss before income taxes (65,075) (104,797) (28,419)
Income tax benefit -- 29,508 10,499
------------ ------------ ------------
Loss from discontinued operations, net of tax (65,075) (75,289) (17,920)
Loss on disposal of discontinued operations, net of tax (212,164) -- --
------------ ------------ ------------
Loss from discontinued operations, net of tax $ (277,239) $ (75,289) $ (17,920)
============ ============ ============
Included in other expense of discontinued PC Systems operations in 1999 was a $4
million charge associated with the closure and consolidation of its Micron
Electronics Japan operation. The charge includes those costs associated with
employee payroll and severance of $1 million for approximately 45 employees,
fixed asset write-downs of $1 million and other closure related costs of $2
million. All of the closure liabilities had been settled by September 2, 1999.
Summarized below are the assets and liabilities of the PC Systems business,
which are included together with the assets and liabilities of SpecTek, in the
accompanying consolidated Balance Sheets under "Net assets of discontinued
operations."
(IN THOUSANDS) AUGUST 31, 2000
- ----- ---------------
ASSETS
Receivables 175,496
Inventories 17,138
Other current assets 7,524
Property, plant and equipment, net 138,134
Other assets 6,437
------------
Total assets 344,729
------------
LIABILITIES
Accounts payable and accrued expenses 214,071
Other liabilities 18,999
------------
Total liabilities 233,070
------------
Net assets of discontinued operations $ 111,659
============
SPECTEK
The Company has discontinued the operations of its SpecTek business segment,
which is accounted for as discontinued operations in accordance with APB No. 30.
Pursuant to the Amended and Restated Component Recovery Agreement (as amended,
the "Component Recovery Agreement"), dated effective September 2, 1999, MTI
exercised its rights to purchase the assets of the SpecTek business. On March
22, 2001, the Company entered into a Purchase Agreement (the "Purchase
Agreement") to sell all assets primarily used by SpecTek and certain land,
buildings and intellectual property to MTI. Pursuant to the terms of the
Purchase Agreement, the Company transferred the land, buildings and intellectual
property to MTI on March 22, 2001, and received $18 million of cash in excess of
the historical cost from MTI. This amount has been recorded, net of tax, as an
increase in additional paid in capital. The Company has leased back a portion of
the land and buildings from MTI and has also been granted a license to use
certain of the intellectual property. In addition, MTI agreed to pay the Company
for the March 1, 2001 net book value of the assets used by SpecTek, less any
outstanding intercompany payables. The proceeds from this transaction, net of
intercompany payables, were approximately $39.6 million, not including certain
land, buildings and intellectual property. Pursuant to the Purchase Agreement,
the assets used by SpecTek were transferred to MTI on April 5, 2001.
Summarized below are the operating results for SpecTek, which are included
together with the PC Systems business' operating results, in the accompanying
consolidated Statements of Operations under "Income (loss) from discontinued
operations."
40
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
(IN THOUSANDS) FOR THE YEAR ENDED
AUGUST 31, AUGUST 31, SEPTEMBER 2,
2001 2000 1999
------------ ------------ ------------
Net sales $ 248,309 $ 491,502 $ 199,617
------------ ------------ ------------
Income before income taxes 62,836 200,084 80,141
Income tax provision -- (57,060) (30,884)
------------ ------------ ------------
Income from discontinued operations, net of tax 62,836 143,024 49,257
Gain on disposal of discontinued operations, net of tax 2,926 -- --
------------ ------------ ------------
Income from discontinued operations, net of tax $ 65,762 $ 143,024 $ 49,257
============ ============ ============
Summarized below are the assets and liabilities of SpecTek, which are included
with the assets and liabilities of the PC Systems business, in the accompanying
consolidated Balance Sheets under "Net assets of discontinued operations."
(IN THOUSANDS) AUGUST 31, 2000
- ----- ---------------
ASSETS
Receivables $ 53,968
Inventories 13,620
Property, plant and equipment, net 35,619
Other assets 411
------------
Total assets $ 103,618
============
LIABILITIES
Accounts payable and accrued expenses $ 126,626
Other liabilities 423
------------
Total liabilities 127,049
------------
Net liabilities of discontinued operations $ (23,431)
============
OTHER EXPENSE (INCOME), NET
In June 2001, the Company sold substantially all of its consumer dial-up
accounts for $3.8 million. The sale resulted in a gain of $2.5 million in fiscal
2001.
RESTRUCTURING, MERGER AND OTHER CHARGES
During the fourth quarter of 2001, the Company approved and implemented a
restructuring program in connection with its acquisition of Interland-Georgia.
The restructuring plan, which is expected to be completed by August 31, 2002,
provides for the consolidation of the Company's operations and elimination of
duplicative facilities. In accordance with EITF 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity," the
restructuring costs, excluding asset impairments, were recognized as liabilities
at the time management committed the Company to the plan. Management determined
that these costs provided no future economic benefit, they were incremental to
other costs incurred by the Company prior to the restructuring, or were
contractual obligations that existed prior to the date the plan was approved and
were either continued after the exit plan was completed with no economic benefit
to the Company or were non-cancelable without a penalty; and they were incurred
as a direct result of the plan to exit the identified activities. The asset
impairments were accounted for in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed Of,"
and are included in merger, integration and restructuring costs in the
Consolidated Statements of Operations.
41
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
The restructuring charges and related accruals recognized under the plan
affected the Company's consolidated financial position as follows:
Property, Employee
Lease plant and Other exit termination Goodwill and
(in thousands) abandonments equipment costs benefits intangibles Total
------------ ------------ ------------ ------------ ------------ --------
Balance at August 31, 2000 -- -- -- -- -- --
Plan charges $ 9,404 $ 26,915 $ 3,528 $ 727 $ 69,704 $110,278
Cash paid (683) -- -- (498) -- (1,181)
Non-cash write-downs -- (26,915) -- -- (69,704) (96,619)
------------ ------------ ------------ ------------ ------------ --------
Balance at August 31, 2001 $ 8,721 $ -- $ 3,528 $ 229 $ -- $ 12,478
============ ============ ============ ============ ============ ========
The lease abandonment charge represents future lease payments for data centers
and office facilities being exited. Asset impairments of $26.9 million represent
the write down of leasehold improvements, equipment, and software that will no
longer be used due to the facility terminations and the integration and merging
of the Company's hosting facilities. The other exit costs represent termination
penalties for bandwidth and data connectivity contracts. Approximately $727,000
of employee termination benefits were recorded for a reduction of the workforce
of approximately 88 employees. The fair value of the impaired property, plant
and equipment of the duplicative facilities, including the related goodwill and
intangibles of $69.7 million, was based on estimated salvage values because the
estimated cash flows were negative. Total accrued liabilities of $12.5 million
are included in the balance sheet under "Accrued expenses."
The Company also recorded a charge for merger costs of $1.7 million for
financial advisory services, legal, accounting and other direct expenses related
to the Interland-Georgia acquisition, which has been recorded in "Merger,
integration and restructuring costs".
GAIN ON SALE OF MCMS COMMON STOCK
On September 29, 2000, the Company sold its remaining 10% interest in MCMS for a
net gain of $4.5 million, which is included in the consolidated statement of
operations as "Loss on investments, net." MCMS was formerly the Company's
wholly-owned subsidiary of which 90% was sold in February 1998.
ACQUISITIONS
The Company has acquired a number of companies to expand its Web hosting and
Internet access capabilities. Over the past three years, the Company has
acquired four Web and applications hosting companies and one Internet access
company.
On August 6, 2001, the Company acquired 100 percent of the outstanding common
shares of Interland-Georgia by issuing 0.861 shares of the Company's common
stock in exchange for each share of Interland-Georgia common stock or 40,899,803
shares. In addition, the Company issued options and warrants to purchase shares
of the Company's common stock in exchange for each issued and outstanding
Interland-Georgia option and warrant using the ratio of 0.861 shares of the
Company for each share of Interland-Georgia. The results of Interland-Georgia's
operations have been included in the consolidated financial statements since the
date of acquisition. Interland-Georgia is an Atlanta, Georgia, based Web and
applications hosting company serving small- and medium-sized businesses. The
primary goal of the acquisition was to create a new company with much greater
scale. The Company also expects to reduce costs through economies of scale and
restructuring its business (see "Restructuring, Merger, and Other Charges"
footnote). The aggregate purchase price was $127.2 million, including equity
issued, including common stock, stock options and warrants, with a value of
$122.9 million and cash of $4.3 million. The value of the 40,899,803 common
shares issued was determined based on the average market price of the Company's
common shares over the 2-day period before and after the terms of the
acquisition were agreed to and announced on March 23, 2001.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition:
Fair Value
------------
(in thousands)
Current assets $ 26,781
Property and equipment 30,462
Intangible assets 17,500
Other assets 507
Goodwill 104,406
Current liabilities (44,547)
Long-term liabilities (7,943)
------------
Net assets acquired $ 127,166
============
42
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
Of the total $17.5 million of acquired intangible assets, $12 million was
assigned to purchased software (5 year useful life), $4.9 million was assigned
to registered trademarks (7 year useful life), and $600,000 was assigned to
reseller and strategic alliances (3 year useful life). The $104.4 million of
goodwill is not expected to be deductible for tax purposes.
On December 14, 1999 the Company acquired LightRealm, Inc. ("LightRealm"), a
Kirkland, Washington-based Web and applications hosting and Internet access
company serving small- and medium-sized businesses. The Company paid
approximately $48 million in cash, including expenses in exchange for 100% of
LightRealm's outstanding stock. On March 16, 2000, the Company acquired
Worldwide Internet Publishing Corporation ("WIPC"), a Boca-Raton, Florida-based
Web hosting company that also served small- and medium-sized businesses. The
Company paid approximately $13 million in cash, including expenses in exchange
for 100% of the outstanding stock of WIPC. The Company accounted for both
transactions as purchases and allocated the purchase price to the net assets
acquired, including intangible assets, based on the their fair values as
determined by an independent appraiser. The Company's results of operations for
2000 include the results of operations of LightRealm and WIPC, subsequent to
their respective acquisition dates.
On March 24, 2000, the Company acquired certain assets and assumed certain
liabilities, which consisted primarily of warranty obligations, of Inacom, for
approximately $5 million in cash. Included in the assets were accounts
receivable and a number of contracts with various federal agencies, including
the Department of Veterans Affairs Procurement of Hardware and Software ("PCHS")
contract. The PCHS contract is currently in its third year of a five-year term
and is open to orders from all government agencies. The operations and the
assets and liabilities of the Inacom acquisition are included with the
discontinued operations of the PC Systems business.
A summary of the net assets of LightRealm, WIPC and Inacom at their respective
acquisition dates, including deferred tax effects is as follows:
(in thousands) Fair Value
------------
Property and equipment $ 2,367
Goodwill and other intangibles 67,750
Net current assets 6,487
Net non-current liabilities (3,427)
Net deferred tax liability (7,187)
------------
$ 65,990
============
On August 2, 1999, the Company acquired NetLimited, Inc. (d.b.a. "HostPro"), a
Seattle-based Web and applications hosting provider serving small- and
medium-sized businesses. The Company paid approximately $22 million in cash,
including expenses in exchange for 100% of the outstanding stock of HostPro. The
purchase agreement contained a clause permitting an upward or downward
adjustment to the purchase price of up to 10% depending on the number of
subscriber accounts existing on February 24, 2000. The number of subscriber
accounts met the requirements as specified in the agreement, and accordingly the
Company paid an additional $2 million in March 2000 to the original
shareholders, which was capitalized as part of the purchase price.
An independent appraiser through an analysis using a risk adjusted cash flow
model determined the fair value of HostPro's technology. The analysis estimated
future cash flows derived from the technology or products incorporating the
technology. These cash flows were discounted taking into account the life
expectancy of the technology and risks related to existing and future markets.
Technology was segregated into that which was determined to be completed (those
currently technologically feasible but that may require adjustments or
relatively minor enhancements) and in-process (technologies that require
additional research and development efforts to reach technological feasibility).
Estimated future cash flows associated with in-process research and development
were discounted considering risks and uncertainties related to the viability,
stage of completion, work required to establish feasibility and to the
completion of products the Company would ultimately market. The analysis
resulted in the allocation of $1 million of purchase price to in-process
research and development. In management's opinion, the acquired in-process
research and development had not yet reached a stage where feasibility, delivery
or product features were certain and had no alternative future use. As a result,
acquired in-process research and development was charged to expense during the
fourth quarter of 1999.
43
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
On the last day of the 1999 fiscal year, the Company acquired the property and
equipment of Micron Internet Services ("MIS"), formerly a division of MTI. MIS
is a provider of dedicated, nationwide dial-up and broadband Internet access,
virtual private network solutions, and e-commerce services. The Company paid
approximately $2 million in cash, which was equal to the book value of the net
assets of MIS. The Company accounted for this transaction at historical cost.
A summary of the net assets acquired, including the $2 million additional
purchase price paid in March 2000 and deferred tax effects is as follows:
(in thousands) FAIR VALUE
- -------------- ------------
In-process research and development $ 1,000
Property and equipment 2,812
Goodwill and other intangibles 23,849
Net current assets 661
Net deferred tax liability (2,127)
------------
$ 26,195
============
The following unaudited pro forma information reflects the results of the
Company's continuing operations for the years ended August 31, 2001, August 31,
2000 and September 2, 1999 as if the acquisition of Interland-Georgia had
occurred at the beginning of 2000 and the acquisitions of LightRealm, WIPC,
HostPro and MIS had occurred at the beginning of 1999, after giving effect to
certain adjustments, including amortization of intangibles, depreciation, and
related income tax effects. Goodwill related to the Interland-Georgia
acquisition is not amortized in these proforma results. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of what operating results would have been had the acquisitions
actually taken place at the beginning of the periods presented or operating
results which may occur in the future.
UNAUDITED UNAUDITED UNAUDITED
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
- ----------------- --------------- --------------- -----------------
(in thousands, except per share data)
Revenues from continuing operations $103,239 $58,131 $22,357
Loss from continuing operations (227,981) (77,134) (7,675)
Net income (loss) (439,458) (9,399) 26,378
Earnings (loss) per share, basic:
Continuing operations $(2.29) $(.80) $(0.08)
Net income (loss) $(2.12) $.70 $0.27
Earnings (loss) per share, diluted:
Continuing operations $(2.29) $(.80) $(0.08)
Net income (loss) $(2.12) $.70 $0.27
44
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
INVESTMENT SECURITIES
(IN THOUSANDS) AUGUST 31, 2001 AUGUST 31, 2000
- -------------- --------------- ---------------
Held to maturity investment securities, at amortized cost:
Commercial paper $ 88,553 $ 128,836
State and local government 17,900 62,077
U.S. Government agency 9,968 96,018
Certificates of deposit 2,839 --
--------- ---------
119,260 286,931
Less: cash equivalents (53,848) (160,899)
Less: restricted cash (27,944) --
--------- ---------
Investments $ 37,468 $ 126,032
========= =========
RECEIVABLES
(IN THOUSANDS) AUGUST 31, 2001 AUGUST 31, 2000
- -------------- --------------- ---------------
Trade receivables $ 7,367 $ 3,639
Notes receivable - related parties 555 --
Other 5,464 1,070
Allowance for doubtful accounts (1,810) (305)
--------- ---------
$ 11,576 $ 4,404
========= =========
Interland-Georgia loaned two of its shareholder officers, one of whom is no
longer affiliated with the Company, $225,000 each. The notes are full recourse
and are also secured by common stock of the Company owned by the individuals,
bear interest at 10% per annum and are due on demand. The notes have accrued
interest of $105,000 as of August 31, 2001.
PROPERTY, PLANT AND EQUIPMENT
(IN THOUSANDS) AUGUST 31, 2001 AUGUST 31, 2000
- -------------- --------------- ---------------
Computer, office equipment and software $ 49,985 $ 16,429
Leasehold improvements 13,551 10,550
Assets in progress 1,935 14,990
Less: accumulated depreciation and amortization (5,622) (4,296)
--------- ---------
$ 59,849 $ 37,673
========= =========
Depreciation and amortization of property, plant and equipment was $11.6
million, $4.2 million and $0.0 million for 2001, 2000 and 1999, respectively.
ACQUIRED INTANGIBLES AND GOODWILL
(IN THOUSANDS) AUGUST 31, 2001 AUGUST 31, 2000
- -------------- --------------- ---------------
Goodwill $ 104,406 $ 65,375
Acquired intangibles 17,500 24,700
--------- ---------
121,906 90,075
Less accumulated amortization (284) (8,254)
--------- ---------
$ 121,622 $ 81,821
========= =========
45
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
Amortization of goodwill and acquired intangible assets relating to continuing
operations was $13.0 million, $8.0 million and $0.2 million for 2001, 2000 and
1999, respectively. Amortization of goodwill and acquired intangible assets
relating to discontinued operations was $0.8 million and $0.5 million for 2001
and 2000, respectively. Goodwill associated with the acquisition of
Interland-Georgia is not being amortized in accordance with FAS 142. Goodwill,
acquired intangibles and the associated accumulated amortization related to
prior acquisitions were written off in connection with the Company's
restructuring plan (see "Restructuring, Merger and Other Charges" footnote).
EQUITY INVESTMENT
On April 7, 2000, the Company invested $7 million in Bird on a Wire, Inc.
("BOAW"), a dedicated Web hosting start-up company in exchange for a
non-interest bearing convertible debenture. The Company has accounted for this
investment using the equity method of accounting. Correspondingly, losses
incurred by BOAW have been treated as a reduction in its equity investment. On
May 28, 2001, BOAW entered into a definitive agreement to sell its assets. After
settling BOAW liabilities, the Company received net proceeds of $1.5 million and
has recorded a loss on disposal of approximately $1.7 million, which is included
in the consolidated Statements of Operations under "Loss on investments, net".
During the year ended August 31, 2001, the Company also wrote off a $5.0 million
investment, which is also included in the consolidated statement of operations
under "Loss on investments, net".
ACCRUED EXPENSES
(IN THOUSANDS) AUGUST 31, 2001 AUGUST 31, 2000
- -------------- --------------- ---------------
Accrued payroll and related liabilities $ 7,694 $ 3,442
Taxes payable 559 7,268
Accrued restructuring liabilities 12,478 --
Acquisition related liabilities 8,837 --
Accrued lease payments 3,398 --
Accrued legal liabilities 3,153 --
Accrued professional fees 2,070 --
Other 19,487 6,426
--------- ---------
$ 57,676 $ 17,136
========= =========
DEBT
(IN THOUSANDS) AUGUST 31, 2001 AUGUST 31, 2000
- -------------- --------------- ---------------
Capitalized lease obligations payable in monthly
installments through February 2006, weighted average
interest rate of 16.05% and 10.29%, respectively $ 33,736 $ 117
Notes payable 5,370 1,854
--------- ---------
39,106 1,971
Less current portion (14,875) (1,971)
--------- ---------
$ 24,231 $ --
========= =========
Equipment under capital leases net of accumulated amortization was $32.9 million
as of August 31, 2001.
The Company has an outstanding note payable under a secured credit agreement
expiring July 31, 2003. As of August 31, 2001, the Company borrowed the full
amount under the agreement of $5.4 million. Under the agreement, the Company is
required to maintain cash and cash equivalents of $6.7 million in a restricted
investment account. The note requires monthly interest only payments with the
principal and any accrued interest payable on July 31, 2003. The note bears
interest at a rate equal to prime less 100 basis points . At August 31, 2001,
the applicable interest rate was equal to 5.5%. At August 31, 2000, the Company
had an unsecured credit agreement with a group of financial institutions
providing for borrowings totaling $100 million. On March 28, 2001, the Company
terminated this credit agreement.
46
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
Interest income is net of approximately $0.06 million, $0.2 million and $0.4
million of interest expenses in 2001, 2000 and 1999, respectively. Construction
period interest of approximately $0, $0.2 million and $1 million, was
capitalized into the cost of discontinued operations assets in 2001, 2000 and
1999, respectively.
WARRANTS
In connection with the purchase of Interland-Georgia on August 6, 2001, the
Company issued warrants to purchase shares of the Company's common stock in
exchange for each issued and outstanding Interland-Georgia warrant using the
exchange ratio of 0.861 shares of the Company for each share of
Interland-Georgia. All of the warrants are fully vested except for warrants for
the purchase of 231,540 shares of common stock. Following is a summary of the
outstanding warrants issued by the Company:
WARRANT HOLDER EXPIRATION DATE NUMBER OF SHARES EXERCISE PRICE
-------------- --------------- ---------------- --------------
Verizon October 11, 2003 2,696,652 $ 20.91
Microsoft Corporation December 24, 2004 470,519 6.24
Microsoft Corporation July 26, 2005 403,594 13.94
Road Runner January 28, 2002 324,528 9.67
VeriSign July 26, 2005 322,875 13.94
VeriSign March 15, 2005 320,648 6.24
Compaq June 30, 2003 78,110 12.90
Compaq December 31, 2003 69,167 13.94
Hewlett Packard June 30, 2003 38,745 12.90
Transamerica October 3, 2005 21,525 13.94
Transamerica May 1, 2005 18,598 9.67
--------
Total 4,764,961
========
STOCK PURCHASE AND INCENTIVE PLANS
The Company's 1995 Employee Stock Purchase Plan (the "Plan") allows eligible
employees to purchase shares of common stock through payroll deductions. The
shares can be purchased for 85% of the lower of the beginning or ending fair
market value of each six-month offering period and is restricted from resale for
a period of one year from the date of purchase. Purchases are limited to 20% of
an employee's eligible compensation. A total of 2,500,000 shares are reserved
for issuance under the plan, of which
47
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
approximately 1,044,000 shares had been issued as of August 31, 2001. Shares
issued under the Plan during 2001, 2000 and 1999, were approximately 183,000,
169,000 and 184,000, respectively.
The Company has two stock option plans, the 2001 Equity Incentive Plan (the
"2001 Plan") and the 1995 Stock Option Plan (the "1995 Plan", collectively
referred to as the "Option Plans").
The Company's 2001 Plan provides for the granting of non-statutory stock options
and restricted stock awards. As of August 31, 2001, there were 6,858,000 shares
of common stock reserved for issuance under the 2001 Plan. Exercise prices of
the non-statutory stock options may be less than fair market value at the date
of grant. Stock options granted generally vest as to 25% of the shares issued
under the option grant after one year from the date of grant. Subsequent to the
one-year anniversary of the grant, the options become vested as to 2.08% of the
total shares of the options grant per month.
The Company's 1995 Plan provides for the granting of incentive and non-statutory
stock options. As of August 31, 2001, there were 15 million shares of common
stock reserved for issuance under the 1995 Plan. Exercise prices of the
incentive and non-statutory stock options are 100% of the fair market value of
the Company's common stock on the date of grant. Prior to April 28, 1999
exercise prices of the incentive and non-statutory stock options were generally
issued at 100% and 85%, respectively, of the fair market value of the Company's
common stock on the date of grant. Stock options granted to employees and
executive officers after April 28, 1999 typically have a term of ten years and
vest twenty-five percent each year for four years from the date of grant. Stock
options granted to employees and executive officers prior to April 28, 1999
typically have a term of six years and vest 20% each year for five years from
the date of grant.
Option activity under the Option Plans is summarized as follows (amounts in
thousands, except per share amounts):
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
- ----------------- ------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- --------- --------- --------- --------- ---------
Outstanding at beginning of year 8,203 $ 11.90 7,448 $ 12.56 5,292 $ 12.56
Granted 6,179 3.79 2,719 10.94 3,713 12.77
Conversion of HostPro stock plans 3,625 2.56 -- -- -- --
Acquisition of Interland-Georgia 5,227 3.00 -- -- -- --
Exercised (10) 11.79 (229) 12.17 (218) 12.28
Terminated or canceled (5,309) 10.15 (1,735) 13.20 (1,339) 13.21
--------- --------- ---------
Outstanding at end of year 17,915 5.13 8,203 11.90 7,448 12.56
========= ========= =========
Exercisable at end of year 7,715 11.51 2,233 12.40 1,426 12.86
Shares available for future grant
under the 2001 Plan 2,428 -- --
1995 Plan 6,736 6,406 2,390
48
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
The following table summarizes information about the Company's stock options
outstanding under the Option Plans as of August 31, 2001 (amounts in thousands,
except per share amounts):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OF SHARES LIFE (YEARS) PRICE OF SHARES PRICE
- ------------------------ --------- ------------ -------- --------- --------
Less than $2.00 4,274 8.7 $ 1.20 822 $ 1.16
$2.01 - $5.00 8,489 6.6 3.34 4,602 3.34
$5.01 - $10.00 1,622 6.2 8.44 564 8.59
$10.01 - $15.00 3,351 4.9 12.12 1,624 12.15
Greater than $15.00 179 2.7 17.59 103 17.92
------ ------
17,915 7,715
The Company adopted the disclosure-only provisions of SFAS 123, and elected to
continue to measure compensation expense for its stock-based employee
compensation using the intrinsic value method prescribed by APB No. 25. The fair
value of options at date of grant is estimated using the Black-Scholes options
pricing model. The weighted average assumptions and resulting fair values at
date of grant for options granted during 2001, 2000 and 1999, follow:
STOCK OPTION PLANS SHARES EMPLOYEE STOCK PURCHASE PLAN SHARES
------------------------------------- ------------------------------------
SHARES 2001 2000 1999 2001 2000 1999
- --------------------------- --------- --------- --------- --------- --------- ---------
Assumptions:
Expected life 3.0 years 3.2 years 3.5 years 0.5 years 0.5 years 0.5 years
Risk-free interest rate 4.0% 6.1% 5.0% 4.0% 5.6% 4.5%
Expected volatility 76.1% 72.0% 70.0% 76.1% 72.0% 70.0%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Weighted average fair values:
Exercise price equal to market price $2.18 $ 6.31 $ 6.88 -- -- --
Exercise price less than market price $1.66 $ 8.83 $ 8.46 $ 3.32 $ 3.99 $ 4.79
Stock based compensation costs would have increased net loss by $21 million,
or $0.21 per diluted share in 2001 and reduced net income by $17 million and $9
million or $0.17 and $0.09 per diluted share in 2000 and 1999, respectively, if
the fair values of all options granted subsequent to 1995 had been recognized as
compensation expense on a straight-line basis over the vesting period of the
grants. The pro forma effect on net income (loss) for 2001, 2000 and 1999, may
not be representative of the pro forma effect on net income in future years
because it does not take into consideration pro forma compensation expense
related to grants made prior to the adoption of SFAS No. 123.
On August 17, 2000, the Board of Directors of the Company and HostPro adopted
the 2000 Equity Incentive Plan I and 2000 Equity Incentive Plan II (the "HostPro
Stock Plans"), reserving a total of 10 million shares of HostPro Common Stock
for issuance under the plans. The grants awarded vested as to 25% of the shares
issued under the option grant after one year from the date of grant. Subsequent
to the one-year anniversary of the grant, the options vest as to 2.08% of the
total shares of the option grant per month. Options could not be exercised prior
to (i) issuance to the public of shares of Common Stock pursuant to an S-1
Registration Statement under the Securities Act of 1933, as amended or (ii) five
years from the date of grant; provided that any option granted to a resident of
49
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
California who is not an officer or director of HostPro shall become exercisable
at the rate of no less than 20% per year over five years from the date of grant.
In March 2001, the Company converted all the outstanding options under the
HostPro Stock Plans using an exchange ratio of 0.5715, to stock options of the
Company and adopted the HostPro Stock Plans as the 2001 Equity Incentive Plan.
The Company recorded deferred compensation of $3.2 million related to this
conversion, of which $268,000 was amortized in 2001.
Option activity under HostPro's Stock Plans are as follows (amounts in
thousands, except per share amounts):
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000
- ----------------- ------------------------------ ------------------------------
Weighted Weighted
average average
Number exercise Number exercise
of shares price of shares price
--------- --------- --------- ---------
Outstanding at beginning of year 3,875 $ 2.25 -- $ --
Granted 4,020 .92 3,876 2.25
Exercised -- -- --
Terminated or canceled (4,270) .68 (1) 2.25
Converted to the 2001 Plan options (3,625) 2.56 -- --
--------- --------- --------- ---------
Outstanding at end of year -- $ -- 3,875 $ 2.25
========= ========= ========= =========
Exercisable at end of year -- -- --
Shares available for future grant under
the Option Plan -- 6,124
RETIREMENT PLAN
The Company offers its employees a 401(k) retirement plan (the "RAM Plan") in
which substantially all employees may participate. Under the RAM Plan, employees
may contribute from 2% to 16% of eligible pay to various savings alternatives.
The RAM plan provides for an annual match of eligible employee's contributions
equal to 100% of the first 4% of pay or $1,500, whichever is greater. In
calendar 2000 and 2001, the Company's contributions under the RAM Plan are made
in the Company's stock, which is purchased on the open market. The Company may
also contribute additional amounts based on its financial performance. The
Company's expense included in continuing operations pursuant to the RAM Plan was
approximately $0.6 million, $0.3 million and $0.1 million in 2001, 2000 and
1999, respectively. The Company's expense included in discontinued operations
pursuant to the RAM Plan was approximately $2.2 million, $2.7 million and $2.1
million in 2001, 2000 and 1999, respectively.
Interland-Georgia offers its employees a 401(k) retirement plan in which
substantially all employees may participate. 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. Interland, at its discretion, may elect to provide for either a
matching contribution or a discretionary profit-sharing contribution or both.
The Company did not elect to provide a discretionary match in 2001.
TRANSACTIONS WITH AFFILIATES
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
- ----------------- --------------- --------------- -----------------
Net sales $ 23,561 $ 7,282 $ 3,742
Inventory purchases 103,808 98,227 51,202
Component recovery agreement expenses 99,483 204,603 65,298
Administrative services and other expenses (income) (206) 524 529
MTI lease 1,165 -- --
Property, plant and equipment purchases 14,186 7,651 6,634
Property, plant and equipment sales 32,649 37,504 2,744
50
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
Substantially all the transactions noted above were between the company's
discontinued operations and MTI.
COMMITMENTS
The Company leases various buildings, computer and office equipment, under
capital and operating lease agreements expiring through 2007, with optional
renewal periods thereafter. The assets and liabilities under capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the assets. The assets are depreciated over the shorter of their
related lease terms or their estimated useful lives. Rental expense was
approximately $4 million, $8 million and $4 million in 2001, 2000 and 1999,
respectively. Future minimum lease payments are as follows:
OPERATING LEASES
AND OTHER FUTURE
MINIMUM COMMITMENTS CAPITAL LEASES
------------------- --------------
2002 $18,388 $18,121
2003 11,631 13,765
2004 8,168 6,956
2005 7,810 308
2006 7,367 --
Thereafter: 21,797 --
------- -------
Total: $75,161 $39,150
Less: amount representing interest 5,414
-------
Present value of net minimum lease payments: 33,736
Less: current portion 14,875
-------
Capital lease obligation excluding current portion $18,861
=======
INCOME TAXES
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
- ----------------- --------------- --------------- -----------------
Current:
U.S. federal $(22,233) $ 15,753 $ 5,346
State (461) 3,416 348
-------- -------- --------
(22,694) 19,169 5,694
-------- -------- --------
Deferred:
U.S. federal -- (1,783) 15,398
State -- 418 1,502
-------- -------- --------
-- (1,365) 16,900
-------- -------- --------
Income tax (benefit) provision $(22,694) $ 17,804 $ 22,594
======== ======== ========
Allocated to:
Continuing operations $(22,694) $ (9,748) $ 2,209
======== ======== ========
Discontinued operations $ -- $ 27,552 $ 20,385
======== ======== ========
51
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -CONTINUED
The tax benefit associated with non-statutory stock options and disqualifying
dispositions by employees of shares issued under the Company's stock plans
reduced taxes payable by approximately $0.0 million, $0.05 million and $0.4
million for 2001, 2000 and 1999, respectively. These benefits were credited to
additional capital.
A reconciliation between the income tax provision and income tax computed using
the federal statutory rate follows:
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
- ----------------- --------------- --------------- -----------------
U.S. federal income tax at statutory rate $ (58,943) $ 20,771 $ 20,691
State taxes, net of federal benefit and state tax credits (8,420) 723 1,777
Goodwill 21,276 -- --
Valuation allowance 20,794 -- --
In-process research and development -- -- 350
Tax-exempt Foreign Trade Income 2,000 (5,398) (2,379)
Other 599 1,708 2,155
--------- --------- ---------
Income tax provision $ (22,694) $ 17,804 $ 22,594
========= ========= =========
52
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
The tax effects of temporary differences and carryforwards that give rise to the
deferred tax assets and liabilities are as follows:
AS OF AUGUST 31, 2001 AUGUST 31, 2000
- ----- --------------- ---------------
Deferred tax assets:
Receivables and other allowances $ 371 $ 2,515
Inventories -- 1,814
Accrued expenses 6,899 6,030
Investment basis difference -- 3,358
Accrued compensation 6,678 4,501
Accrued licenses and royalties 236 1,431
Deferred revenue 6,761 8,631
Property, plant and equipment 8,605 --
Net operating loss carryforwards 112,864 4,652
Other 3,836 2,024
--------- ---------
Total deferred tax assets 146,250 34,956
Valuation allowance (133,251) (4,652)
--------- ---------
Net deferred tax assets 12,999 30,304
--------- ---------
Deferred tax liabilities:
Property, plant and equipment -- (6,231)
Acquired intangibles (12,934) (9,368)
Deferred patent charges (65) (1,843)
Other -- (15,792)
--------- ---------
Total deferred tax liabilities (12,999) (33,234)
--------- ---------
Net deferred taxes $ -- $ (2,930)
========= =========
Deferred tax assets and liabilities have not been classified with net assets of
discontinued operations because income taxes will not be assumed by the buyers
of the discontinued operations and remain the responsibility of the Company.
The Company has federal operating loss carryforwards that are limited by the
Internal Revenue Code of $270 million (including $90 million, $10 million, and
$1 million as a result of the merger with Interland-Georgia, the NetFrame
acquisition, and the HostPro acquisition, respectively) that expire beginning in
2006. The Company experienced an ownership change as defined under Section 382
of the Internal Revenue Code in August 2001. As a result of the ownership
change, the losses will be subject to annual limitations in their future use.
A valuation allowance has been established against the deferred tax assets
because management does not believe such assets are more likely than not to be
realized.
53
INTERLAND, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
EARNINGS PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share", diluted earnings per
share excludes anti-dilutive employee stock options of approximately 17.9
million, 8.2 million and 1.2 million in 2001, 2000 and 1999, respectively. A
reconciliation of the number of common shares outstanding follows:
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
- ----------------- --------------- --------------- -----------------
Common shares outstanding:
Weighted average shares outstanding--basic 99,596 96,447 96,127
Effect of dilutive stock options -- -- 506
------ ------ ------
Weighted average shares outstanding--diluted 99,596 96,447 96,633
====== ====== ======
CONTINGENCIES
On October 2, 2001, Capetronic Computer USA filed a Complaint in Dallas County,
Texas Court seeking damages of approximately $2.1 million for goods purchased by
the Company's PC Systems business. The Company removed the case to federal court
in the Northern District of Texas, Dallas Division, and counterclaimed for legal
fees owed by Capetronic for legal fees they had agreed to indemnify the Company
for that were incurred on an unrelated patent lawsuit. These legal fees amounted
to approximately $1.3 million. This claim is currently in the early stages of
discovery, and the Company is therefore unable to estimate total expenses,
possible loss or range of loss, if any, that may ultimately be connected with
the matter.
The Company is defending a consumer class action lawsuit filed in the Federal
District Court of Minnesota based on the alleged sale of defective computers. No
class has been certified in the case. The case involves a claim that the Company
sold computer products with a defect that may cause errors when information is
written to a floppy disk. Substantially similar lawsuits have been filed against
other major computer manufacturers. The case is currently in the early stages of
discovery, and the Company is therefore unable to estimate total expenses,
possible loss or range of loss, if any, that may ultimately be connected with
the matter.
On June 1, 2001, Plaintiff Kimberley Smith filed a Complaint and Demand for Jury
Trial in the U.S. District Court for Idaho alleging violations of the Fair Labor
Standards Act ("FLSA"), for alleged failures to pay non-exempt employees
overtime for hours worked in excess of 40 in a week as well as other alleged
violations of the FLSA and state wage and hour laws. On June 8, 2001, an Amended
Complaint and Demand for Jury Trial was filed by Plaintiff Smith in which an
additional individual, Plaintiff Michael Hinckley, joined. Ms. Smith and Mr.
Hinckley seek individual damages and class certification and relief as well as
injunctive relief, prejudgment interest and attorneys' fees and costs. Thus far,
forty-four additional, mostly former employees have filed written notice of
consents seeking to join in the action. The Company filed an answer to the
Complaint on June 29, 2001. The Court ordered a hearing to determine whether to
conditionally certify the FLSA collective action, but no trial date has been
set. The case is currently in the early stages of discovery, and the Company is
therefore unable to estimate total expenses, possible loss or range of loss, if
any, that may ultimately be connected with the matter.
The Company is party to various other legal actions arising in the normal course
of business, none of which is expected to have a material adverse effect on its
business, financial position, results of operations and cash flows.
GEOGRAPHIC INFORMATION
The Company's business activities are represented by a single industry segment,
web site hosting. For management purposes, the Company is segmented into two
geographic areas: United States and Non-US.
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
- ----------------- --------------- --------------- -----------------
REVENUES BY GEOGRAPHIC AREA
(based on customer location)
United States $50,179 $29,773 $ 417
Non-US 10,573 3,089 47
------- ------- -------
Totals $60,752 $32,862 $ 464
======= ======= =======
54
INTERLAND, INC.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In thousands, except per share amounts)
FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
2001
Revenue $ 17,365 $ 15,395 $ 14,466 $ 13,526
Gross margin 6,384 5,680 5,270 3,998
Loss from continuing operations (118,523) (9,112) (9,704) (8,378)
Net income (loss) (149,274) (40,554) (168,942) 1,576
Earnings (loss) per share, basic and diluted:
Continuing operations (1.10) (0.09) (0.10) (0.09)
Discontinued operations (0.28) (0.33) (1.65) 0.11
--------- --------- --------- ---------
Net income (loss) (1.38) (0.42) (1.75) 0.02
2000
Revenue $ 11,397 $ 10,155 $ 7,170 $ 4,140
Gross margin 2,700 2,295 2,298 1,234
Income (loss) from continuing operations (14,180) (8,287) (3,772) 47
Net income (loss) 23,065 (1,866) 5,725 14,619
Earnings (loss) per share, basic and diluted:
Continuing operations (0.14) (0.09) (0.04) 0.00
Discontinued operations 0.38 0.07 0.10 0.15
--------- --------- --------- ---------
Net income (loss) 0.24 (0.02) 0.06 0.15
55
INTERLAND, INC.
REPORT OF INDEPENDENT ACCOUNTANTS
The Shareholders and Board of Directors
Interland, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Interland, Inc. (formerly Micron Electronics, Inc.) and its
subsidiaries at August 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended August 31,
2001, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP
Seattle, Washington
November 20, 2001
56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information concerning the Registrant's executive officers and directors
is included under the caption "Officers and Directors of the Registrant"
included in PART I, Item 1 of this report. Other information required by Items
10, 11, 12 and 13 will be contained in the registrant's Proxy Statement which
will be filed with the Securities and Exchange Commission within 120 days after
August 31, 2001, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following are filed as a part of this report:
Financial statements and financial statement schedules--see "Item 8. Financial
Statements and Supplementary Data."
EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE FILED HEREWITH
- ------- ----------- ------------------------------------------ --------------
FORM DATE NUMBER REGISTRANT
---- ---- ------ ----------
2.01 Agreement of Merger, dated as of October S-4 3/13/95 2.1 INLD
30, 1994, as amended by the first amendment
thereto, dated as of December 13, 1994, by
and among ZEOS, MCI and MCMS.
2.02 Articles of Merger, dated April 7, 1995, by 8-K 4/7/95 2.2 INLD
and among ZEOS, MCI and MCMS
2.03 Purchase Agreement, dated March 22, 2001, 8-K 4/10/01 2.01 INLD
by and among MEI California, Inc., the
Registrant and Micron Technology, Inc.
("MTI").
2.04 Agreement and Plan of Merger dated March 8-K 4/10/01 2.01 INLD
22, 2001, by and among the Registrant,
Imagine Acquisition Corporation and
Interland, Inc., a Georgia corporation
("Interland-Georgia").
2.05 Membership Interest Purchase Agreement, 10-Q 5/31/01 2.01 INLD
dated as of April 30, 2001, by and between
the Registrant and GTG PC Holdings, LLC.
2.06 First Amendment to Membership Interest 10-Q 5/31/01 2.02 INLD
Purchase Agreement and Form of Contribution
Agreement, dated as of May 31, 2001, by and
between the Registrant and GTG PC Holdings,
LLC.
3.01 Articles of Incorporation of Registrant, as 10-Q 4/1/95 3.1 INLD
amended.
3.02 Bylaws of the Registrant, as amended. 10K/A 8/28/97 3.2 INLD
3.03 Amendment to Articles of Incorporation of 8-K 8/13/01 4.1 INLD
Registrant.
3.04 Amendment to Restated Bylaws of Registrant. 8-K 8/13/01 4.2 INLD
4.01 Form of Stock Certificate of the Registrant. x
10.35(a) Micron Electronics 1995 Stock Option Plan, S-8 1/14/00 4.1 INLD
as amended through August 29, 2001.
10.35(b) Form of Notice of Grant for Micron Electronics x
1995 Stock Option Plan
10.35(c) Interland 1995 Stock Option Plan, as x
amended August 30, 2001.
10.35(d) Form of Notice of Grant for Interland 1995 x
Stock Option Plan
57
10.36(a) Micron Electronics 1995 Employee Stock 10-Q 6/1/95 10.36 INLD
Purchase Plan, as amended through
August 5, 2001.
10.36(b) Interland 1995 Employee Stock Purchase x
Plan, as amended August 6, 2001.
10.38 Form of Indemnification Agreement between 10-K 8/31/95 10.38 INLD
the Registrant and its officers and
directors.
10.39 Form of Six-Month Termination Agreements 10-K 8/31/95 10.39 INLD
for certain officers of the Registrant.
10.42 Amended and Restated Component Recovery 8-K 9/10/99 10.42 INLD
Agreement, dated effective September 2, 1999,
between the Registrant and MTI
10.44 Form of Twelve-Month Termination Agreements 10-K 8/28/97 10.44 INLD
for certain officers of the Registrant.
10.45 Form of Two-Year Termination Agreements for 10-K 8/28/97 10.45 INLD
certain officers of the Registrant.
10.47 Form of Employment and Noncompete 10-Q 2/26/98 10.47 INLD
Agreement, with 12-month termination
provision, for certain officers of the
Registrant.
10.48 Form of Employment and Noncompete 10-Q 2/26/98 10.48 INLD
Agreement, with 6-month termination
provision, for certain officers of the
Registrant.
10.52 Employment Offer, dated January 10, 1998, 10-Q 2/26/98 10.52 INLD
to Joel J. Kocher.
10.56 Form of Employment, Severance and 10-K 9/3/98 10.56 INLD
Noncompete Agreement for Certain Officers
of the Registrant.
10.58 The Registrant's Executive Incentive Plan, 10-Q 12/2/99 10.58 INLD
as amended.
10.65 Exclusive Sales Representative Agreement 8-K 9/10/99 10.65 INLD
effective September 2, 1999, between the
Registrant and Micron Semiconductor Products,
Inc.
10.68 Amended Non Qualified Stock Option 10-Q 6/1/00 10.68 INLD
Agreement, dated April 6, 2000.
10.69 Amended Non Qualified Stock Option 10-Q 6/1/00 10.69 INLD
Agreement, dated April 6, 2000.
10.70(a) HostPro, Inc. 2000 Equity Incentive Plan I. 10-K 8/31/00 10.70 INLD
10.70(b) HostPro, Inc. 2000 Equity Incentive Plan II. 10-K 8/31/00 10.71 INLD
10.70(c) Form of Notice of Grant for HostPro, Inc. 10-K 8/31/00 10.72 INLD
2000 Equity Incentive Plans.
10.70(d) Form of Notice of Grant for HostPro, Inc. 10-K 8/31/00 10.73 INLD
2000 Equity Incentive Plans.
10.70(e) Micron Electronics 2001 Equity Incentive 10-Q 5/31/01 10.89 INLD
Plan, as amended as of March 22, 2001.
10.70(f) Interland 2001 Equity Incentive Plan, as x
amended August 6, 2001.
10.70(g) Form of Notice of Grant for Interland 2001 x
Equity Incentive Plan.
10.76 Amendment Number 1 To Amended And 10-Q 11/30/00 10.76 INLD
Restated Component Recovery Agreement, dated
November 16, 2000, between the Registrant and
MTI
10.77 Commercial Lease, dated March 22, 2001, 8-K 4/10/01 99.01 INLD
between MTI and the Registrant.
10.78 Commercial Sublease, dated March 22, 2001, 8-K 4/10/01 99.02 INLD
between MTI and the Registrant.
10.79 The Registrant's Severance Plan for 10-Q 3/1/01 10.79 INLD
Employees - 2001 Amendment and Restatement.
10.80 The Registrant's Change in Control 10-Q 3/1/01 10.80 INLD
Severance Plan.
10.81 HostPro, Inc. 2000 Incentive Plan II - 10-Q 3/1/01 10.81 INLD
Notice of Grant to Joel Kocher.
10.82 Retention Agreement between the Registrant 10-Q 3/1/01 10.82 INLD
and Mike Adkins, dated as of December 1,
2000.
10.83 Retention Agreement between the Registrant 10-Q 3/1/01 10.83 INLD
and Steve Arnold, dated as of December 1,
2000.
10.84 Retention Agreement between the Registrant 10-Q 3/1/01 10.84 INLD
and Sid Ferrales, dated as of December 1,
2000.
10.85 Retention Agreement between the Registrant 10-Q 3/1/01 10.85 INLD
and Lyle Jordan, dated as of December 1,
2000.
10.86 Retention Agreement between the Registrant 10-Q 3/1/01 10.86 INLD
and Jim Stewart, dated as of December 1,
2000.
58
10.87 Amended Retention Agreement between the 10-Q 5/31/01 10.87 INLD
Registrant and Steve Arnold, dated as of
April 7, 2001.
10.88 Retention Agreement between the Registrant 10-Q 5/31/01 10.88 INLD
and Jeff Moeser, dated as of February 23,
2001.
10.89 MTI Shareholder Agreement dated as of March 8-K 4/10/01 2.01 INLD
22, 2001 between the Registrant and MTI.
10.91 Operating lease for property located at 10-Q 5/31/01 10.90 INLD
3250 Wilshire Blvd., Los Angeles,
California, dated as of March 16, 1998.
10.92 Operating lease for property located at 10-Q 5/31/01 10.91 INLD
3250 Wilshire Blvd., Los Angeles,
California, dated as of March 19, 1999.
10.93 Operating lease for property located at 10-Q 5/31/01 10.92 INLD
1450 Eagle Flight Way, Boise, Idaho, dated
as of January 7, 2000.
10.94 Operating lease for property located at 10-Q 5/31/01 10.93 INLD
3326 160th Avenue SE, Bellevue, Washington,
dated as of December 16, 1999.
10.95(a) Employment Agreement dated December 2, 1999 S-1/A 6/26/00 10.6 ILND
between the Company and Ken Gavranovic, as
amended.
10.95(b) Employment Agreement Assumption and x
Amendment dated March 22, 2001 between the
Registrant and Ken Gavranovic, as amended.
10.96(a) Interland-Georgia Stock Incentive Plan. S-8 9/17/01 4.05(a) INLD
10.96(b) First Amendment to Interland-Georgia Stock S-8 9/17/01 4.05(b) INLD
Incentive Plan.
10.96(c) Second Amendment to Interland-Georgia Stock S-8 9/17/01 4.05(c) INLD
Incentive Plan.
10.96(d) Third Amendment to Interland-Georgia Stock S-8 9/17/01 4.05(d) INLD
Incentive Plan.
10.96(e) Fourth Amendment to Interland-Georgia Stock S-8 9/17/01 4.05(e) INLD
Incentive Plan.
10.97 Promissory Note of Ken Gavranovic in favor S-1/A 5/18/00 10.15 ILND
of Interland-Georgia dated December 10,
1998.
10.98 Promissory Note of Ken Gavranovic in favor S-1/A 5/18/00 10.17 ILND
of Interland-Georgia dated May 14, 1999.
10.99 Stock Pledge Agreement between S-1/A 5/18/00 10.19 ILND
Interland-Georgia and Ken Gavranovic dated
May 14, 1999.
10.100(a) Agreement of Lease between S-1/A 5/18/00 10.21(a) ILND
Interland-Georgia and 34 Peachtree
Associates, L.P. dated November 19, 1997.
10.100(b) First Amendment to Agreement of Lease S-1/A 5/18/00 10.21(b) ILND
between Interland-Georgia and TCB #4,
L.L.C. (f/k/a 34 Peachtree Associates,
L.P.) dated July 6, 1998.
10.100(c) Second Amendment to Agreement of Lease S-1/A 5/18/00 10.21(c) ILND
between Interland-Georgia and TCB #4,
L.L.C. (f/k/a 34 Peachtree Associates,
L.P.) dated September 15, 1999.
10.101(a) Amended and Restated Lease Agreement S-1/A 5/18/00 10.22(a) ILND
between Interland-Georgia and 101 Marietta
Street Associates dated September 29, 1999.
10.101(b) First Amendment to Amended and Restated S-1/A 5/18/00 10.22(b) ILND
Lease Agreement between Interland-Georgia
and 101 Marietta Street Associates dated
November 23, 1999.
10.102 Employment Agreement dated April 1, 2000 S-1/A 5/18/00 10.23 ILND
between Interland-Georgia and Mark K.
Alexander.
10.103 Employment Agreement dated February 15, S-1/A 6/9/00 10.24 ILND
2000 between Interland-Georgia and Robert
Malally.
10.104(a) SunTrust Plaza Garden Offices Lease x
Agreement by and between SunTrust Plaza
Associates, LLC and Interland-Georgia dated
May 15, 2000.
10.104(b) First Amendment to Lease Agreement by and x
between SunTrust Plaza Associates, LLC and
Interland-Georgia dated September 27, 2000.
59
10.105 Amended and Restated Registration Rights x
Agreement between the Registrant, MTI and
certain shareholders of Interland named
therein dated August 6, 2001.
10.106 Stock Purchase Agreement between MTI and x
Micron Semiconductor Products, Inc. dated
as of August 30, 2001.
10.107 Donation Agreement between Micron x
Semiconductor Products, Inc. and the Micron
Technology Foundation, Inc. dated as of
August 30, 2001.
10.108 Employment Agreement between the Registrant x
and Allen Shulman dated November 1, 2001.
21.01 Subsidiaries of the Registrant. x
23.01 Consent of Independent Accountants. x
* INLD indicates the exhibit is incorporated by reference to the
Registrant's prior filings with the SEC.
ILND indicates the exhibit is incorporated by reference to
Interland-Georgia's prior filings with the SEC.
(b) Reports on Form 8-K:
On June 13, 2001, the Company filed a report on Form 8-K, which
described, under Item 2, certain aspects of the Membership Interest Purchase
Agreement for the completion of the sale of the PC Systems business to GTG PC
Holdings, LLC and included, under Item 7, certain financial information
regarding the PC business as a discontinued operation.
On July 27, 2001, the Company filed a report on Form 8-K, which
described, under Item 5, that it would consolidate two of the smaller data
centers of its Web hosting subsidiary. The Company also disclosed forecasts for
EBITDA and free cash flow.
On August 3, 2001, the Company filed a report on Form 8-K, which
described, under Item 5, the slate of officers that the Company plans to propose
to the Board of Directors to run the combined company after its planned
acquisition of Interland-Georgia is complete.
On August 13, 2001, the Company filed a report on Form 8-K, which
described, under Item 2, certain aspects of the Agreement and Plan of Merger for
the completion of the purchase of Interland-Georgia by the Company.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized, in the City of Atlanta,
State of Georgia, on the 29th day of November, 2001.
Interland, Inc.
/s/ David A. Buckel
--------------------------------------------
David A. Buckel
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Atlanta, State of
Georgia, on the 29th day of November, 2001.
Signature Title Date
- --------- ----- ----
/s/ Joel J. Kocher Chairman of the Board, President, and Chief November 29, 2001
- ------------------------------------ Executive Officer (Principal Executive Officer)
(Joel J. Kocher)
/s/ Kenneth Gavranovic Vice-Chairman of the Board November 29, 2001
- ------------------------------------
(Kenneth Gavranovic)
/s/ Gregg A. Mockenhaupt Director November 29, 2001
- ------------------------------------
(Gregg A. Mockenhaupt)
/s/ John B. Balousek Director November 29, 2001
- ------------------------------------
(John B. Balousek)
/s/ Robert Lee Director November 29, 2001
- ------------------------------------
(Robert Lee)
/s/ Robert T. Slezak Director November 29, 2001
- ------------------------------------
(Robert T. Slezak)
61
SCHEDULE II
INTERLAND, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
FISCAL YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 SEPTEMBER 2, 1999
- ----------------- --------------- --------------- -----------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance at beginning of year $ 6,178 $ 3,846 $ 3,709
Additions charged to expense 2,233 5,750 2,715
Acquisitions 158 400 --
Reductions and write-offs (6,759) (3,818) (2,578)
-- --
--------- --------- ---------
Balance at end of year $ 1,810 $ 6,178 $ 3,846
========= ========= =========
Included in:
Continuing operations 1,810 305 65
========= ========= =========
Discontinued operations -- 5,873 3,781
========= ========= =========
DEFERRED TAX ASSET VALUATION ALLOWANCE
Balance at beginning of year $ 4,652 $ 4,652 $ 4,139
Additions charged to expense 21,030 -- --
Discontinued operations 67,600 -- --
Additions from acquisitions 39,969 -- 513
--------- --------- ---------
Balance at end of year $ 133,251 $ 4,652 $ 4,652
========= ========= =========
Included in:
Continuing operations 65,651 4,652 4,652
========= ========= =========
Discontinued operations 67,600 -- --
========= ========= =========
62
EXHIBIT DESCRIPTION INCORPORATED BY REFERENCE FILED HEREWITH
- ------- ----------- ------------------------------------------ --------------
FORM DATE NUMBER REGISTRANT*
---- ---- ------ ----------
2.01 Agreement of Merger, dated as of October S-4 3/13/95 2.1 INLD
30, 1994, as amended by the first amendment
thereto, dated as of December 13, 1994, by
and among ZEOS, MCI and MCMS.
2.02 Articles of Merger, dated April 7, 1995, by 8-K 4/7/95 2.2 INLD
and among ZEOS, MCI and MCMS
2.03 Purchase Agreement, dated March 22, 2001, 8-K 4/10/01 2.01 INLD
by and among MEI California, Inc., the
Registrant and Micron Technology, Inc.
("MTI").
2.04 Agreement and Plan of Merger dated March 8-K 4/10/01 2.01 INLD
22, 2001, by and among the Registrant,
Imagine Acquisition Corporation and
Interland, Inc., a Georgia corporation
("Interland-Georgia").
2.05 Membership Interest Purchase Agreement, 10-Q 5/31/01 2.01 INLD
dated as of April 30, 2001, by and between
the Registrant and GTG PC Holdings, LLC.
2.06 First Amendment to Membership Interest 10-Q 5/31/01 2.02 INLD
Purchase Agreement and Form of Contribution
Agreement, dated as of May 31, 2001, by and
between the Registrant and GTG PC Holdings,
LLC.
3.01 Articles of Incorporation of Registrant, as 10-Q 4/1/95 3.1 INLD
amended.
3.02 Bylaws of the Registrant, as amended. 10K/A 8/28/97 3.2 INLD
3.03 Amendment to Articles of Incorporation of 8-K 8/13/01 4.1 INLD
Registrant.
3.04 Amendment to Restated Bylaws of Registrant. 8-K 8/13/01 4.2 INLD
4.01 Form of Stock Certificate of the Registrant. x
10.35(a) Micron Electronics 1995 Stock Option Plan, S-8 1/14/00 4.1 INLD
as amended through August 29, 2001.
10.35(b) Form of Notice of Grant for Micron Electronics x
1995 Stock Option Plan
10.35(c) Interland 1995 Stock Option Plan, as x
amended August 30, 2001.
10.35(d) Form of Notice of Grant for Interland x
1995 Stock Option Plan
10.36(a) Micron Electronics 1995 Employee Stock 10-Q 6/1/95 10.36 INLD
Purchase Plan, as amended through
August 5, 2001.
10.36(b) Interland 1995 Employee Stock Purchase x
Plan, as amended August 6, 2001.
10.38 Form of Indemnification Agreement between 10-K 8/31/95 10.38 INLD
the Registrant and its officers and
directors.
10.39 Form of Six-Month Termination Agreements 10-K 8/31/95 10.39 INLD
for certain officers of the Registrant.
10.42 Amended and Restated Component Recovery 8-K 9/10/99 10.42 INLD
Agreement, dated effective September 2, 1999,
between the Registrant and MTI
10.44 Form of Twelve-Month Termination Agreements 10-K 8/28/97 10.44 INLD
for certain officers of the Registrant.
10.45 Form of Two-Year Termination Agreements for 10-K 8/28/97 10.45 INLD
certain officers of the Registrant.
10.47 Form of Employment and Noncompete 10-Q 2/26/98 10.47 INLD
Agreement, with 12-month termination
provision, for certain officers of the
Registrant.
10.48 Form of Employment and Noncompete 10-Q 2/26/98 10.48 INLD
Agreement, with 6-month termination
provision, for certain officers of the
Registrant.
10.52 Employment Offer, dated January 10, 1998, 10-Q 2/26/98 10.52 INLD
to Joel J. Kocher.
10.56 Form of Employment, Severance and 10-K 9/3/98 10.56 INLD
Noncompete Agreement for Certain Officers
of the Registrant.
10.58 The Registrant's Executive Incentive Plan, 10-Q 12/2/99 10.58 INLD
as amended.
10.65 Executive Sales Representative Agreement 8-K 9/10/99 10.65 INLD
effective September 2, 1999, between the
Registrant and Micron Semiconductor Products,
Inc.
10.68 Amended Non Qualified Stock Option 10-Q 6/1/00 10.68 INLD
Agreement, dated April 6, 2000.
10.69 Amended Non Qualified Stock Option 10-Q 6/1/00 10.69 INLD
Agreement, dated April 6, 2000.
10.70(a) HostPro, Inc. 2000 Equity Incentive Plan I. 10-K 8/31/00 10.70 INLD
10.70(b) HostPro, Inc. 2000 Equity Incentive Plan II. 10-K 8/31/00 10.71 INLD
10.70(c) Form of Notice of Grant for HostPro, Inc. 10-K 8/31/00 10.72 INLD
2000 Equity Incentive Plans.
10.70(d) Form of Notice of Grant for HostPro, Inc. 10-K 8/31/00 10.73 INLD
2000 Equity Incentive Plans.
10.70(e) Micron Electronics 2001 Equity Incentive 10-Q 5/31/01 10.89 INLD
Plan, as amended as of March 22, 2001.
10.70(f) Interland 2001 Equity Incentive Plan, as x
amended August 6, 2001.
10.70(g) Form of Notice of Grant for Interland 2001 x
Equity Incentive Plan.
10.76 Amendment Number 1 To Amended And Restated 10-Q 11/30/00 10.76 INLD
Component Recovery Agreement, dated November
16, 2000, between the Registrant and MTI
10.77 Commercial Lease, dated March 22, 2001, 8-K 4/10/01 99.01 INLD
between MTI and the Registrant.
10.78 Commercial Sublease, dated March 22, 2001, 8-K 4/10/01 99.02 INLD
between MTI and the Registrant.
10.79 The Registrant's Severance Plan for 10-Q 3/1/01 10.79 INLD
Employees - 2001 Amendment and Restatement.
10.80 The Registrant's Change in Control 10-Q 3/1/01 10.80 INLD
Severance Plan.
10.81 HostPro, Inc. 2000 Incentive Plan II - 10-Q 3/1/01 10.81 INLD
Notice of Grant to Joel Kocher.
10.82 Retention Agreement between the Registrant 10-Q 3/1/01 10.82 INLD
and Mike Adkins, dated as of December 1,
2000.
10.83 Retention Agreement between the Registrant 10-Q 3/1/01 10.83 INLD
and Steve Arnold, dated as of December 1,
2000.
10.84 Retention Agreement between the Registrant 10-Q 3/1/01 10.84 INLD
and Sid Ferrales, dated as of December 1,
2000.
10.85 Retention Agreement between the Registrant 10-Q 3/1/01 10.85 INLD
and Lyle Jordan, dated as of December 1,
2000.
10.86 Retention Agreement between the Registrant 10-Q 3/1/01 10.86 INLD
and Jim Stewart, dated as of December 1,
2000.
10.87 Amended Retention Agreement between the 10-Q 5/31/01 10.87 INLD
Registrant and Steve Arnold, dated as of
April 7, 2001.
10.88 Retention Agreement between the Registrant 10-Q 5/31/01 10.88 INLD
and Jeff Moeser, dated as of February 23,
2001.
10.89 MTI Shareholder Agreement dated as of March 8-K 4/10/01 2.01 INLD
22, 2001 between the Registrant and MTI.
10.91 Operating lease for property located at 10-Q 5/31/01 10.90 INLD
3250 Wilshire Blvd., Los Angeles,
California, dated as of March 16, 1998.
10.92 Operating lease for property located at 10-Q 5/31/01 10.91 INLD
3250 Wilshire Blvd., Los Angeles,
California, dated as of March 19, 1999.
10.93 Operating lease for property located at 10-Q 5/31/01 10.92 INLD
1450 Eagle Flight Way, Boise, Idaho, dated
as of January 7, 2000.
10.94 Operating lease for property located at 10-Q 5/31/01 10.93 INLD
3326 160th Avenue SE, Bellevue, Washington,
dated as of December 16, 1999.
10.95(a) Employment Agreement dated December 2, 1999 S-1/A 6/26/00 10.6 ILND
between the Company and Ken Gavranovic, as
amended.
10.95(b) Employment Agreement Assumption and x
Amendment dated March 22, 2001 between the
Registrant and Ken Gavranovic, as amended.
10.96(a) Interland-Georgia Stock Incentive Plan. S-8 9/17/01 4.05(a) INLD
10.96(b) First Amendment to Interland-Georgia Stock S-8 9/17/01 4.05(b) INLD
Incentive Plan.
10.96(c) Second Amendment to Interland-Georgia Stock S-8 9/17/01 4.05(c) INLD
Incentive Plan.
10.96(d) Third Amendment to Interland-Georgia Stock S-8 9/17/01 4.05(d) INLD
Incentive Plan.
10.96(e) Fourth Amendment to Interland-Georgia Stock S-8 9/17/01 4.05(e) INLD
Incentive Plan.
10.97 Promissory Note of Ken Gavranovic in favor S-1/A 5/18/00 10.15 ILND
of Interland-Georgia dated December 10,
1998.
10.98 Promissory Note of Ken Gavranovic in favor S-1/A 5/18/00 10.17 ILND
of Interland-Georgia dated May 14, 1999.
10.99 Stock Pledge Agreement between S-1/A 5/18/00 10.19 ILND
Interland-Georgia and Ken Gavranovic dated
May 14, 1999.
10.100(a) Agreement of Lease between S-1/A 5/18/00 10.21(a) ILND
Interland-Georgia and 34 Peachtree
Associates, L.P. dated November 19, 1997.
10.100(b) First Amendment to Agreement of Lease S-1/A 5/18/00 10.21(b) ILND
between Interland-Georgia and TCB #4,
L.L.C. (f/k/a 34 Peachtree Associates,
L.P.) dated July 6, 1998.
10.100(c) Second Amendment to Agreement of Lease S-1/A 5/18/00 10.21(c) ILND
between Interland-Georgia and TCB #4,
L.L.C. (f/k/a 34 Peachtree Associates,
L.P.) dated September 15, 1999.
10.101(a) Amended and Restated Lease Agreement S-1/A 5/18/00 10.22(a) ILND
between Interland-Georgia and 101 Marietta
Street Associates dated September 29, 1999.
10.101(b) First Amendment to Amended and Restated S-1/A 5/18/00 10.22(b) ILND
Lease Agreement between Interland-Georgia
and 101 Marietta Street Associates dated
November 23, 1999.
10.102 Employment Agreement dated April 1, 2000 S-1/A 5/18/00 10.23 ILND
between Interland-Georgia and Mark K.
Alexander.
10.103 Employment Agreement dated February 15, S-1/A 6/9/00 10.24 ILND
2000 between Interland-Georgia and Robert
Malally.
10.104(a) SunTrust Plaza Garden Offices Lease x
Agreement by and between SunTrust Plaza
Associates, LLC and Interland-Georgia dated
May 15, 2000.
10.104(b) First Amendment to Lease Agreement by and x
between SunTrust Plaza Associates, LLC and
Interland-Georgia dated September 27, 2000.
10.105 Amended and Restated Registration Rights x
Agreement between the Registrant, MTI and
certain shareholders of Interland named
therein dated August 6, 2001.
10.106 Stock Purchase Agreement between MTI and x
Micron Semiconductor Products, Inc. dated
as of August 30, 2001
10.107 Donation Agreement between Micron x
Semiconductor Products, Inc. and the Micron
Technology Foundation, Inc. dated as of
August 30, 2001
10.108 Employment Agreement between the Registrant x
and Allen Shulman dated November 1, 2001.
21.01 Subsidiaries of the Registrant. x
23.01 Consent of Independent Accountants. x
* INLD indicates the exhibit is incorporated by reference to the
Registrant's prior filings with the SEC.
ILND indicates the exhibit is incorporated by reference to
Interland-Georgia's prior filings with the SEC.