-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VjDt5/xRiOT1rpk2rNXHwEdMK58vd7LwxBSk9/vPlqxiq8PWBQghZc8ROcigOovN 1wlmDMWJ1p+2RBw6lwuyvw== 0000950123-99-004545.txt : 19990514 0000950123-99-004545.hdr.sgml : 19990514 ACCESSION NUMBER: 0000950123-99-004545 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19990513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERLIANT INC CENTRAL INDEX KEY: 0001065910 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-74403 FILM NUMBER: 99619150 BUSINESS ADDRESS: STREET 1: 215 FIRST ST CITY: CAMBRIDGE STATE: MA ZIP: 02142 BUSINESS PHONE: 6173744700 FORMER COMPANY: FORMER CONFORMED NAME: SAGE NETWORKS INC DATE OF NAME CHANGE: 19990211 S-1/A 1 AMENDMENT NO. 2 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1999 REGISTRATION NO. 333-74403 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 INTERLIANT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 7379 13-397-8980 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
215 FIRST STREET CAMBRIDGE, MASSACHUSETTS 02142 (617) 374-4700 (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ BRADLEY A. FELD CO-CHAIRMAN OF THE BOARD INTERLIANT, INC. 215 FIRST STREET CAMBRIDGE, MASSACHUSETTS 02142 (617) 374-4700 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: E. ANN GILL, ESQ. DAVID C. DRUMMOND, ESQ. JONATHAN L. FREEDMAN, ESQ. WILSON SONSINI GOODRICH & ROSATI, DEWEY BALLANTINE LLP PROFESSIONAL CORPORATION 1301 AVENUE OF THE AMERICAS 650 PAGE MILL ROAD NEW YORK, NEW YORK 10019 PALO ALTO, CALIFORNIA 94304-1050 (212) 259-8000 (650) 493-9300
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [ ] If this Form is filed to register additional securities for an Offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same Offering. [ ] ________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same Offering. [ ] ________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same Offering. [ ] ________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE - --------------------------------------------------------------------------------------------------------------------- Common Stock ($.01 par value)................................. $77,000,000 $21,406(2) - --------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o). (2) Previously paid. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE THIS REGISTRATION STATEMENT CONTAINS TWO SEPARATE PROSPECTUSES. THE FIRST PROSPECTUS RELATES TO A PUBLIC OFFERING OF SHARES OF COMMON STOCK OF INTERLIANT, INC. IN THE UNITED STATES AND CANADA (THE "U.S. OFFERING"). THE SECOND PROSPECTUS RELATES TO A CONCURRENT OFFERING OF COMMON STOCK OUTSIDE THE UNITED STATES AND CANADA (THE "INTERNATIONAL OFFERING"). THE PROSPECTUSES FOR THE U.S. OFFERING AND THE INTERNATIONAL OFFERING WILL BE IDENTICAL IN ALL RESPECTS, OTHER THAN THE FRONT COVER PAGE, THE "UNDERWRITING" SECTION AND THE BACK COVER PAGE RELATING TO THE INTERNATIONAL OFFERING. SUCH ALTERNATE PAGES APPEAR IN THIS REGISTRATION STATEMENT IMMEDIATELY FOLLOWING THE COMPLETE PROSPECTUS FOR THE U.S. OFFERING. 3 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION. DATED MAY 13, 1999. PROSPECTUS 7,000,000 SHARES [INTERLIANT LOGO] COMMON STOCK ------------------------ This is Interliant's initial public offering of common stock. The U.S. underwriters are offering 6,125,000 shares in the United States and Canada and the international managers are offering 875,000 shares outside the United States and Canada. We expect the public offering price to be between $9.00 and $11.00 per share. After pricing this offering, we expect that the common stock will be quoted on the Nasdaq National Market under the symbol "INIT." INVESTING IN THE COMMON STOCK INVOLVES MATERIAL RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS. ------------------------
PER SHARE TOTAL --------- ----- Public Offering Price...................................... $ $ Underwriting Discount...................................... $ $ Proceeds, before expenses, to Interliant, Inc.............. $ $
The U.S. underwriters may also purchase up to an additional 920,000 shares from Interliant at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The international managers may similarly purchase up to an additional 130,000 shares from Interliant. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares of common stock will be ready for delivery in New York, New York on or about , 1999. ------------------------ MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE CIBC WORLD MARKETS ------------------------ The date of this prospectus is , 1999. 4 [GRAPHICS] Interliant(R) is a registered trademark of Interliant, Inc. 5 TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 6 Use of Proceeds............................................. 18 Dividend Policy............................................. 18 Capitalization.............................................. 19 Dilution.................................................... 20 Selected Consolidated Financial Data........................ 21 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 23 Business.................................................... 32 Management.................................................. 56 Related Party Transactions.................................. 65 Principal Stockholders...................................... 67 Description of Capital Stock................................ 69 Shares Eligible for Future Sale............................. 74 Underwriting................................................ 76 Legal Matters............................................... 79 Experts..................................................... 79 Available Information....................................... 80 Index to Consolidated Financial Statements.................. F-1
------------------------ You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. All references to "we," "us," "our" or "Interliant" in this prospectus means Interliant, Inc. i 6 PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. It is not complete and may not contain all the information that you should consider before investing in the common stock. You should read the entire prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to these statements. Except as otherwise indicated, the information in this prospectus (1) assumes that the underwriters' over-allotment option has not been exercised, (2) assumes conversion of all outstanding shares of redeemable convertible preferred stock and (3) gives retroactive effect to a three-for-one stock split on July 28, 1998. OUR COMPANY We are a provider of a wide range of hosting and enhanced Internet services that enable our customers to deploy and manage their Web sites and network-based applications more effectively than internally developed solutions. Our hosting services store our customers' Web sites, software applications, and data on servers typically housed in our data centers so that others on the Internet can access and interact with our customers' Web sites and network-based applications. Our Web hosting services provide a variety of hosting solutions to meet the needs of businesses of all sizes, as their Web sites develop from low-end marketing brochures to more complex, interactive Web sites and finally to applications integral to their businesses, or mission-critical. Our application hosting services provide our customers remote access to mission-critical software applications and data 24 hours a day, 7 days a week, 365 days a year or 24x7. Since our inception in December 1997, we have grown rapidly through the acquisition of 17 hosting and related Internet service businesses. We provide Web hosting solutions to more than 47,000 customers, representing more than 79,000 registered Web sites that are actively maintained and used. We also host more than 10,000 customized Lotus Notes/Domino based applications for more than 1,300 customers. Our pro forma net loss, giving effect to acquisitions completed to date, was approximately $29.4 million for the year ended December 31, 1998 and our pro forma revenues for that same period were $41.3 million. For the year ended December 31, 1998 and on a pro forma basis giving effect to acquisitions completed to date: - 28.0% of our revenues were derived from our Web hosting product offerings; - 51.3% of our revenues were derived from our application hosting product offerings; - 14.0% of our revenues were derived from consulting services; and - 6.7% of our revenues were derived from other services. The number of businesses using the Internet is growing rapidly. Many of these businesses outsource the hosting of their Web sites and software applications, rather than incur the cost of in-house operations and maintenance. International Data Corporation or "IDC" estimates that the worldwide market for Web hosting services will grow from $696 million in 1998 to $10.7 billion by 2002, a 98.0% compounded annual growth rate. In addition, Forrester Research, Inc. reports that the worldwide market for outsourcing application software products will grow from approximately $1.0 billion in 1997 to over $21.0 billion by 2001, a 111.1% compounded annual growth rate. Today, the hosting market is fragmented, consisting for the most part of: - small local and regional providers who do not have the capital, resources or capabilities to provide quality services at competitive prices; - large national providers who focus on Internet connectivity rather than on hosting; and - consulting and Web design firms for which hosting is not their core competency. We believe that a significant market opportunity exists for a nationally-recognized hosting solutions provider with the scale and expertise to offer a wide range of value-priced services to businesses of all sizes. Through the acquisition and consolidation of hosting and enhanced Internet service businesses, we believe we can offer a full range of hosting services that enable businesses to deploy, use, expand and update their Web sites and applications infrastructures more rapidly and cost-effectively than internally developed solutions. 1 7 Our service offerings comprise three main areas: Web hosting, application hosting and consulting. Web Hosting. Our Web hosting services include the following product offerings: Virtual Hosting. Our virtual hosting solution provides Web site hosting on a server that is owned, managed and housed by us for multiple customers. This is an economical solution for customers with simple or moderately accessed sites. Dedicated Hosting. Our dedicated hosting solution provides Web site hosting on a server that is managed, housed and typically owned by us for a single customer. Dedicated server Web hosting enables a customer to host complex Web sites and applications without the need to incur significant infrastructure and overhead costs. This solution provides greater server and network resources for our customers than virtual hosting and allows them to configure their hardware to optimize site performance. Companies with increasing levels of complexity, traffic or reliance on their Web sites may prefer dedicated hosting. Co-located Hosting. Our co-located hosting solution provides Web hosting services on servers that are owned by our customers but which are managed and housed by us. In general, the co-located servers are housed separately from our shared and dedicated servers in our data centers which we monitor on a 24x7 basis and to which we allow customers limited access. Application Hosting. Our application hosting solution, through which we manage software applications for our customers, is designed to support our customers' Internet, intranet and extranet projects through a variety of service and support options, with our primary platform being Lotus Notes/Domino. In addition, through our strategic alliances with software vendors such as Lotus and Microsoft, we host applications such as legal automation, sales automation and distributed learning. We recently began offering ready-made, network-based software applications that run on a remote server hosted by us, or Internet rental applications, which allow anyone with a Web browser and an Internet connection to use sophisticated server-based applications. Our application hosting services consist of the following solutions: Groupware Hosting. Groupware software applications allow people to work more closely together while located remotely from each other. We offer a range of groupware hosting solutions for the Lotus Notes/Domino platform which provides our customers with the infrastructure needed to support the following: - e-mail and other messaging methods for internal and external communication; - project team collaboration and document sharing; - business process automation and workflow; and - document libraries. Application Outsourcing. We offer a range of application outsourcing services which provide our customers with the ability to capitalize on the latest Internet-enabled technologies while outsourcing information technology operations such as deployment strategies and maintenance and upgrades of software to a third party. Our application outsourcing offerings include: - Legal Automation. Our legal automation solutions package offers our customers a suite of collaborative applications that assist corporate legal departments and their outside counsel in managing cases, budgets, intellectual property and workflow in a secure, reliable environment. - Sales Automation. Our sales automation solutions package provides geographically distributed sales and marketing organizations with all the elements needed to quickly deploy a sales automation solution at a reasonable cost. - Distributed Learning. Our distributed learning solutions offer our customers opportunities to deliver online training solutions. Consulting Services. We provide consulting services to our customers for intranet, extranet and application hosting solutions, as well as for internal networking implementations and back-end Web development projects. Consulting services that we provide include: - desktop and network server support; 2 8 - network architecture and design; - strategic technology planning; and - application development and implementation. We have two state-of-the-art primary data centers in Atlanta, Georgia and Houston, Texas and a recently leased facility in Tysons Corner, Virginia. We house co-located servers in separate limited-access rooms in our Atlanta and Virginia data centers. In addition, we provide application hosting to our customers primarily through our Houston data center. Our Atlanta and Houston data centers are monitored on a 24x7 basis and include: - sophisticated monitoring and diagnosis; - 24x7 customer support; - multiple and high-speed network connections to the Internet; and - uninterruptible power supply. We seek to become the industry leader in hosting by providing businesses with cost-effective, innovative solutions that will allow them to capitalize on the potential of the Internet. To achieve this objective, our strategy includes the following key elements: - Build the Interliant Brand. We intend to continue to build the Interliant brand and strengthen brand recognition by marketing our full range of services through an integrated marketing communications program including public relations, print and online advertising campaigns and other strategic initiatives as well as cooperative promotions with key hardware and software vendors. - Continue Acquisition Program. By integrating acquired companies, we believe we can achieve substantial economies of scale and operating efficiencies which will allow us to service customers of all sizes. Further, we intend to capitalize on business practices of acquired companies that we believe will best maintain our competitive advantage and ensure ongoing delivery of high quality hosting services to our customers. - Expand Multiple Sales Channels. We currently use a variety of sales channels to reach our customers including our recently launched business partner program. We expect to increase our inbound and outbound telesales efforts, which are targeted primarily toward virtual and dedicated hosting customers as well as direct sales, which is targeted primarily toward co-located hosting customers. - Leverage the Interliant Customer Base. We intend to capitalize on the enhanced revenue potential of the combined customer bases of our acquired companies by leveraging the numerous cross-selling opportunities that our expanded line of branded service offerings provides. In this regard, we seek to coordinate the selling efforts of our Web hosting, application hosting and consulting sales force to increase customer leads and referrals. - Develop Strategic Relationships. We have established and continue to seek strategic relationships that enable us to provide complete, scalable and reliable hosting solutions to our customers, resellers and referral partners. On March 10, 1999, we completed the acquisition of substantially all the assets of Interliant, Inc. In connection with that acquisition, we changed our name from Sage Networks, Inc. to Interliant, Inc. For purposes of this document the acquired business of Interliant, Inc. is referred to as Interliant Texas. Interliant Texas had revenues in 1998 of $21.2 million. Upon completion of this offering, Web Hosting Organization LLC will control approximately 60.5% of our common stock. Our principal executive offices are located at 215 First Street, Cambridge, Massachusetts 02142, (617) 374-4700. 3 9 THE OFFERING Common stock offered by us: U.S. Offering........................ 6,125,000 shares International Offering............... 875,000 shares Total.............................. 7,000,000 shares Common stock outstanding after this offering............................. 41,663,045 shares Use of proceeds...................... We currently intend to use the net proceeds from the offering for: - acquisitions; - capital expenditures, including completing and equipping our data centers; - repayment of a promissory note assumed in connection with the acquisition of Interliant Texas; and - working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol............................... INIT SUMMARY CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
HISTORICAL PRO FORMA ------------------------------------------------------------------ ---------------------------- PERIOD FROM DECEMBER 8, 1997 (INCEPTION) THREE MONTHS THREE MONTHS THREE MONTHS TO YEAR ENDED ENDED ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, DECEMBER 31, MARCH 31, 1997 1998 1998 1999 1998 1999 ------------ --------------------- ------------ ------------ ------------- ------------ STATEMENT OF OPERATIONS DATA: Revenues.................. $ -- $ 4,905 $ 13 $ 5,434 $ 41,291 $ 10,341 --------- --------- --------- ---------- --------- ---------- Operating loss............ (158) (9,848) (553) (7,258) (28,982) (11,247) --------- --------- --------- ---------- --------- ---------- Net loss.................. $ (158) $ (9,710) $ (539) $ (7,245) $ (29,411) $ (11,385) ========= ========= ========= ========== ========= ========== Net loss per share --basic and diluted............. $ (0.05) $ (1.10) $ (0.18) $ (0.29) Weighted average shares used in computing net loss per share -- basic and diluted................. 3,000,000 8,799,432 3,000,000 24,769,890 Pro forma net loss per share -- basic and diluted................. $ (1.86) $ (0.40) Shares used in computing pro forma net loss per share -- basic and diluted................. 15,829,762 28,626,240
4 10
AS OF MARCH 31, 1999 ------------------------------------------- PRO FORMA AS ACTUAL PRO FORMA ADJUSTED ------------ ------------ ------------- BALANCE SHEET DATA: Cash and cash equivalents................................. $ 4,376 $ 9,376 $ 65,652 Working capital........................................... (5,462) (462) 63,814 Total assets.............................................. 102,432 107,432 163,132 Debt and capital lease obligations, less current portion................................................. 914 914 914 Redeemable convertible preferred stock.................... 13,000 13,000 -- Total stockholders' equity................................ 71,062 76,062 152,762
The unaudited pro forma statement of operations data gives effect to the acquisitions completed in 1998 and 1999 as if they occurred on January 1, 1998. The unaudited pro forma balance sheet data gives effect to the exercise in April 1999 of warrants to purchase 749,625 shares of common stock for gross proceeds of $5.0 million. See "Description of Capital Stock -- The SOFTBANK Investment." The unaudited pro forma as adjusted balance sheet data gives effect to the conversion of all preferred stock into common stock upon completion of this offering, see "Description of Capital Stock -- The SOFTBANK Investment," and the sale of 7,000,000 shares of common stock offered hereby for net proceeds of $63.7 million after deducting underwriting discounts and commissions and estimated offering expenses. 5 11 RISK FACTORS Investing in our common stock involves risk. You should carefully consider the risks and uncertainties described below and elsewhere in this prospectus before making an investment decision. If any of the following risks or uncertainties actually occur, our business could be adversely affected. In this event, the trading price of our common stock could decline, and you could lose all or a part of your investment. WE HAVE A LIMITED OPERATING HISTORY AND MAY NOT SUCCESSFULLY IMPLEMENT OUR BUSINESS PLAN. We have a very limited operating history. We were incorporated in December 1997 and began offering Web hosting services in February 1998. We only recently completed the acquisition of the application hosting business of Interliant Texas. As a result, our business model is still in development. Our business and prospects must be considered in light of the risks frequently encountered by companies in their early stages of development, particularly companies in the new and rapidly evolving hosting and enhanced Internet services market. Some of these risks relate to our ability to: - build a more comprehensive sales structure to support our business; - provide reliable and cost-effective services to our customers; - continue to build our operations and accounting infrastructure to accommodate additional customers; - respond to technological developments or service offerings by our competitors; - develop and offer new, successful products and services or differentiate such products and services from those offered by our competitors; - enter into strategic relationships with application software vendors; - build, maintain and expand distribution channels; and - attract and retain qualified personnel. We may not be successful in addressing these risks, and if we are not successful, our business could be adversely affected. WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND THESE LOSSES MAY INCREASE IN THE FUTURE. Since our inception in December 1997, we have experienced operating losses and negative cash flows for each quarterly and annual period. As of December 31, 1998 and March 31, 1999, we had an accumulated deficit of approximately $9.9 million and $17.1 million, respectively. We experienced net losses of approximately $9.7 million in the year ended December 31, 1998 and $7.2 million in the three months ended March 31, 1999. The revenues and income potential of our business is unproven, and our limited operating history makes it difficult to evaluate our prospects. We anticipate increased expenses as we expand our sales and marketing initiatives to continue to grow the Interliant brand, fund greater levels of product development, continue to build out our data centers, implement centralized billing, accounting and customer service systems and continue our acquisition program. In addition, we have experienced growth in revenues, primarily attributable to acquisitions, and we do not believe that this growth rate is necessarily indicative of future operating results which will depend not only on continuing our acquisition strategy but also on internal growth. We expect that future acquisitions will increase our operating expenses and operating losses. As a result, we expect to incur operating losses for the foreseeable future. We cannot give any assurance that we will ever achieve profitability on a quarterly or annual basis, or, if we achieve profitability, that it will be sustainable. 6 12 OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS. AS A RESULT, PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF OPERATIONS ARE NOT NECESSARILY MEANINGFUL AND SHOULD NOT BE RELIED UPON AS INDICATIONS OF FUTURE PERFORMANCE. Our quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, some of which are outside of our control. These factors include: - the demand for and market acceptance of our hosting and enhanced Internet services; - our ability to identify, complete and integrate acquisitions to sustain growth; - downward price adjustments by our competitors on services and products they offer which are similar to ours; - changes in the mix of products and services sold by our competitors; - technical difficulties or system downtime affecting the Internet generally or our hosting operations; - the ability to meet any increased technological demands of our customers; - the amount and timing of our costs related to our marketing efforts and service introductions by us or reseller or referral partners; and - economic conditions specific to the hosting industry. Therefore, our operating results for any particular quarter may differ materially from our expectations or those of security analysts and may not be indicative of future operating results which may adversely impact the price of our common stock. THE SUCCESS OF OUR BUSINESS PLAN DEPENDS ON OUR ABILITY TO MAKE ADDITIONAL ACQUISITIONS. We intend to pursue opportunities to expand our business through the acquisition of selected companies in targeted markets. Although we expect to finance future acquisitions, in part, with some of the proceeds from this offering and, at a future date with the issuance of additional shares of our common stock or other debt or equity securities, we cannot guarantee that: - we will be able to identify appropriate acquisition candidates or negotiate acquisitions on favorable terms; - we will be able to obtain the financing necessary to complete future acquisitions; or - the issuance of our common stock or other securities in connection with any future acquisition will not result in a substantial dilution in the ownership interests of holders of our common stock. THE SUCCESS OF OUR BUSINESS PLAN DEPENDS ON THE SUCCESSFUL INTEGRATION OF ACQUISITIONS. Since February 1998, we have acquired 17 businesses, and we are currently pursuing additional acquisitions. Our future success will depend in large part on our ability to integrate these businesses or any future acquired businesses with our existing operations. To integrate these businesses, we will need to: - consolidate their billing and accounting systems into our systems and implement financial and other control systems; - relocate the servers of acquired companies and other equipment to an Interliant facility; - migrate the operations of acquired companies onto our technology platforms; - integrate the customer accounts of acquired companies into our customer service system; - integrate the service offerings of acquired companies into the Interliant brand; and - identify resellers and referral partners of the services of acquired companies and migrate them to our business partner program. 7 13 The 17 businesses we acquired are in various stages of the integration process. Our integration plan is constantly changing as a result of our business activities as well as future acquisitions. We are not able to estimate when, if at all, all acquired companies will be fully integrated. THE COSTS ASSOCIATED WITH AND MANAGEMENT RESOURCES DEDICATED TO INTEGRATING BUSINESSES WE ACQUIRE AND INTERNAL CONTROLS WITH RESPECT TO THOSE ACQUIRED BUSINESSES MAY ADVERSELY AFFECT OUR BUSINESS. We may not be able to successfully integrate acquired businesses with existing operations without substantial costs, delays or other problems, if at all. As we integrate acquired businesses: - we may lose certain customers of acquired companies due to difficulties during the integration process; - we may not be able to bill customers of the acquired companies accurately due to potential deficiencies in the internal controls of the acquired Web hosting companies such as inadequate back-office systems of the acquired companies and potential difficulties in migrating records onto our own systems; - we may experience difficulty in collecting accounts receivable of acquired companies due to inaccurate record keeping of the acquired companies; - key employees of the acquired companies whom we wish to retain may resign; - management's attention and resources could be diverted from our ongoing business concerns; and/or - we may not be able to integrate newly acquired technologies with our existing technologies. Acquisitions also involve a number of other risks, including adverse effects on our operating results from increases in amortization of intangible assets, increased compensation expense associated with newly hired employees and unforeseen liabilities. In addition, any acquired company could significantly underperform relative to our expectations. In particular, acquired companies have often experienced modest revenue declines immediately following the closing of the acquisition. Because we have only recently completed many of our acquisitions, we are currently facing all of these challenges, and we have not established our ability to meet them over the long term. As a result of all of the foregoing, our pursuit of an acquisition strategy could adversely affect our business. OUR RECENT ACQUISITION OF INTERLIANT TEXAS, OUR LARGEST ACQUISITION TO DATE, MAY ADVERSELY AFFECT OUR BUSINESS IF WE DO NOT SUCCESSFULLY INTEGRATE INTERLIANT TEXAS OR IF THE COSTS AND MANAGEMENT RESOURCES WE EXPEND IN CONNECTION WITH THE INTEGRATION EXCEED OUR EXPECTATIONS. In March 1999, we purchased, through a wholly-owned subsidiary, substantially all the assets, and assumed certain liabilities, of Interliant Texas, which had revenues of $21.2 million for the year ended December 31, 1998. Our acquisition of the business of Interliant Texas has been our largest acquisition to date, and we expect that it will have a continuing, significant impact on our business. Although we do not currently intend to integrate all the operations of Interliant Texas into our operations, we still expect to incur significant integration costs. In addition, the following factors could increase the costs of integration: - unexpected employee turnover; - delays in addressing duplicate operations; and - additional fees and charges to obtain consents, regulatory approvals or permits. Further, we cannot guarantee that we will realize the benefits or strategic objectives we are seeking to obtain by acquiring Interliant Texas. Costs associated with this acquisition that exceed our expectations would have an adverse effect on our business. 8 14 A SIGNIFICANT PORTION OF OUR ASSETS CONSISTS OF INTANGIBLE ASSETS, THE RECOVERABILITY OF WHICH IS NOT CERTAIN AND THE AMORTIZATION OF WHICH WILL INCREASE LOSSES OR REDUCE EARNINGS IN THE FUTURE. In connection with all of our acquisitions completed to date, $85.2 million of the aggregate purchase price has been allocated to intangible assets such as covenants not to compete, customer lists, trade names, assembled work force and goodwill. Annual amortization of these intangible assets will amount to approximately $15.4 million and will increase as we acquire additional business. Our business could suffer if changes in our industry or our inability to operate the business successfully and produce positive cash flows from operations result in an impairment in the value of our intangible assets and therefore necessitate a write-off of all or part of these assets. OUR APPLICATION HOSTING SOLUTIONS DEPEND ON SOFTWARE APPLICATIONS PROVIDED TO US UNDER AGREEMENTS WE HAVE WITH APPLICATION SOFTWARE VENDORS. We obtain software products pursuant to agreements with Lotus and Microsoft and package them as part of our application hosting solutions. The agreements are typically for terms ranging from one to three years. If these agreements were terminated or not renewed, we might have to discontinue products or services that are central to our business strategy or delay their introduction unless we could find, license and package equivalent technology. Our business strategy also depends on obtaining additional application software. We cannot be sure, however, that we will be able to obtain the new and enhanced applications we may need to keep our solutions competitive. If we cannot obtain these applications and as a result must discontinue, delay or reduce the availability of our solutions or other products and services, our business may be adversely affected. OUR AGREEMENTS WITH APPLICATION SOFTWARE VENDORS ARE NOT EXCLUSIVE AND MAY NOT PROVIDE US WITH ANY COMPETITIVE ADVANTAGE. None of our third-party agreements are exclusive. Our competitors may also license and utilize the same technology in competition with us. We cannot be sure that the vendors of technology used in our products will continue to support this technology in its current form. Nor can we be sure that we will be able to adapt our own products to changes in this technology. In addition, we cannot be sure that the financial or other difficulties of third party vendors will not have an adverse affect on the technologies incorporated in our products, or that, if these technologies become unavailable, we will be able to find suitable alternatives. WE DEPEND ON OUR RESELLER SALES CHANNEL TO MARKET AND SELL MANY OF OUR SERVICES. We rely significantly on resellers to market and sell our services. We estimate that as of December 31, 1998 approximately 16% of our active hosted domains were maintained by resellers. For this purpose, we include as resellers any entity which has three or more active domains hosted by us. Our failure to maintain and grow our reseller sales channel may adversely affect our business. Our agreements with resellers generally do not require that the resellers sell any minimum level of our services and do not restrict the resellers' development or sale of competitive services. We have very little control over whether these resellers will dedicate resources or give priority to selling our services. We will need to continue to deliver reliable service and keep our reseller pricing and support programs competitive. If we succeed in increasing our sales through resellers, we may lose brand identification and brand loyalty, since our services may not be identified by the Interliant brand or may be marketed differently by our resellers. WE ONLY RECENTLY BEGAN TO OFFER MANY OF OUR PRODUCTS AND SERVICES. IF THEY ARE NOT ACCEPTED BY THE MARKET OR HAVE RELIABILITY OR QUALITY PROBLEMS OUR BUSINESS MAY SUFFER. We have recently introduced new hosting solutions such as providing our customers with integrated text, graphics, video, information and sound capabilities on their Web sites, or multimedia hosting and providing our customers with the ability to rent software applications instead of purchasing them as well as 9 15 enhanced Internet services such as e-commerce and consulting services. If these and other new hosting solutions and enhanced Internet services fail to gain market acceptance, our business could be adversely affected. In addition, if these newly introduced hosting solutions and enhanced Internet services have reliability, quality or compatibility problems, market acceptance of these products could be greatly hindered and our ability to attract new customers could be adversely affected. We cannot offer any assurance that these new solutions and services are free from any reliability, quality or compatibility problems. THE EXPECTED CONTINUED GROWTH IN THE MARKET FOR OUR PRODUCTS AND SERVICES MAY NOT MATERIALIZE. Our market is new and rapidly evolving. Whether the market for our products and services will continue to grow is uncertain. Our business would be adversely affected if the hosting market does not continue to grow or if businesses prove to be unwilling to outsource their hosting business. Our success depends in part on continued growth in the use of the Internet. Our business would be adversely affected if Web usage does not continue to grow. Web usage may be inhibited for a number of reasons, such as: - security and privacy concerns; - uncertainty of legal and regulatory issues concerning the use of the Internet; - inconsistent quality of service; and - lack of availability of cost-effective, high-speed connectivity. OUR RAPID GROWTH AND EXPANSION HAS AND MAY CONTINUE TO SIGNIFICANTLY STRAIN OUR RESOURCES. We are currently experiencing rapid growth, primarily due to our acquisition of 17 businesses since February 1998. In addition, from inception we have grown to 500 employees, which includes 19 employees on a contract basis. This rapid growth of our business and our product and service offerings has placed, and is likely to continue to place, a significant strain on our operating and financial resources. Our future performance will partly depend on our ability to manage our growth effectively, which will require that we further develop our operating and financial system capabilities and controls. We have invested, and intend to continue to invest, significant amounts in billing, accounts receivable, customer service and financial systems which we believe, once implemented, will be able to produce timely, accurate and consistent information as our business continues to grow. However, because we employ a strategy that includes a high level of acquisition activity, at any time there are likely to be one or more operating businesses that have not been fully integrated into our core systems and continue to produce financial and other information from their existing systems. As a result, our ability to record, process, summarize and report financial data could be adversely affected. WE DEPEND ON THE GROWTH AND STABILITY OF THE INTERNET INFRASTRUCTURE. If the use of the Internet continues to grow, its infrastructure may not be able to support the demands placed on it by such growth and its performance or reliability may decline. In addition, Web sites have experienced interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays occur frequently, use of the Internet as a commercial or business medium could, in the future, grow more slowly or decline which would adversely affect our business. WE DEPEND ON OUR NETWORK INFRASTRUCTURE. IF WE DO NOT HAVE CONTINUED ACCESS TO A RELIABLE NETWORK, OUR BUSINESS WILL SUFFER. Our success partly depends upon the capacity, scalability, reliability and security of our network infrastructure, including the capacity leased from our telecommunications network suppliers such as UUNET Technologies, Inc. We depend on these companies to provide uninterrupted and "bug free" 10 16 service and would be adversely affected if such services were not provided. In addition, we would be adversely affected if such companies greatly increased the prices of their services or if the telecommunications capacity available to us was insufficient for our business purposes and we were unable to use alternative networks or pass along any increased costs to our customers. OUR BUSINESS AND EXPANSION MODELS ASSUME THAT WE WILL BE ABLE TO EASILY SCALE OUR NETWORK INFRASTRUCTURE TO SUPPORT INCREASING NUMBERS OF CUSTOMERS AND INCREASED TRAFFIC. HOWEVER, THE SCALABILITY OF OUR NETWORK IS UNPROVEN. We must continue to develop and expand our network infrastructure as the number of users and the amount of information they wish to transport as well as the number of products and services we offer increases and to meet changing customer requirements. Our expansion and adaptation of our telecommunications and hosting facility infrastructure will require substantial financial, operational and management resources. If we are required to expand our network significantly and rapidly due to increased usage, additional stress will be placed upon our network hardware, traffic management systems and hosting facilities. Due to the limited deployment of our services to date, the ability of our network to connect and manage a substantially larger number of customers at high transmission speeds while maintaining superior performance is unknown. As our customers' bandwidth usage increases, we will need to make additional investments in our infrastructure to maintain adequate data transmission speeds, the availability of which may be limited and the cost of which may be significant. Additional network capacity may not be available from third-party suppliers as it is needed by us. As a result, our network may not be able to achieve or maintain a sufficiently high capacity of data transmission, especially if customers' usage increases. Any failure on our part to achieve or maintain high-capacity data transmission could significantly reduce consumer demand for our services and adversely affect our business. WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS, WHICH COULD AFFECT OUR ABILITY TO COMPETE. To succeed, we must be able to operate our network infrastructure on a 24x7 basis without interruption. Our operations depend upon our ability to protect our network infrastructure, equipment and customer files against damage from: - human error; - various natural disasters; - power loss or telecommunications failures; and - sabotage or other intentional acts of vandalism. However, even if we take precautions, the occurrence of a natural disaster or other unanticipated problems at our data centers could result in interruptions in the services we provide to our customers. At this time, we do not have a formal disaster recovery plan. Although we believe that our Atlanta and Houston data centers are state-of-the-art and have sufficient system protections in place to ensure high quality service with minimal interruptions, we estimate that currently only approximately 34% of our customers are hosted in these data centers. In addition, we may not integrate into our Network Operations Centers all the data centers of companies we acquire. Therefore, in some instances, our network reliability may be compromised. Although we have attempted to build redundancy into our network and hosting facilities, our data centers are currently subject to various single points of failure. As a result, a problem with one of our routers, switches or fiber paths could cause an interruption in the services we provide to some of our customers. We have experienced interruptions in service in the past. Any future interruptions could: - require us to spend substantial amounts of money replacing existing equipment or adding redundant facilities; 11 17 - damage our reputation for reliable service; - cause existing end users, resellers and referral partners to cancel their contracts; - cause end users to seek damages for losses incurred; or - make it more difficult for us to attract new end users, resellers and referral partners. Any of these occurrences could adversely affect our business. We have entered into service level agreements with some of our customers, and we anticipate that we will offer service level agreements to a larger group of customers in the future. In that case, we could incur significant liability to our customers in connection with any system downtime and those obligations may adversely affect our business. IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL CHANGE, OUR BUSINESS COULD SUFFER. The Internet industry is characterized by rapidly changing technology, industry standards, customer needs and competition, as well as by frequent new product and service introductions. Our future success will depend, in part, on our ability to accomplish all of the following in a timely and cost-effective manner, all while continuing to develop our business model and roll-out our services on a national level: - effectively use and integrate leading technologies; - continue to develop our technical expertise; - enhance our products and current networking services; - develop new products and services that meet changing customer needs; - advertise and market our products and services; and - influence and respond to emerging industry standards and other changes. We cannot assure you that we will successfully use or develop new technologies, introduce new services or enhance our existing services on a timely basis, or that new technologies or enhancements used or developed by us will achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. OUR FAILURE TO DEVELOP BRAND RECOGNITION FOR THE INTERLIANT BRAND COULD HURT OUR BUSINESS. Upon acquiring Interliant Texas and its application hosting business, we began the process of offering the full range of our hosting products and enhanced Internet services under the Interliant brand. We are currently marketing and expect to continue to market many of our products and services under the Sage Networks brand and the brand names of acquired companies. Our sales and marketing expenses were $2.6 million in the year ended December 31, 1998 and $1.9 million in the three months ended March 31, 1999. A key component of our strategy is to significantly increase our sales and marketing activities. This will include the expansion of our sales force, development of reseller and referral partner channels and increased marketing efforts. As a result, sales and marketing expenses will increase substantially in future periods. We expect sales and marketing expenses for the year ending December 31, 1999 to exceed $20.0 million. Our business could be adversely affected if the Interliant brand is not well received by our customers, our marketing efforts are not productive or we are otherwise unsuccessful in increasing our brand awareness. WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET AND MAY NOT BE ABLE TO COMPETE EFFECTIVELY. Our current and prospective competitors are numerous. Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, 12 18 greater name recognition and more established relationships in the industry than we do. Our current and prospective competitors generally may be divided into the following groups: - other Web hosting and Internet services companies such as AboveNet Communications, Inc., Exodus Communications, Inc., Frontier GlobalCenter, Globix Corporation and local and regional hosting providers; - national and regional Internet service providers such as Concentric Network Corporation, MindSpring Enterprises, Inc., UUNET Technologies, Inc., PSINet Inc. and Verio Inc.; - global telecommunications companies including AT&T Corp., British Telecommunications plc, Telecom Italia SpA and Nippon Telegraph and Telephone Corp.; - regional and local telecommunications companies, including the regional Bell operating companies such as Bell Atlantic Corporation and US West, Inc.; - companies that focus on application hosting such as USinternetworking, Inc. and IBM Global Services; and - multimedia hosting companies such as broadcast.com. WE DEPEND ON THE SKILLS OF KEY PERSONNEL. We are dependent on the continued service of our key personnel, including: - Leonard J. Fassler and Bradley A. Feld, our Co-Chairmen; - Stephen W. Maggs, our Chief Executive Officer and President; - James M. Lidestri, our Executive Vice President; - Rajat Bhargava, our Senior Vice President, Strategic Planning and Integration; and - William A. Wilson, our Chief Financial Officer. We recently entered into one-year employment agreements with Messrs. Fassler, Maggs and Bhargava and a one-year consulting agreement with Mr. Feld through Intensity Ventures, Inc. In addition, in connection with our acquisition of Interliant Texas, we entered into a two-year employment agreement with Mr. Lidestri. The loss of the services of one or more of these people could adversely affect our business. Our Co-Chairmen, Bradley A. Feld and Leonard J. Fassler, are each currently active in, and serve as directors and/or executive officers of, a number of businesses other than Interliant. Although Mr. Feld spends approximately half of his time and Mr. Fassler spends substantially all of his time at Interliant, and both are active in its management, neither is contractually committed to spend any specific amount of time at Interliant. If Mr. Feld or Mr. Fassler were to significantly reduce the time they devoted to Interliant, our business may be adversely affected. WE OPERATE IN AN INDUSTRY WHERE IT IS DIFFICULT TO ATTRACT AND RETAIN QUALIFIED PERSONNEL. We expect that we will need to hire additional personnel in all areas of our business. The competition for personnel throughout our industry is intense. At times, we have experienced difficulty in attracting qualified new personnel. If we do not succeed in attracting new, qualified personnel or retaining and motivating our current personnel, our business could suffer. WE MAY NEED ADDITIONAL FUNDS WHICH, IF AVAILABLE COULD RESULT IN AN INCREASE IN OUR INTEREST EXPENSE OR DILUTION OF YOUR SHAREHOLDINGS. IF THESE FUNDS ARE NOT AVAILABLE, OUR BUSINESS COULD BE HURT. We currently anticipate that our available cash resources combined with the net proceeds from this offering will be sufficient to fund our acquisition program, the expansion of our sales and marketing program, completion of our data centers and our other operating needs through the end of 1999. 13 19 Thereafter, we expect to require additional financing. At this time, we do not have any credit facility or other working capital credit line under which we may borrow funds for working capital or other general corporate purposes. If our plans or assumptions change or are inaccurate, we may be required to seek additional capital or seek capital sooner than anticipated. We may need to raise funds through public or private debt or equity financing. If funds are raised through the issuance of equity securities, the percentage ownership of our then current stockholders may be reduced and such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds are raised through the issuance of debt securities, such securities would have certain rights, preferences and privileges senior to those of the holders of our common stock and the terms of such debt could impose restrictions on our operations. If additional funds become necessary, additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available on acceptable terms, we may not be able to continue to fund our operations and growth or to continue our acquisition program. Our inability to raise capital could adversely affect our business. CURRENCY FLUCTUATIONS AND DIFFERENT STANDARDS, REGULATIONS AND LAWS RELATING TO OUR INTERNATIONAL OPERATIONS MAY ADVERSELY AFFECT OUR BUSINESS. On a pro forma basis, giving effect to acquisitions completed to date, approximately 18.5% of our dollar amount of billings for the year ended December 31, 1998 and 19.8% for the three months ended March 31, 1999 were to customers located outside the United States, primarily in Europe, Asia and South America. Our success may depend in part on expanding our international presence. Because our sales overseas are denominated in U.S. dollars, currency fluctuations may inhibit us from marketing our services to potential foreign customers or collecting for services rendered to current foreign customers. In addition different privacy, censorship and service provider liability standards and regulations and different intellectual property laws in non-U.S. countries may adversely affect our business. DISRUPTION OF OUR SERVICES DUE TO ACCIDENTAL OR INTENTIONAL SECURITY BREACHES MAY ADVERSELY IMPACT OUR BUSINESS. A significant barrier to the growth of e-commerce and communications over the Internet has been the need for secure transmission of confidential information. Despite our design and implementation of a variety of network security measures, unauthorized access, computer viruses, accidental or intentional actions and other disruptions could occur. We may incur significant costs to protect against the threat of security breaches or to alleviate problems caused by such breaches. If a third person were able to misappropriate our users' personal or proprietary information or credit card information, we could be subject to claims, litigation or other potential liabilities. NEW LAWS AND REGULATIONS WHICH IMPACT OUR INDUSTRY COULD HARM OUR BUSINESS. We are not currently subject to direct regulation by the Federal Communications Commission or any other governmental agency, other than regulations applicable to businesses in general. However, in the future, we may become subject to regulation by the FCC or another regulatory agency. Our business could suffer depending on the extent to which our activities are regulated or proposed to be regulated. WE OPERATE IN AN UNCERTAIN REGULATORY AND LEGAL ENVIRONMENT WHICH MAY MAKE IT MORE DIFFICULT TO DEFEND OURSELVES AGAINST ANY CLAIMS BROUGHT AGAINST US. While there are currently few laws or regulations which specifically regulate Internet communications, laws and regulations directly applicable to online commerce or Internet communications are becoming more prevalent. There is much uncertainty regarding the marketplace impact of these laws. In addition, various jurisdictions already have enacted laws covering intellectual property, privacy, libel and taxation that could affect our business by virtue of their impact on online commerce. Further, the growth of the 14 20 Internet, coupled with publicity regarding Internet fraud, may lead to the enactment of more stringent consumer protection laws. If we become subject to claims that we have violated any laws, even if we successfully defend against these claims, our business could suffer. Moreover, new laws that impose restrictions on our ability to follow current business practices or increase our costs of doing business could hurt our business. IF STATES AND COUNTRIES IN WHICH WE DO NOT CURRENTLY COLLECT SALES OR OTHER TAXES MANDATE THAT WE DO SO, OUR BUSINESS COULD SUFFER. We currently do not collect sales or other taxes with respect to the sale of services or products in states and countries where we believe we are not required to do so. We do collect sales and other taxes in the states and countries in which we have offices and are required by law to do so. One or more jurisdictions have sought to impose sales or other tax obligations on companies that engage in online commerce within their jurisdictions. A successful assertion by one or more jurisdictions that we should collect sales or other taxes on our products and services, or remit payment of sales or other taxes for prior periods, could have an adverse effect on our business. WE COULD FACE LIABILITY FOR INFORMATION DISSEMINATED THROUGH OUR NETWORK. It is possible that claims could be made against online services companies and Internet service providers in connection with the nature and content of the materials disseminated through their networks. Several private lawsuits are pending against other entities which seek to impose liability upon online services companies and Internet service providers as a result of the nature and content of materials disseminated over the Internet. If any of these actions succeed, we might be required to respond by investing substantial resources or discontinuing some of our service or product offerings. The increased attention focused upon liability issues as a result of these lawsuits and legislative proposals could impact the growth of Internet use. Although we carry professional liability insurance, it may not be adequate to compensate or may not cover us in the event we become liable for information carried on or disseminated through our networks. Any costs not covered by insurance incurred as a result of such liability or asserted liability could adversely affect our business. WE DEPEND ON THE PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS. We currently license and may in the future license certain technologies from third parties, which may subject us to infringement actions based upon the technologies licensed from these third parties. Any of these claims, with or without merit, could subject us to costly litigation and divert the attention of our technical and management personnel. These third-party technology licenses may not continue to be available to Interliant on commercially reasonable terms. The loss of the ability to use such technology could require Interliant to obtain the rights to use substitute technology, which could be more expensive or offer lower quality or performance, and therefore have a material adverse effect on Interliant's business. OUR COMPUTER SYSTEMS AND THOSE OF THIRD PARTIES WITH WHOM WE DO BUSINESS MAY NOT BE YEAR 2000 COMPLIANT, WHICH MAY CAUSE SYSTEM FAILURES AND DISRUPTIONS OF OPERATIONS. Currently, many computer and software products are coded to accept two-digit entries in the date code field. These date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems, including ours, may need to be upgraded or replaced in order to comply with Year 2000 requirements. We recognize the need to ensure that our operations will not be adversely impacted by Year 2000 software and computer system failures. We have made a preliminary assessment of the Year 2000 readiness of our information technology systems. In addition, we are currently seeking assurances from our material hardware and software vendors that their products are Year 2000 compliant. Until such process is complete, we will not be able to completely evaluate whether our information technology systems will need to be revised or replaced. 15 21 Although we have not incurred any material expenditures in connection with identifying or evaluating Year 2000 compliance issues to date, we do not at this time possess the information necessary to estimate the potential costs of revisions or replacements to our software and systems or third party software, hardware or services that are determined not to be Year 2000 compliant. Such expenses, if higher than anticipated, could have a material adverse effect on our business. Although we are not currently aware of any Year 2000 compliance problems relating to our information technology systems that would have a material adverse effect on our business, there is no assurance that we will not discover any such compliance problems. Our failure to fix or replace our software, hardware or services on a timely basis could result in lost revenues, increased operating costs and the loss of customers and other business interruptions, any of which could have a material adverse effect on our business. Moreover, the failure to adequately address Year 2000 compliance issues in our information technology systems could result in claims of mismanagement, misrepresentation or breach of contract and related litigation, which could be costly and time-consuming to defend. OUR STOCK PRICE MAY BE VOLATILE. There has not been a public market for our common stock. We cannot predict the extent to which investor interest in Interliant will lead to the development of a trading market or how liquid that market might become. Further, we cannot guarantee that the price of our common stock will not decline below the initial public offering price. Stock prices of technology companies, especially Internet-related companies, have been highly volatile. The initial public offering price may not be indicative of prices that will prevail in the trading market. Various factors could cause the market price of our common stock to fluctuate substantially. These factors may include: - variations in our revenue, earnings and cash flow; - announcements of new service offerings, technological innovations or price reductions by us, or our competitors or providers of alternative services; and - changes in analysts' recommendations or projections and general economic and market conditions. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against such a company. Such litigation could result in substantial costs and a diversion of management's attention and resources and could have a material adverse effect on our business. WEB HOSTING ORGANIZATION LLC WILL CONTROL APPROXIMATELY 60.5% OF OUR COMMON STOCK AFTER THIS OFFERING, AND ITS INTERESTS MAY BE IN CONFLICT WITH THOSE OF INTERLIANT AND THE OTHER STOCKHOLDERS. Immediately following this offering, Web Hosting Organization LLC will control approximately 60.9% of our outstanding common stock. Accordingly, Web Hosting Organization LLC will be able to control any stockholder vote, including any vote on the election of directors. The members of Web Hosting Organization LLC are affiliates of Charterhouse Group International, Inc. and the WHO Management LLC, of which Interliant's Co-Chairmen, Leonard J. Fassler and Bradley A. Feld, are the member managers. Web Hosting Organization LLC's interests could conflict with the interests of our other stockholders. See "Description of Capital Stock -- The WEB Hosting Organization Investment" and "Related Party Transactions." Charterhouse Equity Partners III, L.P., which is an affiliate of Charterhouse Group International, Inc., has the ability to control our direction and future operations through its significant equity ownership of Web Hosting Organization LLC. Certain decisions concerning our operations or financial structure may present conflicts of interest between Charterhouse and our other stockholders. In addition to its investments in us, Charterhouse or its affiliates may in the future invest in other entities engaged in the hosting business or other Internet-related business. As a result, Charterhouse or its affiliates have, and may develop, relationships with businesses that are or may be competitive with us. Conflicts may also arise in the negotiation or enforcement of arrangements entered into by us and entities in which Charterhouse has 16 22 an interest. Such conflicts of interest could cause Charterhouse to use its significant ownership interest to force us to act in a manner adverse to the interests of our other stockholders. OUR STOCK PRICE MAY BE AFFECTED BY THE AVAILABILITY OF SHARES FOR SALE IN THE NEAR FUTURE. THE FUTURE SALE OF LARGE AMOUNTS OF OUR STOCK, OR THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD NEGATIVELY AFFECT OUR STOCK PRICE. The market price of the common stock could drop as a result of sales of a large number of shares of common stock in the market after this offering. There will be 41,663,045 shares of common stock outstanding immediately after this offering. The 7,000,000 shares of common stock sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, unless such shares are held by "affiliates" of Interliant, as that term is defined in Rule 144 under the Securities Act. Of the remaining 34,663,045 shares of common stock 34,621,085 are subject to restrictions under Rule 144 of the Securities Act. Holders of 32,320,790 restricted shares have registration rights with respect to such shares. However, such shares are subject to lock-up agreements pursuant to which the holders of these shares have agreed, subject to certain limited exceptions, not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this prospectus, or exercise their registration rights, without the prior written consent of Merrill Lynch & Co., Inc. See "Shares Eligible for Future Sale." At the time of this offering, 3,649,234 shares of common stock issuable upon exercise of options issued as compensation will also become available for resale in the public market at prescribed times. We also intend to register under the Securities Act the shares of common stock reserved for issuance under our stock option plan. See "Shares Eligible for Future Sale." FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. This prospectus contains certain forward-looking statements, relating to, among other things, future results of operations, growth plans, sales, gross margin and expense trends, capital requirements and general industry and business conditions applicable to Interliant. These forward-looking statements are based largely on Interliant's current expectations and are subject to a number of risks and uncertainties. When used in this prospectus, the words "anticipate," "believe," "estimate" and similar expressions are generally intended to identify forward-looking statements. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this "Risk Factors" discussion, important factors to consider in evaluating such forward-looking statements include changes in external competitive market factors, changes in Interliant's business strategy or an inability to execute its strategy due to unanticipated changes in the hosting industry or the economy in general and various other competitive factors that may prevent Interliant from competing successfully in existing or future markets. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this prospectus will be in fact realized. 17 23 USE OF PROCEEDS We estimate that we will receive net proceeds from the sale of 7,000,000 shares in this offering of approximately $63.7 million assuming an initial public offering price of $10.00 and, after deduction of underwriting discounts and commissions and expenses payable by us, estimated at $6.3 million. We currently intend to use approximately $40.0 million of the net proceeds of this offering for acquisitions. We are currently engaged in discussions with respect to several acquisitions. See "Business -- Strategy" and "-- Acquisition Program." We also expect to use the net proceeds as follows: - approximately $9.0 million for capital expenditures including completing and equipping our data centers; and - $8.0 million for repayment of a 9% promissory note issued in favor of Matthew Wolf in connection with the acquisition of Interliant Texas, which will be paid in full on the consummation of this offering. See "Business -- Technology and Network Operations -- Network Operations" and "-- Facilities." The balance of the net proceeds of this offering will be used for working capital and general corporate purposes. Pending use of the net proceeds for the above purposes, we intend to invest such funds in short-term investment grade interest-bearing securities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DIVIDEND POLICY We have never paid or declared any cash dividends on our common stock. We currently intend to retain any future earnings for our business and, therefore, do not anticipate paying cash dividends in the foreseeable future. Future dividends, if any, will depend on, among other things, our results of operations, capital requirements, restrictions in loan agreements and on such other factors as our Board of Directors may, in its discretion, consider relevant. 18 24 CAPITALIZATION The following table sets forth at March 31, 1999 (1) our actual capitalization, (2) capitalization on a pro forma basis to reflect (a) the amendment of our Restated Certificate of Incorporation to provide for authorized capital stock of 200,000,000 shares of common stock and 1,000,000 shares of undesignated preferred stock and (b) the exercise in April 1999 of warrants to purchase 749,625 shares of common stock for gross proceeds of $5.0 million and (3) the pro forma capitalization adjusted to reflect (a) the conversion of 2,647,658 shares of Series A Redeemable Convertible Preferred Stock into an equal number of shares of common stock upon the consummation of this offering (see "Description of Capital Stock -- The SOFTBANK Investment") and (b) this offering, assuming an initial public offering price of $10.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses. You should read this table in conjunction with the Selected Consolidated Financial Data, the Unaudited Pro Forma Consolidated Financial Statements and Interliant's Consolidated Financial Statements and Notes thereto included elsewhere in this prospectus.
MARCH 31, 1999 ------------------------------------ PRO FORMA ACTUAL PRO FORMA AS ADJUSTED -------- --------- ----------- (DOLLARS IN THOUSANDS) Notes payable, less current portion....................... $ 914 $ 914 $ 914 ======== ======== ======== Series A Redeemable Convertible Preferred Stock, $0.01 par value; 2,647,658 shares authorized and outstanding, actual and pro forma; and 0 shares authorized and outstanding, pro forma as adjusted...................... 13,000 13,000 Stockholders' equity: Preferred stock, 0 shares authorized, actual; 1,000,000 shares authorized, 0 shares issued and outstanding, pro forma and pro forma as adjusted.................. Common stock, $0.01 par value; 100,000,000 shares authorized, 30,998,802 shares issued and outstanding, actual; 200,000,000 shares authorized, 31,748,427 shares issued and outstanding, pro forma; 200,000,000 shares authorized, 41,396,085 shares issued and outstanding, pro forma as adjusted(1)................ 310 317 414 Additional paid-in capital.............................. 89,067 94,060 170,663 Deferred compensation................................... (1,202) (1,202) (1,202) Accumulated deficit..................................... (17,113) (17,113) (17,113) -------- -------- -------- Total stockholders' equity.............................. 71,062 76,062 152,762 -------- -------- -------- Total capitalization............................ $ 84,976 $ 89,976 $153,676 ======== ======== ========
- --------------- (1) Excludes 3,322,194 shares of common stock issuable upon exercise of options outstanding under our 1998 Stock Option Plan at a weighted average exercise price of $1.76. See "Management." 19 25 DILUTION Our pro forma negative net tangible book value as of March 31, 1999 was $(2.9) million or $(0.09) per share of common stock. The pro forma net tangible book value per share of common stock is determined by subtracting our total liabilities from the total book value of our tangible assets and dividing the difference by the number of shares of common stock deemed to be outstanding on the date as of which such book value is determined, after giving effect to the pro forma events listed in the introductory paragraph of "Capitalization." After giving effect to (a) the conversion of 2,647,658 shares of Series A Redeemable Convertible Preferred Stock into shares of common stock upon the consummation of this offering (see "Description of Capital Stock -- The SOFTBANK Investment") (b) receipt of net proceeds from the sale of the 7,000,000 shares of common stock in this offering, assuming an initial public offering price of $10.00 per share and after deducting the estimated underwriting discounts and commissions and offering expenses, the pro forma net tangible book value of Interliant as of March 31, 1999 would have been $73.8 million, or $1.78 per share. This represents an immediate increase in net tangible book value of $1.87 per share to existing stockholders and an immediate dilution of $8.22 per share to new investors purchasing shares at the initial public offering price. Dilution is defined as the reduction in the proportion of income, or earnings per share, to which each share is entitled due to the issuance of additional shares. The following table illustrates the per share dilution: Assumed initial public offering price per share............. $10.00 Pro forma net tangible book value per share as of March 31, 1999............................................... (0.09) Increase per share attributable to new investors.......... 1.87 ----- Pro forma net tangible book value per share after this offering.................................................. 1.78 ------ Dilution per share to new investors......................... $ 8.22 ======
The following table summarizes on a pro forma basis, as of March 31, 1999, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by the existing stockholders and by the investors purchasing shares of common stock in this offering (before deducting the estimated underwriting discounts and commissions and offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION ------------------------- ------------------------- NUMBER PERCENT AMOUNT PERCENT AVERAGE PRICE PER SHARE -------------- ------- -------------- ------- ----------------------- (IN THOUSANDS) (IN THOUSANDS) Existing stockholders..... 28,597(1) 80.3 $ 60,000(1) 46.2 $ 2.10 New investors............. 7,000 19.7 70,000 53.8 10.00 ------ ----- -------- ----- Total........... 35,597 100.0 $130,000 100.0 ====== ===== ======== =====
The foregoing table assumes no exercise of stock options outstanding. As of the date hereof there are options outstanding to purchase a total of 3,649,234 shares of common stock at a weighted average per share exercise price of $2.40. To the extent that any of these options are exercised, there will be further dilution to new investors. See "Capitalization," "Management -- Stock Option Plan," "Description of Capital Stock" and Note 7 of Notes to Consolidated Financial Statements. - --------------- (1) Includes 2,647,658 shares of common stock issuable upon conversion of preferred stock for total consideration of $13,000,000. 20 26 SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) The following selected consolidated financial data should be read in conjunction with Interliant's (formerly Sage Networks, Inc.) Consolidated Financial Statements and Notes thereto, the Unaudited Pro Forma Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus. The statement of operations data for the period ended December 31, 1997 and the year ended December 31, 1998, and the balance sheet data as of December 31, 1997 and 1998, are derived from the consolidated financial statements of Interliant that have been audited by Ernst & Young LLP, independent auditors, whose report with respect thereto is included elsewhere in this prospectus. The statement of operations data for the three months ended March 31, 1998 and 1999 and the balance sheet data as of March 31, 1999 have been derived from the unaudited financial statements included in this prospectus. We believe that the unaudited historical financial statements contain all adjustments needed to present fairly the information in those statements, and that the adjustments made consist only of recurring adjustments. The unaudited pro forma statement of operations data for the year ended December 31, 1998 and for the three months ended March 31, 1999 assumes that the acquisitions completed in 1998 and 1999 had occurred on January 1, 1998, and includes the historical consolidated statements of operations of Interliant, adjusted for the pro forma effects of such acquisitions. The unaudited pro forma balance sheet data gives effect to the exercise in April 1999 of warrants to purchase 749,625 shares of common stock for gross proceeds of $5.0 million. See "Description of Capital Stock -- The SOFTBANK Investment." The unaudited pro forma as adjusted balance sheet data gives effect to the conversion of 2,647,658 shares of Series A Redeemable Convertible Preferred Stock into shares of common stock upon consummation of this offering (see "Description of Capital Stock -- The SOFTBANK Investment") and the sale of 7,000,000 shares of common stock offered hereby. Results of operations for the period from inception to December 31, 1997 and for the year ended December 31, 1998 and for the three months ended March 31, 1999 are not necessarily indicative of results of operations for future periods. Interliant's development and expansion activities, including acquisitions, during the periods shown below may significantly affect the comparability of this data from one period to another. The unaudited pro forma statement of operations data is not necessarily indicative of the results of operations that would actually have occurred if the transactions had been consummated as of January 1, 1998 and is not intended to indicate the expected results for any future period. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
HISTORICAL PRO FORMA ----------------------------------------------------------- --------------------------- PERIOD FROM DECEMBER 8, 1997 THREE MONTHS THREE MONTHS THREE MONTHS (INCEPTION) TO YEAR ENDED ENDED ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, DECEMBER 31, MARCH 31, 1997 1998 1998 1999 1998 1999 -------------- ------------ ------------ ------------ ------------ ------------ STATEMENT OF OPERATIONS DATA: Revenues...................... $ -- $ 4,905 $ 13 $ 5,434 $ 41,291 $ 10,340 Costs and expenses: Cost of revenues............ -- 3,236 54 3,251 20,291 5,976 Sales and marketing......... -- 2,555 111 1,896 9,394 3,487 General and administrative............ 156 5,121 256 3,700 20,575 5,558 Depreciation................ 2 696 9 700 3,820 1,279 Amortization of intangibles............... -- 1,417 2 2,082 14,465 4,224 Start-up and acquisition integration costs......... -- 1,728 134 1,063 1,728 1,063 ---------- ---------- ---------- ----------- ----------- ----------- Operating loss................ (158) (9,848) (553) (7,258) (28,982) (11,247) Interest income and other non- operating expense........... -- 138 14 13 (429) (138) ---------- ---------- ---------- ----------- ----------- ----------- Net loss...................... $ (158) $ (9,710) $ (539) $ (7,245) $ (29,411) $ (11,385) ========== ========== ========== =========== =========== =========== Net loss per share -- basic and diluted................. $ (0.05) $ (1.10) $ (0.18) $ (0.29) Weighted average shares used in computing net loss per share -- basic and diluted..................... 3,000,000 8,799,432 3,000,000 24,769,890 Pro forma net loss per share -- basic and diluted..................... $ (1.86) $ (0.40) Shares used in computing pro forma net loss per share -- basic and diluted........... 15,829,762 28,626,240
21 27
AS OF MARCH 31, 1999 AS OF AS OF ---------------------------------- DECEMBER 31, DECEMBER 31, PRO FORMA 1997 1998 ACTUAL PRO FORMA AS ADJUSTED ------------ ------------ -------- --------- ----------- BALANCE SHEET DATA: Cash and cash equivalents.................... $ 912 $ 6,813 $ 4,376 $ 9,376 $ 65,652 Working capital.............................. 815 3,755 (5,462) (462) 63,814 Total assets................................. 953 27,219 102,432 107,432 163,132 Debt and capital lease obligations, less current portion............................ -- -- 914 914 914 Redeemable, convertible preferred stock...... -- -- 13,000 13,000 Total stockholders' equity................... 842 22,716 71,062 76,062 152,762
HISTORICAL PRO FORMA -------------------------------------------- ---------------------------- PERIOD FROM DECEMBER 8, 1997 (INCEPTION) THREE MONTHS THREE MONTHS TO YEAR ENDED ENDED YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, 1997 1998 1999 1998 1999 ------------ ------------ ------------ ------------ ------------ OTHER DATA: EBITDA(1).......................... $ (156) $ (7,735) $ (4,476) $ (10,697) $ (5,744) Net cash flows from operating activities....................... (59) (6,001) (4,210) Net cash flows from investing activities....................... (29) (17,919) (21,807) Net cash flows from financing activities....................... 1,000 29,821 23,580 Net capital expenditures........... 29 4,322 984
- --------------- (1) EBITDA represents earnings before net interest expense, income taxes, depreciation and amortization and other income (expense). EBITDA is presented because it is a widely accepted financial indicator used by certain investors and analysts to analyze and compare companies on the basis of operating performance and because our management believes that EBITDA is an additional meaningful measure of performance and liquidity. EBITDA is not intended to present cash flows for the period, nor has it been presented as an alternative to operating income (loss) as an indicator of operating performance and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. The items excluded from the calculation of EBITDA are significant components in understanding and assessing our financial performance. Our computation of EBITDA may not be comparable to the computation of similarly titled measures of other companies. EBITDA does not represent funds available for discretionary uses. See Interliant's (formerly Sage Networks, Inc.) Consolidated Financial Statements and Notes thereto appearing elsewhere in this prospectus. 22 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following description of our financial condition and results of operations in conjunction with the Consolidated Financial Statements and the Notes thereto and the Unaudited Pro Forma Consolidated Financial Statements included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in "Risk Factors," "Business" and elsewhere in this prospectus. OVERVIEW We are a provider of a wide range of hosting and enhanced Internet services that enable our customers to deploy and manage their Web sites and network-based applications more effectively than internally developed solutions. Our Web hosting services provide virtual, dedicated and co-located hosting solutions to meet the needs of businesses of all sizes, as their Web sites develop from low-end marketing brochures to more complex, interactive Web sites and finally to Web sites that are integral to the operating, marketing and sales and customer support functions, or mission-critical, of a business. Our application hosting services consist of groupware hosting and application outsourcing solutions that can provide our customers with 24x7 remote access to mission-critical applications and data required by their businesses. During 1998 and 1999, our strategy has been to rapidly acquire operating companies in the Web hosting and application hosting services businesses, to build or acquire data centers, and to integrate the acquired operations into those data centers. We acquired 17 operating businesses during 1998 and 1999 for total consideration of approximately $85.2 million, including transaction costs. We have accounted for all acquisitions using the purchase method of accounting which has resulted in the inclusion of substantial intangible assets on our balance sheet. Of the total consideration, we paid $7.9 million of assumed seller debt and have or will allocate approximately $(9.7) million to tangible net assets and $87.0 million to intangible assets which are comprised of covenants not to compete, customer lists, assembled work force, trade names and goodwill. In connection with acquisitions where specific intangible assets were not stated in the purchase agreements, an allocation methodology was applied to each acquisition to determine the value to be assigned to each type of intangible asset where appropriate. Amounts not allocated to specific intangible assets have been recorded as goodwill. Recoverability of our investment in intangible assets is dependent on our ability to operate our business successfully and generate positive cash flows from operations. Annual charges to operations for amortization of intangible assets will be approximately $15.4 million, which will result in increased losses or reduced net income. During 1998, we charged approximately $1.4 million of amortization of the intangible assets to operations. Additionally, during 1998 we issued stock valued at approximately $2.6 million as compensation in connection with agreements entered into with sellers of acquired operating businesses. During 1998, we amortized and charged to operations approximately $0.8 million of deferred compensation. The purchase consideration for the acquisitions was in the form of cash, stock or a combination of cash and stock. See "Business -- Acquisition Program." Most of the operating businesses we acquired in 1998 have been small and entrepreneurial in nature and highly dependent on the focus and attention of the owners. It has been our experience that during the negotiation period prior to an acquisition, the attention of the owners has been diverted from the operation of the business. The result of this has often been a modest revenue decline immediately following the closing of the acquisition. In most cases, the owner continued to have direct responsibility for the acquired business, but in some instances, we re-assigned the owner to take advantage of unique skill sets that have broad application within our operations. In those cases, the operating businesses have experienced a modest decline in revenues due to loss of customers. These factors resulted in minimal aggregate internal growth in 1998 for us and the businesses we acquired. 23 29 Since our inception in December 1997, we have experienced operating losses and negative cash flows from operating activities for each quarterly and annual period. As of December 31, 1998, we had an accumulated deficit of approximately $9.9 million. Had the companies acquired to date been included since January 1, 1998, our accumulated deficit would have been $29.5 million. The revenue and income potential of our business is unproven and its limited operating history makes an evaluation of us and our prospects difficult. We anticipate increased operating expenses as we: - expand our sales and marketing initiatives to continue to grow our brands; - fund greater levels of product development; - continue to build-out our data centers; - implement centralized billing, accounting and customer service systems; and - continue our acquisition program. Although we have experienced revenue growth, primarily attributable to acquisitions, we do not believe that this growth is necessarily indicative of future operating results. Future acquisitions are expected to increase operating expenses and operating losses and as a result, we expect to incur operating losses for the foreseeable future. We cannot assure you that we will ever achieve profitability on a quarterly or annual basis, or, if achieved, that we will sustain profitability. See "Risk Factors -- We have a history of significant losses and these losses may increase in the future." RESULTS OF OPERATIONS We derive our revenues from Web hosting, enhanced Internet services and consulting services. In March 1999, we acquired Interliant Texas to enter the application hosting market. Revenues for our Web hosting business consist primarily of hosting fees and setup fees, which cover costs incurred by us to establish a customer's Web site. We provide virtual, dedicated and co-located hosting. We charge our Web hosting customers a fixed amount for bandwidth availability and incremental fees if those fixed amounts are exceeded. In addition, our virtual Web hosting customers are also charged for disk space on a server, dedicated hosting customers are charged for use of one or more dedicated servers and our co-located customers are charged for the amount of physical space such co-located customers' servers occupy. We charge flat rates for our enhanced Internet services. For application hosting, our revenues are comprised primarily of a one-time implementation fee and monthly usage fees per number of end users, including bandwidth fees. For our consulting services, we charge either a fixed fee or a fee based on time and materials. Our contracts with our Web hosting customers typically range in length from month-to-month to one year, a large proportion of which are cancellable by either us or our customers with 30 days notice. Our contracts with our application hosting customers typically range in length from one year to three years. Revenues derived from hosting are recognized ratably over the applicable contractual period. Payments received and billings in advance of providing services are deferred until such services are provided. Revenues from consulting services are recognized as the services are rendered. Substantially all of our consulting contracts call for billings on a time and materials basis. Cost of revenues consists primarily of salaries and related expenses associated with consulting and network operations personnel as well as data communications expenses, including one-time fees for circuit installation and variable recurring circuit payments to network providers. Monthly circuit charges vary based upon circuit type, distance and usage, as well as the term of the contract with the carrier. Sales and marketing expense consists of personnel costs associated with the direct sales force, the internal telesales group and product marketing employees, as well as costs associated with marketing programs, product literature, external telemarketing costs and corporate marketing activities, including public relations. 24 30 Start-up and acquisition integration costs consist primarily of salaries for our acquisition and integration team as well as related travel expenses. General and administrative expense includes the cost of customer service functions including: - finance; - accounting; - human resources; - legal and executive salaries; and - fees paid for professional services and corporate overhead. THREE MONTHS ENDED MARCH 31, 1999 AND 1998 Revenues Revenues were $5.4 million for the three months ended March 31, 1999 representing an increase of $5.4 million from the comparable 1998 period. The increase in revenues was due primarily to the 15 acquisitions consummated during the last three quarters of 1998 and the first quarter of 1999. On a pro forma basis, giving effect to acquisitions completed to date, revenues for the quarter ended March 31, 1999 were $10.3 million. Interliant Texas accounted for 44.8% of such revenues. Revenues for Interliant Texas were $4.6 million for the quarter ended March 31, 1999 compared to $4.8 million for the quarter ended March 31, 1998. This decrease was due to lower bandwidth charges to our customers in 1999. For the three months ended March 31, 1999, on a pro forma basis and giving effect to acquisitions completed to date: - Web hosting revenues comprised 31.4% of our revenues; - application hosting revenues comprised 44.8% of our revenues; - consulting services revenues comprised 16.0% of our revenues; and - each of disk space, excess bandwidth and one-time implementation fee revenues have been de minimus. Cost of Revenues Cost of revenues increased by $3.2 million for the three months ended March 31, 1999. This increase was attributable to the 15 acquisitions consummated during the last three quarters of 1998 and the first quarter of 1999. In the future, cost of revenues may fluctuate due to capacity utilization, the timing of investments in data centers, changes in the mix of services, fluctuations in bandwidth costs and increased levels of staffing. On a pro forma basis, giving effect to acquisitions completed to date, cost of revenues for the quarter ended March 31, 1999 were $6.0 million. Interliant Texas accounted for 46.7% of such costs of revenues. Cost of revenues for Interliant Texas were $2.8 million for the quarter ended March 31, 1999, approximately the same as the amount for the quarter ended March 31, 1998. Sales and Marketing Sales and marketing expense increased by $1.8 million for the three months ended March 31, 1999. This increase was attributable to the 15 acquisitions consummated during the last three quarters of 1998 and the first quarter of 1999. A key component of our strategy is to significantly increase our sales and marketing activities for application hosting and Web hosting products. This will include the expansion of our sales force, development of reseller and referral partner channels and increased marketing efforts to 25 31 grow recognition of our brands. As a result, sales and marketing expenses will increase substantially in future periods. We expect sales and marketing expenses for the year ending December 31, 1999 to exceed $20.0 million. On a pro forma basis, giving effect to acquisitions completed to date, sales and marketing expense for the three months ended March 31, 1999 was $3.5 million. Interliant Texas accounted for 53.2% of such sales and marketing expense. Sales and marketing expense for Interliant Texas were $1.9 million for the three months ended March 31, 1999 compared to $1.5 million for the three months ended March 31, 1998. This increase was attributable to increased personnel in the sales force and the marketing staff. General and Administrative General and administrative expense increased by $3.4 million for the three months ended March 31, 1999. This increase in general and administrative expense was attributable to the 15 acquisitions consummated during the last three quarters of 1998 and the first quarter of 1999 and increased investments in infrastructure and levels of staffing to implement centralized billing, accounting and customer service systems to integrate the operations of acquired companies. Substantial staffing increases are expected to continue in future periods. On a pro forma basis, giving effect to acquisitions completed to date, general and administrative expense for the three months ended March 31, 1999 was $5.6 million. Interliant Texas accounted for 28% of such general and administrative expense. General and administrative expense of Interliant Texas was $1.6 million for the three months ended March 31, 1999 compared to $1.3 million for the three months ended March 31, 1998. This increase was attributable to higher professional fees and training expenses. Depreciation Depreciation expense increased by $0.7 million for the three months ended March 31, 1999. This increase in depreciation expense was attributable to the 15 acquisitions consummated during the last three quarters of 1998 and the first quarter of 1999 and investment in plant and equipment by us to complete our data center in Atlanta. We expect depreciation expense to increase in the future as we continue to invest in data centers and systems to integrate future acquisitions and support future growth. On a pro forma basis, giving effect to acquisitions completed to date, depreciation expense for the three month period ended March 31, 1999 was $1.3 million. Interliant Texas accounted for 53.8% of such depreciation expense. Depreciation expense of Interliant Texas was $0.7 million compared to $0.5 million for the three month period ended March 31, 1998. This increase was due to an increase in investment in computer hardware, primarily servers. Amortization Amortization expense increased by $2.1 million for the three months ended March 31, 1999. This increase in amortization expense was attributable to the 15 acquisitions consummated during the last three quarters of 1998 and the first quarter of 1999. We expect amortization expense to increase in future periods as we continue to make additional acquisitions as well as reflect amortization of intangibles associated with acquisitions consummated to date. On a pro forma basis, giving effect to acquisitions completed to date, amortization expense for the three month period ended March 31, 1999 was $4.2 million. Amortization expense related to the acquisition of Interliant Texas represented 42.8% of such amortization expense. Start-up and Acquisition Integration Costs Start-up and acquisition integration costs increased by $0.9 million for the three months ended March 31, 1999. This increase was attributable to our continuing acquisition program and our expanded acquisition integration team, including salaries and travel expenses, and the amortization of deferred stock compensation costs. 26 32 YEAR ENDED DECEMBER 31, 1998 AND 1997 Revenues Our revenues increased by $4.9 million for the year ended December 31, 1998. This increase in revenues was primarily attributable to the 12 acquisitions consummated during 1998. On a pro forma basis, giving effect to acquisitions completed to date, revenues for the year ended December 31, 1998 were $41.3 million. Interliant Texas accounted for 51% of such revenues. Revenues for Interliant Texas were $21.2 million for the year ended December 31, 1998 compared to $16.9 million for the year ended December 31, 1997. This increase was primarily due to an increase in the number of higher revenue generating customers. For the year ended December 31, 1998, on a pro forma basis and giving effect to acquisitions completed to date: - Web hosting revenues comprised 28.0% of our revenues; - application hosting revenues comprised 51.3% of our revenues; - consulting services revenues comprised 14.0% of our revenues; and - each of disk space, excess bandwidth and one-time implementation fee revenues have been de minimus. Cost of Revenues Cost of revenues increased by $3.2 million for the year ended December 31, 1998. This increase in cost of revenues was attributable to the 12 acquisitions consummated during 1998. In the future, cost of revenues may fluctuate due to capacity utilization, the timing of investments in data centers, changes in the mix of services, fluctuations in bandwidth costs and increased levels of staffing. On a pro forma basis, giving effect to acquisitions completed to date, cost of revenues for the year ended December 31, 1998 were $20.3 million. Interliant Texas accounted for 58.5% of such cost of revenues. Cost of revenues for Interliant Texas were $11.9 million for the year ended December 31, 1998 compared to $9.4 million for the year ended December 31, 1997. This increase was primarily due to an increase in staffing, a change in mix of staff to higher paid employees, including technical engineers, and increased connectivity costs associated with network upgrades. Sales and Marketing Sales and marketing expense increased by $2.6 million for the year ended December 31, 1998. This increase in sales and marketing expense was attributable to the 12 acquisitions consummated during 1998. A key component of our strategy is to significantly increase our sales and marketing activities for application hosting and Web hosting products. See "Business -- Strategy" and "-- Marketing." This will include the expansion of our sales force, development of reseller and referral partner channels and increased marketing efforts to grow recognition of our brands. As a result, sales and marketing expenses will increase substantially in future periods. On a pro forma basis, giving effect to acquisitions completed to date, sales and marketing expense for the year ended December 31, 1998 was $9.4 million. Interliant Texas accounted for 71.6% of such sales and marketing expense. Sales and marketing expense for Interliant Texas were $6.7 million for the year ended December 31, 1998 compared to $4.4 million for the year ended December 31, 1997. This increase was primarily due to an increase in staffing, a change in mix of staff to higher paid employees and increased external marketing costs. 27 33 General and Administrative General and administrative expense increased to $5.1 million for the year ended December 31, 1998 as compared to $0.2 million for the period from December 8, 1997 (inception) to December 31, 1997. This increase in general and administrative expense was attributable to the 12 acquisitions consummated during 1998 and increased investments in infrastructure and levels of staffing to implement centralized billing, accounting and customer service systems to integrate the operations of acquired companies. Staffing for general and administrative functions increased substantially late in 1998 and is expected to continue to increase during 1999 and as a result, general and administrative expense will increase substantially in future periods. On a pro forma basis, giving effect to acquisitions completed to date, general and administrative expense for the year ended December 31, 1998 was $20.6 million. Interliant Texas accounted for 20.1% of such general and administrative expense. General and administrative expense of Interliant Texas was $4.1 million for the year ended December 31, 1998 compared to $2.9 million for the year ended December 31, 1997. This increase was primarily due to an increase in staffing, a change in mix of staff to higher paid employees, increased training costs and increased telecommunications costs. Depreciation Depreciation expense increased by approximately $0.7 million for 1998. This increase was due to the acquisition of approximately $5.7 million of furniture, fixtures and equipment. This amount includes approximately $1.4 million acquired with operating businesses we acquired during 1998. Investments included the build-out and acquisition of equipment for our Web hosting facilities to ensure high levels of service to our customers and capacity for future growth and of technology and infrastructure to implement centralized billing, accounting and customer service systems to integrate the operations of acquired companies. We expect depreciation expense to increase in the future as we continue to invest in data centers and systems to integrate future acquisitions and support future growth. On a pro forma basis, giving effect to acquisitions completed to date, depreciation expense for the year ended December 31, 1998 was $3.8 million. Interliant Texas accounted for 66.1% of such depreciation expense. Depreciation expense of Interliant Texas was $2.5 million for the year ended December 31, 1998 compared to $1.6 million for the year ended December 31, 1997. This increase was due to an increase in investment in computer hardware, primarily servers. Amortization Amortization expense increased by approximately $1.4 million in 1998. The amortization expense was attributable to intangible assets associated with the 12 acquisitions consummated during 1998. On a pro forma basis, giving effect to acquisitions completed to date, amortization expense for the year ended December 31, 1998 was $14.5 million. Amortization expenses related to the acquisition of Interliant Texas represented $7.4 million of such amortization expense. We expect amortization expense to increase in the future as we continue to acquire businesses. Start-up and Acquisition Integration Costs Start-up and acquisition integration costs increased by $1.7 million for the year ended December 31, 1998. This increase was primarily attributable to the 12 acquisitions consummated during 1998. We expect start-up and acquisition integration costs to remain relatively constant in future periods. LIQUIDITY AND CAPITAL RESOURCES We have historically financed our operations and acquisitions primarily from private placements of equity. Net cash used in operations for the three months ended March 31, 1999 was $4.2 million. This reflects primarily the net loss for the period of $7.2 million along with changes in operating assets and liabilities. Net cash used for investing activities for the three month period ended March 31, 1999 was 28 34 $21.8 million, of which $1.0 million was for purchases of furniture, fixtures and equipment, and $18.9 was for acquisitions of businesses. Net cash from financing activities for the three month period ended March 31, 1999 was $23.6 million, reflecting $24.0 million of proceeds from issuance of common stock and preferred stock less issuance costs and repayment of debt under equipment financing facilities. We had $4.4 million in cash and cash equivalents at March 31, 1999. In April 1999 the Company received $5.0 million for the issuance of common stock upon the exercise of a warrant by SOFTBANK. In connection with our acquisition of Interliant Texas, we assumed a promissory note in favor of Mathew Wolf in the amount of $8.0 million and a promissory note in favor of Erving Wolf in the amount of $7.9 million. Upon the closing of this acquisition, we paid in full the note in favor of Erving Wolf, and we canceled the note in favor of Mathew Wolf and replaced it with a note issued by us for the same principal amount (the "Wolf Note") which bears interest at a rate of 9% per annum and is payable in full upon the completion of this offering. In addition to funding ongoing operations and capital expenditures including, without limitation, $4.0 million of expenditures planned to be made in connection with the application hosting business, our principal commitments consist of non-cancelable operating leases and contingent payments of earnouts to certain sellers of operating companies acquired by us. If all earnout targets are achieved in full, total payments pursuant to all earnouts will be $1.8 million in cash and 37,481 shares of common stock in 1999 and $1.3 million in cash and 37,481 shares of common stock in 2000. During 1998, we constructed a data center in Atlanta into which the majority of the operating businesses we acquired have been or are being integrated. We believe that this facility has the capacity to service a larger number of customers than are currently serviced there. The cost of constructing and equipping this facility was approximately $2.0 million. We intend to invest approximately $5.0 million to construct and equip our data centers as more operating businesses are acquired and integrated into these facilities, and as sales and marketing efforts generate internal growth, requiring additional servers, routers and related equipment. We may decide to construct one or more additional facilities in 1999, dependent upon acquisition activity. Our current anticipated level of capital expenditures for 1999 is expected to be approximately $15.0 million, but may vary from that amount depending upon acquisitions and changes in operating plans. We are in the process of negotiating a sale/leaseback transaction in the amount of approximately $6.0 million. Pursuant to the proposed transaction, we would sell and then lease back some of our capital equipment, including computer, telecommunications and other general office equipment in our data center in Atlanta. At March 31, 1999, restricted cash totaled $1.4 million. In connection with our acquisition of Interliant Texas, we entered into an Assignment and Assumption Agreement, dated March 10, 1999, pursuant to which we were assigned all right, title and interest in and to, and assumed all obligations under, the lease for the Houston data center. In connection with receiving the landlord's consent to assignment of the lease, we were required to issue letters of credit in favor of the landlord totaling approximately $0.7 million to replace the letters of credit issued by Interliant Texas. The aggregate dollar amount which may be drawn upon by the landlord under these letters of credit shall be reduced at specified dates in specified amounts such that by August 8, 2000 all of the letters of credit shall have lapsed. In addition, restricted cash includes approximately $0.5 million held in escrow in connection with one of our acquisitions and approximately $0.2 million held to secure outstanding letters of credit used as deposits on our facilities. We believe that our existing cash and cash equivalents together with the net proceeds of this offering will be adequate to meet operating needs through the end of 1999 and will provide enough funds to continue our acquisition program through 1999. Thereafter, we expect to require additional financing. If our plans or assumptions change or prove to be inaccurate, we may be required to seek additional sources of capital or seek additional capital sooner than currently anticipated. We may also seek to raise additional capital to take advantage of favorable conditions in the capital markets. We have no credit facility or other working capital credit line under which it may borrow funds for working capital or other general corporate purposes. 29 35 YEAR 2000 COMPLIANCE Currently, many computer and software products are coded to accept two-digit entries in the date code field. These date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems, including our own, may need to be upgraded or replaced in order to comply with Year 2000 requirements. We recognize the need to ensure that our operations will not be adversely impacted by Year 2000 software and computer system failures. State of Readiness. We have made a preliminary assessment of the Year 2000 readiness of our information technology, or IT, systems, including the hardware and software that enable us to provide and deliver our solutions, and our non-IT systems. Our plan consists of: - quality assurance testing of our internally developed proprietary software and systems; - contacting third-party suppliers, vendors and licensors of material hardware, software and services that are both directly and indirectly related to the delivery of our solutions to our customers; - contacting vendors of material non-IT systems; - assessment of repair or replacement requirements; - repair or replacement; - implementation; and - creation of contingency plans in the event of Year 2000 failures. We have been informed by our vendors of material hardware and software components of our IT systems that their products used by us are currently Year 2000 compliant. We are currently assessing the materiality of our non-IT systems and will seek assurances of Year 2000 compliance from providers of material non-IT systems. Until such testing is complete and such vendors and providers are contacted, we will not be able to completely evaluate whether our IT systems or non-IT systems will need to be revised or replaced. We plan to complete our Year 2000 evaluation during the second half of 1999. Costs. To date, we have not incurred any material expenditures in connection with identifying or evaluating Year 2000 compliance issues. Most of our expenses have related to our internal staffing costs associated with the evaluation process and Year 2000 compliance matters generally. This trend is expected to continue in the future. At this time, we do not possess the information necessary to estimate the potential costs of revisions to our software and systems should such revisions be required or the replacement of third party software, hardware or services that are determined not to be Year 2000 compliant. Although we do not anticipate that such expenses will be material, such expenses, if higher than anticipated, could have an adverse effect on our business. Risks. We are not currently aware of any Year 2000 compliance problems relating to our IT or non-IT systems that would have a material adverse effect on our business, results of operations and financial condition. We cannot give you any assurance that we will not discover Year 2000 compliance problems in our software and systems that will require substantial revisions. In addition, we cannot give you any assurance that third party software, hardware or services incorporated into our material IT and non-IT systems will not need to be revised or replaced, all of which could be time consuming and expensive. Our failure to fix or replace our software, hardware or services on a timely basis could result in lost revenues, increased operating costs and the loss of customers and other business interruptions, any of which could have an adverse effect on our business. Moreover, the failure to adequately address Year 2000 compliance issues in our IT and non-IT systems could result in claims of mismanagement, misrepresentation or breach of contract and related litigation, which could be costly and time-consuming to defend. In addition, we cannot give you any assurance that governmental agencies, utility companies, telecommunication companies, other Internet service providers, third party service providers, hardware and software manufacturers and others outside our control will be Year 2000 compliant. The failure by such entities to be Year 2000 compliant could result in a systemic failure beyond our control, such as a prolonged 30 36 Internet, telecommunications or electrical failure, which could also prevent us from delivering our services to our customers, decrease the use of the Internet or prevent users from accessing the Web sites of our customers. Any of these occurrences could have an adverse effect on our business. Contingency Plan. As discussed above, we are engaged in an ongoing Year 2000 assessment and have not yet developed any contingency plans. The responses received from third-party vendors and service providers will be taken into account in determining the nature and extent of any contingency plans. INTEREST RATE RISK We have limited exposure to financial market risks, including changes in interest rates. At March 31, 1999, we had short-term investments of approximately $2.1 million. These short-term investments consist of highly liquid investments in debt obligations of highly rated entities with maturities of between one and 90 days. These investments are subject to interest rate risk and will fall in value if market interest rates increase. We expect to hold these investments until maturity, and therefore expect to realize the full value of these investments, even though changes in interest rates may affect their value prior to maturity. If interest rates decline over time, this will result in a reduction of our interest as our cash is reinvested at lower rates. 31 37 BUSINESS OUR COMPANY We are a provider of a wide range of hosting and enhanced Internet services that enable our customers to deploy and manage their Web sites and network-based applications more effectively than internally developed solutions. Hosting services we provide include: - Virtual hosting, or shared server hosting, which allows customers to store their databases, applications or Web sites on a shared server which is owned and maintained by us; - Dedicated hosting, which allows customers to store their databases, applications or Web sites on a server typically owned and maintained by us that is dedicated solely to that customer; - Co-located hosting, which allows customers to store their databases, applications or Web sites on servers that they own but which are maintained by us and are located in our data centers; - Groupware hosting, which allows customers to store groupware applications such as email, discussion forums and document libraries on computers which we own and manage in our data centers; and - Application outsourcing, which combines hosting services with prepackaged applications that can be sold directly to our customers. By doing so, our customers can quickly deploy a software application solution without having to purchase hardware, software or network connections. Since our inception in December 1997, we have grown rapidly through the acquisition of 17 hosting and related Internet service businesses. We provide Web hosting solutions to more than 47,000 customers, representing more than 79,000 active domains. We also host more than 10,000 customized Lotus Notes/ Domino based applications for more than 1,300 customers and believe that we are the leading provider of Lotus Notes/Domino hosting solutions. We have two state-of-the-art primary data centers in Atlanta and Houston and a recently leased facility in the Tysons Corner, Virginia. Our Atlanta and Houston data centers are monitored on a 24x7 basis and include sophisticated monitoring and diagnosis, 24x7 customer support, redundant and high-speed network connectivity and uninterruptible power supply. INDUSTRY BACKGROUND Growth of the Internet. The Internet is experiencing significant growth and is emerging as a global medium for communications and commerce. International Data Corporation or IDC estimates that the number of Web users worldwide will increase from approximately 97.3 million at the end of 1998 to 319.8 million by the end of 2002, a 34.6% compounded annual growth rate. IDC also estimates that the number of Web users in the United States will increase from approximately 51.6 million at the end of 1998 to 135.9 million by the end of 2002, a 27.4% compounded annual growth rate. During this same period, the number of business Web sites in the United States is projected by Forrester Research, Inc. to increase from approximately 650,000 in 1998 to approximately 2.6 million in 2002, a 41.1% compounded annual growth rate. This growth in the number of Web users and number of Web sites is being driven by a number of factors including: - the large and growing installed base of personal computers; - easier and less expensive alternatives for Internet access; - improvements in the speed, reliability and security of the Internet; - commerce-enabling technologies; - higher quality and more diverse content; - an increase in the number of networked applications; and 32 38 - the proliferation of broadband technologies that promise consumers faster, more convenient access to the Internet. Growth in Business Use of the Internet. The dramatic growth in usage combined with enhanced functionality and accessibility have made the Internet an increasingly attractive medium for businesses to: - disseminate information; - engage in e-commerce; - build customer relationships; - streamline and automate data-intensive processes; and - communicate more efficiently with dispersed employees. In the last several years, businesses have emerged with operating models that are exclusively dependent on the Internet, while traditional businesses of all sizes are working quickly to establish a Web presence. Many of these businesses establish their initial online presence with a simple, static brochure for marketing purposes. As they become more familiar with the Internet as a communications platform, an increasing number of businesses are implementing more complex, mission-critical applications on the Web including sales, customer service, customer acquisition and retention, employee communications and e-commerce between suppliers and business partners. Trend Toward Outsourcing. According to Forrester Research, Inc., U.S. firms are now spending approximately 25% of their overall IT budgets on outsourcing services. These services include packaged application software implementation and support, customer support and network development and maintenance. Reasons for the growth in outsourcing include: - the desire of companies to focus on their core businesses; - the increased costs that businesses experience in developing and maintaining their networks and software applications; - the fast pace of technological change that shortens time to obsolescence and increases capital expenditures as companies attempt to capitalize on leading-edge technologies; - the challenges faced by companies in hiring, motivating and retaining qualified application engineers and IT employees; and - the desire of companies to reduce deployment time and risk. Trend Toward Web Hosting Outsourcing. Many businesses, both small and large, lack the resources and expertise to cost-effectively develop and continually enhance their Web sites with evolving technologies while maintaining a network infrastructure that remains operational in the event of a hardware or software failure as well as supports increased bandwidth capability as their business grows. Small- to medium-sized businesses typically lack the IT resources, capital and scale to design their own Web sites and install, maintain and monitor their own Web servers and Internet connectivity. Large businesses typically require state-of-the-art facilities and networks that are monitored and managed on a 24x7 basis by experts in Internet technology and that can be upgraded and scaled to meet the needs of mission-critical Internet applications that may be integral to their businesses. As a result, we believe enterprises of all sizes are seeking outsourcing arrangements to help: - build effective Web sites; - improve their sites' reliability and performance; - provide continuous monitoring of their Internet operations; and - reduce costs. 33 39 Trend Toward Application Hosting Outsourcing. Businesses increasingly face competitive demands to automate business processes. This problem has been exacerbated by a shortage of IT professionals. Until recently, implementation of Internet applications required development of in-house software applications or the customization of existing packages. This made each implementation unique and costly. It also made implementation time frames and costs unpredictable. We believe that businesses of all sizes have a significant need to outsource the hosting of these and other software applications to improve core business processes, reduce costs and enhance their global competitive position. OUR OPPORTUNITY Today the hosting market is fragmented, consisting for the most part of: - small local and regional providers who do not have the capital, resources or capabilities to provide quality services at competitive prices; - large national providers who focus on Internet connectivity rather than on hosting; and - consulting and Web design firms for which hosting is not their core competency. We believe that a significant market opportunity exists for a nationally-recognized hosting solutions provider with the scale and expertise to offer a wide range of value-priced services to businesses of all sizes. Interliant believes that through the acquisition and consolidation of hosting and enhanced Internet service businesses, a hosting provider can offer a full range of services that enable businesses to deploy, use, expand and update their Web sites and applications infrastructures more rapidly and cost-effectively than internally developed solutions. Web Hosting Opportunity. IDC estimates that the worldwide market for Web hosting services will grow from $696 million in 1998 to $10.7 billion by 2002, a 98.0% compounded annual growth rate. The market for Web hosting services can be segmented into virtual, dedicated and co-located hosting. Virtual hosting primarily addresses the needs of small- to medium-sized businesses and includes such services as disk space, shared connectivity and certain value-added services such as e-mail hosting, e-commerce tools and other specialized offerings. Dedicated and co-located hosting services primarily address the needs of medium- to large-sized businesses and include: - dedicated server equipment owned by either the hosting provider or the customer, with an emphasis on network reliability; - 24x7 monitoring; - dedicated and redundant bandwidth; - flexibility to scale rapidly; and - high-end, value-added services such as consulting services, systems integration and links to legacy systems. We believe we are well positioned to take advantage of the opportunities which exist for a nationally-recognized Web hosting solutions provider with the scale and expertise to offer a wide range of value-priced services to businesses of all sizes. Application Hosting Opportunity. Forrester Research, Inc. reports that the worldwide market for outsourcing application software products will grow from approximately $1.0 billion in 1997 to over $21.0 billion by 2001, a 111.1% compounded annual growth rate. Traditionally, enterprises faced with the issues of internal development and maintenance of application hosting capabilities have sought solutions from a variety of information technology providers including system integrators, Internet service providers, hardware and software vendors and telecommunication companies. Thus, these companies have had to work with at least three independent suppliers: a software applications provider, a systems integrator and a site hosting provider, or have had to support implementation with in-house resources. There are inherent conflicts and difficulties with this approach, as each supplier is dedicated to providing its own specific 34 40 product or service with only limited knowledge of the bundle of products and services required to provide the complete business solution. We believe that these trends create a substantial market opportunity for a single-source solution that combines software from multiple vendors, hardware, systems integration and Internet-based communications in an integrated service offering. Interliant believes it is well-positioned to take advantage of these opportunities as companies realize the value a single-source hosting service provider can offer in facilitating deployment and improving management of their corporate intranet and extranet solutions as well as mission-critical applications. OUR SOLUTION We are a provider of hosting solutions that enable our customers to deploy and manage their Web sites and network-based applications more effectively than internally developed solutions and to take advantage of a single-source solution for their Internet-enabled application software needs. We offer a unique blend of technological expertise, partnering ability and understanding of the business and licensing models which it believes are essential to succeed in the hosting marketplace. We believe we have developed the infrastructure, resources, application management expertise and industry relationships required to capitalize on this emerging market opportunity. We provide the following advantages to our customers: Comprehensive Hosting Solutions. We are able to provide Web hosting services that meet our customers' needs as their Web sites evolve from low-end marketing brochures to more complex, interactive Web sites and finally to applications that are integral to their businesses. In addition, our application hosting services such as groupware hosting and application outsourcing can provide our customers with continuously available remote access to applications and data which are mission-critical. Finally, we offer consulting services and a broad range of enhanced Internet services such as e-commerce capabilities, multimedia hosting and community hosting. Performance and Reliability. Our hosting solutions help to ensure that our customers' Web sites and networking applications are continuously online and deliver data rapidly to users. Our state-of-the-art data centers in Atlanta and Houston provide high-quality performance and reliability through features such as a redundant, high-speed, secure network architecture, continuous monitoring, alternate power sources, environmental controls, regular data back-ups and a fault tolerant hosting platform. Interliant's Network Operations Centers or NOCs monitor Interliant's network on a 24x7 basis and allow its staff to minimize service interruptions. Cost Savings. Our customers benefit from our focus on hosting and the capital and labor investments that we have made to support hosting and enhanced Internet services. For customers to replicate our performance and reliability would require them to make significant expenditures for equipment, personnel and dedicated bandwidth. We believe that our hosting solutions are significantly more cost-effective and reliable than in-house solutions, both for businesses with low-end application requirements as well as for those businesses whose Internet operations are mission-critical and require sophisticated application support. Customer Service. We are dedicated to providing the highest quality customer service. We endeavor to provide rapid and accurate responses through customer service personnel who can answer questions over the telephone or via e-mail. In addition, Interliant's customer service organizations in Atlanta and Houston can address technical problems on a 24x7 basis. Interliant has invested in advanced customer service software and call routing technology to streamline the customer service process. Interliant also offers customers who are hosted in its Atlanta data center a self-service customer support alternative which provides online access to account and billing data and site statistics such as disk storage capacity and bandwidth utilization. 35 41 STRATEGY Our objective is to become the industry benchmark in the hosting services market by providing businesses with cost-effective, innovative solutions that will allow them to capitalize on the potential of the Internet. To achieve this objective, our strategy includes the following key elements: Build the Interliant Brand. We believe we have established a strong brand identity within the application hosting industry under the Interliant brand. Our brand will be enhanced as we begin marketing Web hosting products under the Interliant brand and will be further enhanced as acquired companies are assimilated under our brands. We intend to continue to build name recognition for our brand and strengthen our brand recognition by marketing our full range of services through an integrated marketing communications program using public relations, print and online advertising campaigns and other strategic initiatives as well as cooperative promotions with key hardware and software vendors. Continue Acquisition Program. We intend to continue our acquisition program to capitalize on consolidation opportunities in the hosting and enhanced Internet services market in the United States and overseas. We expect that these acquisitions will also result in substantial operating synergies, greater internal growth and cost savings. Further, we plan to capitalize on best practices we may identify within acquired companies to maintain our competitive advantage and to ensure ongoing delivery of high quality hosting services to our customers. Expand Multiple Sales Channels. We reach our customers through multiple sales channels including a direct sales force, indirect sales through numerous resellers and referral partners, inbound and outbound telesales and Web marketing programs. We intend to continue expanding these channels to further enhance our ability to attract customers of all sizes. As an example, we recently launched our business partner program, creating standard incentives across our entire product line to foster growth of our business partner network. Leverage the Interliant Customer Base. We intend to capitalize on the enhanced revenue potential of the customer bases of our acquired companies, leveraging the numerous cross-selling opportunities of our expanded line of branded service offerings. We will use our multiple sales channels, including our direct sales force, to target specific customer segments within our diverse customer base with relevant new product offerings to realize increased revenues. For example, we believe that we can grow our revenues by cross-selling existing Web hosting customers with application hosting and consulting services. Further, we believe that by coordinating the sales efforts of our combined Web hosting, application hosting and consulting sales forces, we can increase customer leads and referrals. Finally, we intend to assimilate the customer bases of our acquired companies into a unified customer information management system to facilitate sophisticated analysis and segmentation of our total customer base and thus enable us to maximize marketing and sales opportunities. Develop Strategic Relationships. We have established and continue to seek strategic relationships that enhance our infrastructure and distribution capabilities and broaden our product offerings. We believe that our strategic alliances with companies such as IBM Corporation, Lotus Development Corporation, Microsoft Corporation, UUNET Technologies, Inc., Equant, N.V., Allaire Corporation, Elemental Software, Inc. and iMall, Inc. enable us to provide complete, scalable and reliable hosting solutions to our customers, resellers and referral partners. SERVICES Our service offerings comprise three main areas: Web hosting, application hosting and consulting. 36 42 WEB HOSTING SERVICES We offer a comprehensive suite of solutions to meet the current and future Web hosting needs of our customers. We provide virtual, dedicated and co-located hosting services.
HOSTING WEB SITE CUSTOMER SERVICES PRICE* PROFILE KEY FEATURES BENEFITS - -------- ------------ ---------------- ----------------- -------------- Virtual $25-$350 Static Web Shared space on Economical per month pages, Interliant-owned moderately server accessed sites Dedicated $100-$5,000 Dynamic Web Dedicated Greater server per month content, heavily Interliant-owned resources accessed sites server in shared requiring rack minimal customer maintenance Co-Located $500-$40,000 Mission-critical Secure cabinet Greater per month applications for customer- customer owned server control/access to hardware
- --------------- * Prices are representative for products marketed under the Sage Networks and Interliant brands and may not be representative for our products marketed under other brand names. All product offerings hosted in the Atlanta and Houston data centers are designed to achieve optimal performance through features such as: - sophisticated monitoring, notification and diagnosis; - 24x7 customer support through the NOCs and customer service centers; - remote access management and reporting tools; - a high-speed network designed to continue operating in the case of any software or hardware failure; - uninterruptible power supply, including back-up generators capable of sustaining server operations for more than one week; - firewall, intrusion monitoring and site security auditing; - full daily back-ups with off-site storage; - air-conditioned, static and humidity controlled environment; and - high level of physical security. It is our intention that all product offerings marketed under our brands and hosted at data centers other than Atlanta and Houston also have the above features. Customers generally pay monthly, quarterly or annual fees for the services used, as well as one-time fees for installation and any equipment purchased by the customer. On a pro forma basis, giving effect to acquisitions completed to date, Web hosting revenues comprised 28.0% of our revenues in the year ended December 31, 1998 and 31.4% of our revenues for the three months ended March 31, 1999. Although we do not account for revenues based on the virtual, dedicated and co-located components of our Web hosting product offerings, we derive a substantial majority of our revenues from virtual hosting as 84.0% of active domains managed by us at March 31, 1999 are virtual hosting domains. 37 43 Virtual Hosting. Our virtual hosting solution provides customers with all the elements needed to establish a basic presence on the Web at a reasonable cost. This entry-level service is known as virtual hosting because the customer's home page has its own domain name, www.mycompany.com, and appears to exist as a stand-alone server. It operates with the speed and efficiency of Interliant's high-speed connections and its location at our facility remains invisible to Web site visitors. Customers are able to have their own Web site with a domain name at a fraction of the cost of maintaining it themselves. As a result, virtual hosting is an economical solution for relatively simple or moderately accessed Web sites. Because customers do not need to invest in costly hardware or personnel to accommodate future growth, we believe this solution also maximizes the customers' flexibility. For these accounts, we host the site on a UNIX or Windows NT server that is shared by multiple customers. Prices for virtual hosting products marketed under the Sage Networks and Interliant brands range from $25 to $350 a month, depending on the data transfer limit, storage capacity, number of e-mail accounts provided and additional functionality requested such as e-commerce capabilities, multimedia hosting and community hosting. For certain customers of acquired businesses, the price range may be lower depending upon the functionality of the services and reflecting a lower level of services requested by such customers. In 1998, our average virtual hosting customer paid approximately $20 per month. Dedicated Hosting. As companies increase the complexity, level of traffic or reliance on their Web sites, they may prefer to host their Web site on a dedicated server, which is typically owned and maintained by us. A dedicated server provides greater server and network resources to our customers than virtual hosting and allows them to configure their hardware to optimize site performance. Customers receive a high level of site security, maintenance, and technical support without the prohibitive costs of setting up and maintaining their own server and Internet connection. We support most leading Internet hardware and software system vendor platforms, including Solaris which operates on a Sun Microsystems, Inc. platform, Microsoft Windows NT which operates on a Intel/PC platform and Linux which operates on a Cobalt Networks, Inc. platform. Prices for dedicated hosting products marketed under the Sage Networks and Interliant brands range from $100 to $5,000 a month, depending upon the hardware configuration, bandwidth requirements and additional features that may be requested by our customers. For certain customers of acquired businesses, the price range may be lower. In 1998, our average dedicated hosting customer paid $1,000 per month. Co-located Hosting. We currently provide co-located hosting services in our Atlanta and Washington, D.C. area data centers for customers with sophisticated, mission-critical applications. This solution allows the customer to own and access their servers on a 24x7 basis while delegating the day-to-day management of their Web site to our IT specialists. In addition, co-located servers are housed in separate, limited-access rooms in our data center. Prices for co-located products marketed under our Sage Networks and Interliant brands range from $500 to $40,000 a month, which incorporates fees such as bandwidth charges and space. Bandwidth is the capacity of a telecommunications network to carry voice, data and video information. For certain customers of acquired businesses, the price range may be lower. In 1998, our average co-located customer paid $750 per month. We also provide the following enhanced Internet services to our Web hosting customers: E-commerce Capabilities. Through our reseller relationships, we offer a variety of e-commerce solutions to help businesses create and maintain a successful Web storefront. E-commerce provides businesses the ability to sell products and services on the Internet. The e-commerce capability can be added to an existing Web site or it can be the basis for a Web site, starting with the customer's product catalog. Representative e-commerce offerings include: - a full suite of Internet payment solutions offered by CyberCash, Inc., including payment services for credit card, micropayment and Internet check transactions; - ShopSite from Open Market, Inc. which allows users to build quickly a simple catalog and begin taking orders; and 38 44 - SoftCart from Mercantec which allows users to create sophisticated e-commerce Web sites that includes order taking, credit card processing and order fulfillment. Multimedia Hosting. We allow our customers to include various multimedia capabilities in their Web sites, including integrated text, graphics, video, information and sound capabilities. With the acquisition of Telephonetics International, Inc., we have added audio production and hosting capabilities to the suite of Internet services available to our customers. In addition, we provide our customers with the ability to include Real Networks and Microsoft NetShow content within their Web sites. Community Hosting. We allow customers of all sizes to include community-building features such as e-mail and chat hosting. We provide POP or Post Office Protocol e-mail boxes that can be used to send and receive e-mail from any connection to the Internet and include unlimited aliases, forwarding and auto-responders. We also offer chat hosting through our relationship with eShare Technologies. APPLICATION HOSTING SERVICES We offer application hosting services which consist of groupware hosting and application outsourcing solutions that provide its customers with 24x7 remote access to applications and data that are integral to their businesses. On a pro forma basis, giving effect to acquisitions completed to date, application hosting revenues comprised 51.3% of our revenues in the year ended December 31, 1998 and 44.8% of our revenues for the three months ended March 31, 1999. Groupware Hosting. We offer our customers a broad spectrum of groupware hosting solutions for Lotus Notes/Domino, the industry-leading groupware platform. Our groupware hosting solutions allow our customers who want to work together collectively while located remotely from each other to store software applications that facilitate this type of work environment on a computer that we own and manage for them. Our groupware hosting services provide support for the following: - feature-rich e-mail and other types of messaging for internal and external communication; - workgroup and project team collaboration and document sharing; - business process automation and workflow; and - proprietary or custom applications built for the groupware platform. We also can provide our customers with sophisticated, collaborative Web-based intranets and extranet. An intranet is an Internet network which usually belongs to a corporation and is accessible only by employees, or others who have authorized access. An extranet is basically an intranet that provides various levels of accessibility to outsiders who through a user name and password can access selected parts of the extranet. We seek to provide the following benefits to our customers hosting their groupware implementations with us: - reduced deployment time and risk; - reduced day-to-day operational responsibility, allowing in-house IT departments to focus on creating strategic value; - lower ongoing cost; - no capital investment in servers, facilities and other infrastructure; - access to emerging technologies and improved responsiveness to change; and - 24x7 operations, high availability, rapid scalability and robust security. Customers generally pay monthly fees for the services offered, as well as one-time fees for installation and deployment services. Customers typically sign one- to three-year service contracts. Our customers have the option of using shared or dedicated servers in one of our data centers for their groupware hosting 39 45 services, or can have their on-premise server managed by our customer-managed server offering. Prices for our groupware hosting services range from $1,500 to over $100,000 a month. We provide hosting for groupware applications that are specifically tailored for a Lotus Notes/Domino operating environment on both shared and dedicated servers at one of our data centers or on the customer's premises. The hosted servers support connections to: - geographically dispersed Lotus Domino servers for messaging and replication; - Lotus Notes clients for remote access to e-mail and Lotus Notes applications; and - Web browsers for intranets and extranets. Customers can connect to our servers using the Internet or a variety of private network options, including frame relay, dedicated lines and local dialup access in more than 160 countries. We provide messaging gateway services for Lotus Domino, including: - Internet e-mail; - X.400 mail; - Lotus cc:Mail; - fax; and - a variety of pager networks. In addition, we and certain customers have established a Lotus Domino/Microsoft Exchange messaging interoperability technology pilot program which will allow users of both systems to communicate electronically, and we are considering further expansion of this program to enhance our Microsoft Exchange hosting offering. As part of our groupware hosting implementation process, we start with what we believe to be the best available system configurations and work with our customers to modify them to the customer's specific needs. Customers may choose from a wide variety of hardware capacity and availability options, including RAID, or Redundant Array of Inexpensive Disks, storage and full server clustering. Once installed, we not only monitor server hardware, operating system and application-level system performance, but also can provide full server administration services including adding or deleting users, database installation, access control changes and other required server administration tasks. This groupware hosting service is also available for custom implementations in conjunction with Interliant's consulting service offerings. Application Outsourcing. Our application outsourcing offers customers an integrated solution that combines packaged application software with managed hosting services. We believe it is an industry leader in forging strategic relationships with leading application developers and other key partners to deliver these best-of-breed solutions. Through such strategic relationships, we enable businesses of all sizes to capitalize on the latest Internet-enabled technologies while outsourcing non-core business operations such as deployment and migration strategies and maintenance or software upgrades to a third party. Our branded application hosting services address the following major business process areas: - Legal Automation. Our legal automation solutions offer customers a suite of collaborative applications that assist attorneys in securely and reliably managing litigation, intellectual property matters and general workflow within corporate legal departments and law firms. These applications can be customized, deployed, supported and fully managed on dedicated or shared servers at our data centers. The legal automation suite of applications currently encompasses both Web-based and client server applications that are priced from $100 to $300 per user per month, as well as Internet rental applications that are priced as low as $20 per user per month. 40 46 - Sales Automation. Our sales automation services provide geographically distributed sales and marketing organizations with all the elements needed to quickly deploy a sales automation solution at a reasonable cost. These solutions include modules for - opportunity management; - contact and account management; - revenue forecasting reports; - an integrated group calendar; - automated proposal generator; - pricing information; - telesales campaign management; and - correspondence and fulfillment in a shared hosting environment. We believe that selling application outsourcing as part of a package of hosting services rather than as a product to be installed and managed by the customer, reduces the customer's initial capital investment, thereby making it easier to minimize the customer's technology risk. Accordingly, it also allows us to engage clients in long-term contracts with fixed monthly payments. The application solution is customized, deployed, and fully managed and supported by us, providing a single-source solution to customers. We partner with leading packaged commercial software vendors, hardware vendors and system integrators to deliver these solutions. Our sales automation services can be accessed through our secure network using a variety of dial-up or dedicated access methods on a 24x7 basis, leading to more efficient practices and effective communications. The solution can be easily configured to the customer's selling methodology and can be deployed within 30 days. The solutions range in price from $100 to $200 per user per month depending upon the application features, hardware configuration and amount of disk storage needed. - Distributed Learning. Distributed Learning over the Web represents a broad, horizontal market for us, with opportunities to deliver online training in virtually all market segments. Working with leading software technology vendors, best-of-breed content providers and business partners, we offer comprehensive solutions for corporate, academic, and non-profit customers. These solutions encompass: - browser based, asynchronous or any time, any place learning technologies; - browser based, synchronous or same time, any place learning technologies; - sophisticated course and student management systems; - online facilitation; and - application sharing. In addition, our distributed learning solutions leverage our core competencies: Web hosting, multimedia technology and e-commerce, to deliver a complete package to our customers. Layering distributed learning know-how and functionality on top of its existing infrastructure services allows us to quickly deliver cost-effective solutions. Our Distributed Learning services are priced on a "per user, per course," or a "per person, per year" basis, with the typical cost of instruction per user per course in the range of $20 to $75. Costs are driven largely by the course's duration and complexity, as well as by the range of application level services that the customer desires. Deployment of existing courses is very rapid, with students typically able to access courses within a few days following registration. - Rental Applications. We are is working to create a new generation of 100% Web-based application solutions that are designed to be delivered as services over the Internet. No installation is required 41 47 as users need only a Web browser and an Internet connection to select, set up, configure and use a rental application. Pricing models vary based on application usage models, but are all inclusive of the fees for application licensing, hosting, and basic support. We establish partnerships with software vendors to create these application services, many of which will be based on Lotus Domino Instant!Host, a platform for application hosting service providers co-developed by us and Lotus. We have established a portal site, www.appsonline.com, that contains a catalog for these Internet rental applications. Our first Internet rental application is Lotus Instant!TEAMROOM, a "teamware" collaboration tool available for a $14.95 monthly fee per end user which allows distributed teams to discuss issues, share documents, and track action items. Additional rental application services in development include teamware for specific vertical market segments, an application which allows companies to hold private auctions online, and more sophisticated collaboration tools for project management, calendaring and scheduling and document management. CONSULTING SERVICES We provide consulting services for Intranet, extranet and application hosting solutions, as well as for internal networking implementations and back-end Web development projects. In addition, we provide support for our customers' enterprise networking needs. Our consulting services are scaled to meet each client's needs. We address the complete spectrum of services, including: - desktop and network server support; - network architecture and design; - local area network, wide area network and virtual private network design; - strategic technology planning; - application development and implementation; and - Web hosting. On a pro forma basis, giving effect to acquisitions completed to date, consulting services revenues comprised 14.0% of our revenues in the year ended December 31, 1998 and 16.0% of our revenues for the three months ended March 31, 1999. ACQUISITION PROGRAM Since inception, we have acquired 16 companies and intend to continue its acquisition program. Specifically, we seek to identify businesses which will generate a positive return on investment and: - expand its customer base; - complement and expand its product and service offerings; - enhance its engineering and technical capabilities; - strengthen its reseller and referral partner relationships; and/or - broaden its management team. We believe that the integration of acquired companies will create economies of scale and generate significant operating efficiencies. Because of our ongoing acquisition strategy, we expect that at all times some portion of its acquired companies will be in various stages of integration. We seek to identify areas in which acquired companies outperform its competitors and adopt their best practices. Once we acquire a company, a multi-disciplinary team begins the four-step integration process: Technical Integration. Technical integration begins with the physical move of the acquired company's equipment into one of our facilities. Generally, the customers of the acquired company are then 42 48 migrated onto the our hosting platforms. Migration entails duplicating the server contents onto a new server, which runs in parallel for a test period, before being switched over. For Web sites with real-time databases or customized applications, the process can become significantly more complex. Our platform is typically more robust than that of the acquired company and standardization allows us to manage the servers more efficiently. In certain circumstances, however, Interliant finds that it is not strategic or cost-effective to migrate customers to our platform. Customer Service Integration. We integrate our customer service operations for our acquired Web hosting customers at our data center in Atlanta and for our application hosting customers in Houston. By centralizing hosting customer service, we believe that it can improve performance while reducing costs. In Atlanta, we have implemented the Vantive Support system, a customer/asset management tracking application, which enables a customer service representative to view a customer's entire account, including past and recent interactions with the customer. Further, the Vantive Support system provides a resolution database that recognizes and documents support records into a central repository that can be accessed by all customer service personnel. Business Systems Integration. Many of the businesses we acquire do not have adequate back-office systems or procedures. As a result, we are in the process of transitioning acquired companies onto the PORTAL Infranet billing system. With PORTAL Infranet, our resellers, referral partners and customers will be able to obtain monthly statements delivered electronically which we believe will provide them with easy access to and accurate tracking of our hosting expenditures. In particular, we believe that PORTAL will allow resellers and referral partners to add new products and services, as well as pricing discounts and incentive programs, in a timely and cost-effective manner. Product Integration. We expect to integrate the majority of its acquired companies into our product line, with uniform branding, pricing strategies and distribution channels. In certain cases, however, where an acquired company's brand is already established, we may for a period of time continue to market certain products and services under the existing brand in order to capitalize on the competitive advantages the acquired brand name may bring to us. Our long-term goal, however, is to migrate most product offerings to our brand. 43 49 The following chart identifies the 17 hosting and Internet-related service companies acquired by Interliant, or from which we have acquired significant assets.
DATE NAME PRIMARY FOCUS LOCATION - ---- ---- ------------- -------- February 13, 1998.... Omnetrix, Inc. (dba "DirectNet") Web hosting Los Angeles, CA April 7, 1998........ Clever Computers, Inc. Web hosting Atlanta, GA April 30, 1998....... Server and Network connectivity Web hosting McLean, VA assets from Knowledgelink Interactive, Inc. May 1, 1998.......... Tri-Star Web Creations, Inc. Web hosting New York, NY June 10, 1998........ HostAmerica, a division of HomeCom Web hosting Atlanta, GA Communications, Inc. June 29, 1998........ All Information Systems, Inc. Web hosting Dallas, TX July 1, 1998......... Software Business Technologies, Inc. Web hosting San Rafael, CA Web Hosting Business Unit July 1, 1998......... DevCom (division of Nextron, Inc.) Web hosting San Jose, CA July 30, 1998........ BestWare, Inc. (dba "Maikon") Web hosting Dallas, TX August 31, 1998...... B.N. Technologies, Inc. (dba "ICOM") Web hosting Los Angeles, CA September 16, 1998... GEN International Inc. Web hosting St. Petersburg, FL (Global Entrepreneur's Network, Inc.) December 17, 1998.... Dialtone, Inc. Web hosting Pembroke Pines, FL February 4, 1999..... Digiweb, Inc. Web hosting College Park, MD February 4, 1999..... Telephonetics International, Inc. Multimedia Miami, FL February 17, 1999.... Net Daemons Associates, Inc. Consulting Woburn, MA, Burlingame, CA and Boulder, CO March 10, 1999....... Interliant Texas Application Houston, TX and hosting London, England May 4, 1999.......... Advanced Web Creations, Inc. Web hosting Fairfield, NJ
We are currently engaged in discussions with respect to several acquisitions. With respect to one of those acquisitions, we have entered into a non-binding letter of intent. We cannot assure you that this transaction will be consummated, or if consummated as to the terms of the transaction. The following is a summary of the potential acquisition: - It is engaged in the virtual hosting business. - It had unaudited revenues of $2.8 million and (loss) of $(6.6) million for the year ended December 31, 1998. - Although we are currently renegotiating the letter of intent, we expect the consideration to be paid to be up to 1.7 million shares of common stock plus earnout consideration of up to an additional 500,000 shares of common stock. CUSTOMERS We have established a diversified customer base across our service offerings. Our customers include a variety of business types, ranging from small office/home office companies through Fortune 500 companies. In addition, our customers also include resellers of our services such as Web consulting firms, Internet service providers, network integration companies and system integrators who sell our services to their customers. We do not believe that the loss of any one customer would materially adversely affect us. Web Hosting Customers. Our contracts with our Web hosting customers generally cover services for a period ranging from one month to two years. We provide hosting solutions to more than 47,000 44 50 customers, representing more than 79,000 active domains. The following is a list of selected Web hosting customers: Adtronics Atlanta Public Schools Cadin.com Gy Digital Net.Capitol Powerize.com Searchtech The Audio Works Group Application Hosting Customers. Our contracts with our application hosting customers generally cover services for a period ranging from one to three years. We host more than 10,000 customized Lotus Notes/ Domino based applications for more than 1,300 customers, including: Abbott Laboratories NationsBanc Services, Inc. Four Seasons Hotels Limited Jones, Day, Reavis & Pogue Panasonic Swiss Reinsurance Company SmithKline Beecham Pharmaceuticals R&D The Rank Group Plc Consulting Customers. Our contracts with our consulting customers generally cover services on a project-by-project basis, with project periods typically ranging from six months to one year. We provide consulting services to more than 200 customers, including: Hitachi Computer Products America Inc. TMP Worldwide, Inc. O'Reilly and Associates, Inc. Phoenix Technologies Ltd. Forrester Research, Inc. Edify, Inc. Solbright, Inc. Stratus Computer, Inc./Ascend Communications, Inc. We believe that the above listed customers are representative in their applicable categories in terms of types of services we provide to those customers and revenues generated from those customers. STRATEGIC RELATIONSHIPS Interliant's strategic relationships and partnerships with leading technology companies allow it to provide a wide range of services to meet its customers' needs. The following is a list of selected companies with whom Interliant has a strategic relationship: IBM Corporation. We are an IBM BESTeam partner and began offering the IBM Net.Commerce Hosting Server product in January 1999. IBM currently lists Interliant on its Web site as one of a select group of partners that are able to offer this product. Interliant intends to introduce Net.Commerce hosting services to our large reseller community as a world-class end-to-end e-commerce solution. Interliant is also hosting IBM Net.Commerce Pro solutions for dedicated server customers who maintain large e-stores and require large scale implementations. There is no written contract that governs this relationship with IBM and either of us can terminate this relationship at any time. Currently, we do not have any financial commitments to IBM as a result of this arrangement, and we do not expect this relationship to generate any material financial commitments for us in the future. Lotus Development Corporation. We believe we are a leading partner of IBM's Lotus software division and are a Lotus Net Service Provider, Lotus Net Service Provider/Alliance Partner, as well as a Lotus Premier Business Partner. We provide a variety of messaging and hosting services for Lotus Notes/ Domino Internet, intranet and extranet applications. We are currently listed by Lotus on several sections of Lotus' Web site as one of a select group of partners that provide hosting services for Lotus Notes/Domino and other Lotus application solutions and have twice been recognized with Lotus' highest recognition, the Lotus Beacon Award, most recently in January 1999. We are parties to a Joint Development Agreement with Lotus Development Corporation, dated April 27, 1998, which is scheduled to expire on April 27, 2000, but will be automatically renewed for additional one year terms unless terminated by either party upon prior written notice. Under this agreement, together with Lotus we co-developed Lotus' Domino Instant! Host platform, which enables 45 51 application developers to deploy and offer Web-based collaborative applications. [Under the terms of this agreement, we share joint development responsibilities with Lotus. Terms of this agreement include: - We are obligated to contribute proprietary computer code owned by us, to name one of our employees as the project liaison and to provide non-dedicated architectural and project management assistance to Lotus. - Lotus is obligated to contribute substantially similar type of intellectual property and personnel resources to the project. - Lotus is obligated to pay us a royalty equal to a percentage of the net revenues received from licensing Instant! Host. - We must pay Lotus at its standard rate for all copies of Instant! Host which we desire to license. - If Lotus engages in product development or promotional activities which impact its ability to generate revenues from the sale of Instant! Host, the agreement will terminate and Lotus will be obligated to pay us up to $250,000 in penalties depending upon the amount of royalties paid to us through the date of termination. Microsoft Corporation. We are a Microsoft Certified Solution Partner (MCSP) and are currently engaged in several strategic initiatives with Microsoft. We have entered into a co-marketing and promotion agreement whereby Microsoft will include our advertisements in a catalog that is inserted into every FrontPage 2000 product box that is packaged for retail sale. Microsoft has also agreed that it will issue a press release on its Web site highlighting our joint involvement in the promotion of FrontPage 2000. In return, we have agreed to feature Front Page 2000 on our Web site with greater frequency and visibility than any competing product and have agreed to offer either free Web hosting with a value of up to $105 or free or reduced registration and set-up fees with a value of up to $500, in order to induce the public to host a FrontPage 2000 Web site. This agreement remains in effect until the earlier of the initial release of the next version of FrontPage, Microsoft ceasing to produce FrontPage, or December 31, 2000. We are also participating in a Microsoft initiative called the Complete Commerce program. In conjunction with selected other MCSP's, we will incent customers seeking to engage in e-commerce activities on the Web to enter into this program by offering a specially priced, all inclusive storefront hosting package integrating shipping, credit card processing and tax elements. The service will also include consulting and development of the storefront application Web site, back-end integration and hosting activities. Microsoft will provide resources to help us market this program, including promotional activities, marketing activities and participation in the customer engagement activities. Our marketing activities for the Complete Commerce program commenced in April 1999. This relationship may be terminated at any time by either party. We currently have no material financial commitments under either of these agreements; and we do not expect either of these agreements to generate any material financial commitments for us in the future. UUNET Technologies, Inc. On February 17, 1999 we entered into an agreement with UUNET to be our primary connectivity provider on a worldwide basis. The agreement is scheduled to expire on February 19, 2002, but will be renewed automatically for an additional year unless either party notifies the other of its intent not to renew. Terms of this agreement include: - UUNET has agreed to provide and we have agreed to purchase minimum levels of connectivity from 100 Mbps to 600 Mbps of bandwidth. - Upon execution of this agreement we were committed to purchase 100 Mbps of bandwidth. - We must increase our bandwidth purchases to 300 Mbps of bandwidth by December 31, 1999 and 600 Mbps of bandwidth by December 31, 2000. - UUNET has agreed to significant discounts and competitive pricing assurances over the term of the agreement. 46 52 - - We have agreed that if during the second and third years of this agreement, we obtain over 600 Mbps of bandwidth for our Internet traffic, we will purchase a percentage of all bandwidth in excess of 600 Mbps from UUNET. If we do not purchase the agreed upon percentage of capacity from UUNET, we must pay UUNET a flat rate for each Mbps we are obligated but fail to purchase from them. Under the terms of the agreement, the connectivity may range in capacity from T-1 to DS-3 to OC-12 which are the technical names of the physical telecommunications connections or pipelines that will be used to transport data. A larger pipeline can carry a greater volume of data at a greater speed. For example, a T-1 can carry 1.544 megabytes per second; a DS-3 can carry 44.736 megabytes per second and an OC-12 can carry 622 megabytes per second. At our Atlanta data center, we are currently installing four OC-3. connections; each of which can carry 155.52 megabytes of data per second to diverse hubs in UUNET's network utilizing diverse fiber for redundancy. In addition to the connectivity provisions, our companies have agreed to develop and implement a joint marketing program including: - allowing us to resell UUNET services through our network of resellers; - cooperating on mutually beneficial hosting and co-located remarketing agreements; and - cooperating on international co-location facilities agreement. Our current financial commitments under this agreement are not material nor do we expect our future financial commitments, including the increase in the minimum bandwidth commitment and the possibility of having to pay penalties, to be material. Equant, N.V. We have entered into a Network Services agreement in which Equant, N.V. provides worldwide local dialup (X.25 and PPP) and dedicated (frame relay) connectivity from more than 160 countries. The original agreement expired on December 31, 1997, and since then we have continually renewed it for successive three month terms. The current term expires on June 30, 1999. Equant, N.V. provides significant discounts to us and competitive pricing assurances. In addition, Equant, N.V. has entered into a distribution agreement with us, in which Equant, N.V.'s worldwide sales force is able to offer our groupware and application hosting services to its customers. The distribution agreement terminates on December 19, 1999 unless the parties agree to renew the agreement by June 19, 1999. We currently have no material financial commitments under either of these agreements; and we do not expect either of these agreements to generate any material financial commitments for us in the future. Allaire Corporation. Allaire markets and distributes proprietary commercial computer software products such as Cold Fusion Enterprise Application Server, Cold Fusion Professional Application Server and Home Site. We have a worldwide non-exclusive fee-bearing license to: - reproduce exact copies of these software products onto its servers and to allow its customers to use these products; - reproduce exact object code copies of the products; and - market and distribute the products as stand-alone products or bundled with our other product offerings. This one-year agreement commenced February 2, 1999 and will be automatically renewed for another year unless either party notifies the other that it elects not to renew within sixty days of the original termination date. Upon execution of the agreement we paid Allaire an aggregate of $66,552 covering product user and subscription fees, distribution copies, training fees and annual support fees. We are also obligated to purchase five additional hosted copies, products and subscriptions during each of the last three calendar quarters of the original term of the agreement at an aggregate price of approximately $15,000 per quarter. In addition to the fees we pay for these licenses, we have agreed to promote and market actively Allaire's products. We have also agreed to participate in certain joint marketing and promotional activities. Elemental Software, Inc. We have been granted a non-exclusive, royalty-free license to market and resell Drumbeat(TM) 2000. By working with a Drumbeat(TM) 2000 ISP Hosting Partner such as our company, organizations will be able to publish data-driven Active Server Pages (ASP) applications without the need 47 53 to set up and administer Web servers locally. As an ISP Hosting Partner, we also provides hosting accounts for trial Drumbeat(TM) 2000 users. Under this agreement, we are a Drumbeat(TM) 2000 reseller which means our customers receive preferred pricing on each sale of Drumbeat(TM) 2000 generated through the Elemental Software/Interliant e-commerce Web site. We have agreed to undertake certain cross marketing activities to promote the launch of our partnership, including press releases, Web advertising and a special promotion by us of Drumbeat(TM) 2000. In addition, we have been given the opportunity to provide an insert card to be included in the Drumbeat(TM) 2000 product packaging promoting our services. This agreement which is dated December 13, 1998 may be terminated by either Elemental or us with thirty days prior notice to the other. We do not have nor do we expect to incur in the future any material financial commitments as a result of this agreement. iMALL, Inc. iMALL operates an Internet shopping mall and has created a suite of e-commerce tools labeled iSTORE(TM) and Bolt-on e-commerce(TM). Interliant and iMALL have agreed to use iMALL's experience and technical infrastructure to create a mall where our customers can sell their products and services online. Under the terms of the agreement, we pay iMALL for the use of the Bolt-on e-commerce(TM) solution and iSTORE(TM) at various discounted rates based on the number of iMALL accounts created by us. The aggregate amount of fees payable under this agreement over the term of the agreement are not material. Our agreement with iMALL states that it is intended to establish a long-term relationship between us and iMALL and as such has a three-year term which commenced on October 23, 1998. Revenues and expenses generated by these strategic relationships are recognized on an accrual basis. Where appropriate, revenue and expenses are matched. 48 54 SALES AND DISTRIBUTION We sell our hosting services to our customers through a variety of sales channels. The following schematic represents our sales approach. The prices set forth below are for product offerings marketed under our brand. [FLOW CHART] SMALL - MEDIUM MEDIUM -LARGE TARGET BUSINESSES BUSINESSES CUSTOMER ---------------------------------------- ---------------------------------------- MAINSTREAM RESELLERS VERY COMPLEX WEB DEVELOPERS HOSTING SOLUTIONS
- -------------------------------------------------------------------------------- SERVICES WEB-HOSTING & APPLICATION HOSTING & OFFERED CONSULTING CONSULTING
- -------------------------------------------------------------------------------- PRICING $25/MONTH $1,000 - 2,000/MONTH $100,000/MONTH
- -------------------------------------------------------------------------------- SALES INTERNET TELESALES/ DIRECT STRATEGY MARKETING INDIRECT SALES SALES
We have historically used a variety of marketing and sales techniques, including Internet marketing, telesales, indirect sales channels, such as resellers and referral partners, and direct sales in order to increase its market share. Our acquisition strategy has facilitated the integration of different indirect and direct distribution channel models used by acquired companies and has enabled us to customize them to fit the needs of specific markets in which we compete. Internet Marketing. Our Internet marketing sales program offers an automated online sales interface to our customers that enables them to purchase hosting services on a 24x7 basis from our Web site at www.interliant.com and www.sagenetworks.com or purchase Internet rental application services at www.appsonline.com. Telesales. In the telesales area, we currently acquire, and plan to develop further, our hosting accounts through inbound calls generated through traditional media and outbound telesales to pre-qualified potential customers. Indirect Sales. In the indirect sales channel area, our goal is to develop the leading reseller and referral partner program in the industry through our recently introduced business partner program. Our target partners include reseller and referral partners, such as Web consulting firms, Internet service providers, independent software vendors, network integration companies and system integrators that have an established relationship with our prospective customer base as well as a sales force capable of selling Internet services. The benefits to us of using these indirect sales channels include greater market reach without fixed overhead costs and the ability to use the partners to assist in the delivery of complete 49 55 solutions to meet customer needs. We offer our partners a discount from our retail price on both products and services. We believe that our business partner program offers its reseller and referral partners a wide variety of benefits such as: - financial incentives including volume discounts and/or royalties, waived set up fees and advantageous software leasing opportunities; - access to our hosting services and applications; - advanced technical support; - sales and marketing support services; and - training and support programs. Direct Sales. We have a sales group dedicated to selling hosting and consulting solutions to large enterprises and other businesses whose Internet operations are mission-critical. As of the date hereof, we have 53 employees engaged in distribution and sales. MARKETING We market our full range of hosting solutions under the SageNetworks and Interliant brands via a marketing program that seeks to use a variety of media and channels. We will continue to invest in building greater equity of the Interliant brand worldwide, using a variety of marketing techniques including print advertisements in key industry publications, broadcast advertising, direct marketing and online advertising, such as general rotation and keyword-specific Web banner advertisements. The focus of these branding efforts is primarily to reinforce our position as a full service hosting provider. In addition, we will also employ a number of other marketing tactics and communications vehicles, such as product literature, trade shows, promotions with key hardware and software vendors, direct response programs and our Web site to generate greater numbers of qualified leads and to further increase awareness of our brand. When an acquired company's brand is already well-established, we may for a period of time continue to market certain products and services under that brand to capitalize on the competitive advantages the acquired brand may bring to us. Our long-term goal, however, is to migrate most of our acquired product offerings to our brands. Our products are available from our primary Web site at www.interliant.com as well as at www.appsonline.com. We expect to increase our marketing expenditures in order to support our brand marketing and lead-generation efforts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." CUSTOMER SERVICE We view customer service as a critical part of our business strategy. Our customer service group has 136 employees who are mainly located in our Atlanta and Houston data centers. The customer service group is responsible for providing customer service to all of our customers as well as our resellers and referral partners, including helping customers to initially set up their Web sites, answering technical questions or helping customers use our application hosting solutions and other enhanced offerings. Through our customer service systems, customer service representatives can generally resolve any issues in a timely manner via e-mail or our toll-free number. Web Hosting Customer Service. Our Web hosting customers are primarily serviced through our Atlanta data center. To ensure that each Web hosting customer is connected with the customer service representative best able to address its needs, our call center routing system, provided by Aspect Communications, directs calls based on the phone number dialed or the menu choice selected. In addition, the Vantive Support system, a customer/asset management tracking application, enables a customer 50 56 service representative to view a customer's entire account, including past and recent interactions with such customer. Further, the Vantive Support system provides a resolution database that recognizes and documents support records into a central repository that can be accessed by all customer service personnel. This database categorizes all reported problems so that if a particular problem recurs, customer service representatives can view its prior resolution and provide timely and accurate customer service. The Vantive Support system is also linked to the Vantive Sales Force Automation module which helps sales staff get current information on the status of accounts, recent problems or account issues prior to calling customers to pursue new business opportunities. In addition to the Aspect and Vantive systems, we are in the process of implementing the PORTAL Infranet billing system. With PORTAL Infranet, Interliant's resellers, referral partners and customers will be able to obtain monthly statements delivered electronically which we believe will provide them with easily accessible and accurate tracking of their hosting expenditures. In particular, we believe that PORTAL will allow resellers and referral partners to add new products and services, as well as pricing discounts and incentive programs, in a timely and cost-effective manner. Application Hosting Customer Service. Our application hosting customers are primarily serviced through our Houston data center. Customers serviced in Houston can contact a Technical Support Engineer on a 24x7 basis to address issues including registration, mail routing, connectivity or enhancements to a customer account such as rolling out new databases and changing access control lists. Certain customer accounts also have access to dedicated support engineers who are familiar with each unique configuration or requirement a larger customer may have. A focused support team handles all the application hosting support requirements via several mechanisms including a facilitated discussion database environment available over the Internet where customers, application developers and support technicians can discuss pertinent issues and build a relevant knowledge base. Customers may also access support staff through e-mail as well as through a toll-free number. On-line Customer Service. We also provide resellers and customers who are hosted in its Atlanta data center the opportunity to access an online control panel which serves as a personalized, virtual customer service representative. When fully implemented through PORTAL, this online control panel will enable customers to find information they need such as billing histories, orders and account profiles in a timely manner. In addition, at that time, the online control panel will offer viewing of real-time billing statements and invoices, the ability to order new or additional services, access to an online Web development library, free applications and step-by-step guidance through common Web publishing procedures. Thus, our resellers, referral partners and end users hosted in Atlanta will have the option of accessing account and services information themselves online or by calling the customer service centers. TECHNOLOGY AND NETWORK OPERATIONS We have developed a secure, reliable, high-performance, and scalable hosting solution, which we believe provides a significant competitive advantage in the market. This solution is comprised of multiple hosting platforms that incorporate automated functionality and a network infrastructure that includes multiple Internet data centers and is monitored on a 24x7 basis by our personnel in Atlanta and Houston. our strategy in developing our hosting solution focuses on utilizing internally created technological innovations that we integrate with leading software and hardware providers. Web Hosting Platform. Although industry-standard Web servers are adequate for basic Web hosting, we believe that efficiently managing large numbers of Web sites and users on a single server requires significant technological innovations. Accordingly, we have focused our technology development efforts on creating various operating system level tools to facilitate a high customer to server ratio. We have developed multiple Web hosting platforms that permit efficient hosting of more than 5,000 Web sites on a Sun Microsystems, Inc. Solaris server. We have also developed Web server applications designed to improve performance in a virtual server environment and implemented resource monitoring tools designed to report and address scarcity of shared computer processing units and memory resources. Our solution is scalable, allowing servers to be added while being monitored centrally independent of where they are 51 57 located. To address the diverse requirements of our customers, we offer Web hosting services on a range of operating systems and computing platforms including Solaris which operates on a Sun Microsystems, Inc. platform, Microsoft Windows NT which operates on an Intel/PC platform and Linux which operates on a Cobalt Networks, Inc. platform. Application Hosting Platform. We maintain a state-of-the-art data center in Houston from which we manage our application hosting services. This facility features separate, redundant fiber and power connections, diesel generators, cooling systems and uninterruptible power supplies designed to provide on site power for up to four weeks. Quality and security are paramount concerns for our customer base. Consequently, we employ several security measures including: - 24x7 building guards; - electronic surveillance; - limited access electronic card key measures; as well as - the physical separation of servers from administrative workstations. The Houston facility includes high-end Compaq servers equipped with multiple power supplies and RAID technology. Other strategic providers include Sun Microsystems, Microsoft, and Lotus. We offer connectivity to our systems from virtually anywhere in the world, enabling customers to deploy global solutions. Customers can access us: - via the Internet; - through X.28 connections provided by Compuserve and Equant, N.V. in more than 160 countries; - over Frame Relay through AT&T Corp., Sprint Corporation and MCI Worldcom, Inc.; or - domestically via a toll-free number. We use two DS-3 connections to the Internet provisioned directly off a SONET ring. Internally developed management and monitoring systems provide insight into the performance of our entire network, as well as consistency of security measures across all of our current hosting platforms. Network Operations. In order to provide its customers with high-quality service, we have invested substantial resources in building our network infrastructure. We have designed our network to minimize the effect of any interruptions. We have also implemented security measures and monitoring systems to ensure that our network is protected, identify potential sources of failure, limit downtime and notify staff of any problems. Although we have attempted to build redundancy into our network and hosting facilities, our data centers are currently subject to various single points of failure, and a problem with one of our routers or switches could cause an interruption in the services we provide to some of our customers. Our NOCs are responsible for monitoring our entire network on a 24x7 basis. We monitor each piece of equipment, including routers, switches and servers. The NOCs also monitor all Internet and telecommunications connections and ensures that they are functional and properly loaded. The design of the NOCs enables systems administrators and support staff to be promptly alerted to problems, and we have established procedures for rapidly resolving any technical problems that arise. The NOCs are fully integrated into our customer service facilities. We currently have two primary data centers located in Atlanta and Houston. These data centers are fitted with continuous monitoring capabilities, back-up generators and environmental controls to ensure high-quality service with minimal interruptions. The Atlanta data center is our primary Web hosting facility and the Houston data center is our primary groupware and application outsourcing facility. The customer service and network monitoring infrastructures are based in Atlanta and Houston. Our Virginia data center currently serves as a co-location facility. We have recently entered into a ten-year lease for approximately 13,000 square feet of space in Tysons Corner, Virginia. We intend to use a portion of the proceeds from this offering to complete construction of this space and create a third state- 52 58 of-the-art data center for hosting and providing customer service. Once the construction of this new space is completed, all of our Washington, D.C. area operations will be moved into the new space. See " -- Facilities" and "Use of Proceeds." COMPETITION The market served by us is highly competitive. Although barriers to entry and continued growth are increasing, there are still few substantial barriers to entry, particularly with respect to virtual hosting, and we expect that we will face additional competition from existing competitors and new market entrants in the future. The principal competitive factors in this market include: - quality of service, including network capability, scalability, reliability and functionality; - customer service and support; - variety of services and products offered; - price; - brand name; - Internet system engineering and technical expertise; - timing of introductions of additional value services and products; - network security; - financial resources; and - conformity with industry standards. We may not have the resources, expertise or other competitive factors to compete successfully in the future. Our current and potential competitors include: - other Web hosting and Internet services companies such as AboveNet Communications, Inc., Exodus Communications, Inc., Frontier GlobalCenter, Globix Corporation and local and regional hosting providers; - national and regional Internet service providers such as Concentric Network Corporation, MindSpring Enterprises, Inc., UUNET Technologies, Inc., PSINet Inc. and Verio Inc.; - global telecommunications companies including AT&T Corp., British Telecommunications plc, Telecom Italia SpA and Nippon Telegraph and Telephone Corp.; - regional and local telecommunications companies, including the regional Bell operating companies such as Bell Atlantic Corporation and US West, Inc.; - companies that focus on application hosting such as USinternetworking, Inc. and IBM Global Services; and - audio and video content hosting companies such as broadcast.com. Many of our competitors have substantially greater financial, technical and marketing resources, larger customer bases, longer operating histories, greater name recognition and more established relationships in the industry than us. As a result, certain of these competitors may be able to develop and expand their network infrastructures and service offerings more rapidly, adapt to new or emerging technologies and changes in customer requirements more quickly, take advantage of acquisition and other opportunities more readily, devote greater resources to the marketing and sale of their services and adopt more aggressive pricing policies than can we. In addition, these competitors have entered and will likely continue to enter into joint ventures or consortia to provide additional services competitive with those provided by us. 53 59 In an effort to gain market share, certain of our competitors have offered hosting services similar to those of us at lower prices than those of us or with incentives not matched by us. In addition, certain of our competitors may be able to provide customers with additional benefits, which could reduce the overall costs of their services relative to those of us. We may not be able to reduce the pricing of its services or offer incentives in response to the actions of its competitors without a material adverse impact on its operating results. We also believe that the market in which we compete is likely to encounter consolidation in the near future, which could result in increased price and other competition that could have an adverse effect on our business. INTELLECTUAL PROPERTY RIGHTS We rely on a combination of copyright, trademark, service mark, trade secret laws and contractual restrictions to establish and protect certain proprietary rights in its services. We have no patented technology that would preclude or inhibit competitors from entering our market. The steps taken by us to protect its intellectual property may not prove sufficient to prevent misappropriation of our technology or to deter independent third-party development of similar technologies. The laws of certain foreign countries may not protect our services or intellectual property rights to the same extent as do the laws of the United States. We also rely on certain technologies that it licenses from third parties. These third-party technology licenses may not continue to be available to us on commercially reasonable terms. The loss of the ability to use such technology could require us to obtain the rights to use substitute technology, which could be more expensive or offer lower quality or performance, and therefore have an adverse effect on our business. To date, we have not been notified that its services infringe on the proprietary rights of third parties, but third parties could claim infringement by us with respect to current or future services. From time to time, we are notified that the content of one of our customer's sites infringes on a third party's trademark or copyright. In response, we inform the customer of such claim and, if necessary, will terminate a customer's service. We expect that participants in our markets will be increasingly subject to infringement claims as the number of services and competitors in our industry segment grows. Any such claim, whether meritorious or not, could be time-consuming, result in costly litigation, cause service installation delays or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements might not be available on terms acceptable to us or at all. As a result, any such claim could have an adverse effect upon our business. GOVERNMENT REGULATION We are not currently subject to direct federal, state or local government regulation, other than regulations that apply to businesses generally. Only a small body of laws and regulations currently applies specifically to hosting and commerce activities, or access to the Internet. Due to the increasing popularity and use of the Internet, however, it is possible that laws and regulations with respect to the Internet may be adopted at international, federal, state and local levels, covering issues such as user privacy, freedom of expression, pricing, characteristics and quality of products and services, taxation, advertising, intellectual property rights, information security and the convergence of traditional telecommunications services with Internet communications. Although sections of the Communication Decency Act of 1996 (the "CDA") that, among other things, proposed to impose criminal penalties on anyone distributing "indecent" material to minors over the Internet were held to be unconstitutional by the U.S. Supreme Court, similar laws may be proposed, adopted and upheld. The nature of future legislation and the manner in which it may be interpreted and enforced cannot be fully determined and, therefore, legislation similar to the CDA could subject us and/or its customers to potential liability, which in turn could have a material adverse effect on our business, results of operations and financial condition. The adoption of any such laws or regulations might decrease the growth of the Internet, which in turn could decrease the demand for the services of us or increase the cost of doing business or in some other manner have an adverse effect on our business. We currently do not collect sales or other taxes with respect to the sale of services or products in states and countries where we believe we are not required to do so. We do collect sales and other taxes in the states we have offices and are required by law to do so. One or more jurisdictions have sought to 54 60 impose sales or other tax obligations on companies that engage in online commerce within their jurisdictions. A successful assertion by one or more jurisdictions that we should collect sales or other taxes on our products and services, or remit payment of sales or other taxes for prior periods, could have an adverse effect on our business. In addition, applicability to the Internet of existing laws governing issues such as property ownership, copyright and other intellectual property issues, taxation, libel, obscenity and personal privacy is uncertain. The vast majority of such laws were adopted prior to the advent of the Internet and related technologies and, as a result, do not contemplate or address the unique issues of the Internet and related technologies. Changes to such laws intended to address these issues could create uncertainty in the marketplace that could reduce demand for the services of Interliant 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 an adverse effect on our business. Any new legislation or regulation, or the application of laws or regulations from jurisdictions whose laws do not currently apply to our business, could have an adverse effect on our business. EMPLOYEES As of the date hereof, we have 500 employees (including 19 on a contract basis), of which 87 are in sales, distribution and marketing, 175 are in engineering and service development, 136 are in customer service and technical support, 94 are in finance and administration and 8 in acquisition integration. We believe that our future success will depend in part upon our continued ability to attract, hire and retain qualified personnel. Although we believe we have thus far been successful in this endeavor (including a high retention rate of key employees from acquired companies), the competition for such personnel is intense, and we may not be able to identify, attract and retain such personnel in the future. None of our employees are represented by a labor union, and management believes that our employee relations are good. FACILITIES Our executive offices are located in Cambridge, Massachusetts and consist of approximately 7,800 square feet that are leased pursuant to an agreement that expires in June 1999. Although we have not yet entered into a definitive agreement, we are in negotiations for the lease of office space in Purchase, New York. We intend to relocate our executive offices to such space as soon as possible after execution of a lease. We also lease approximately 15,740 square feet in Atlanta, Georgia under an agreement that expires in June 2003 and approximately 1,000 square feet of space in McLean, Virginia area under a lease that expires in July 2001. We also lease 59,885 square feet of space in Houston, Texas under an agreement that expires in August 2001 and office space in London, England. In addition, we have recently leased approximately 13,000 square feet of space in Tysons Corner, Virginia under a lease that expires in 2009. A portion of the proceeds of this offering will be used by us to complete and equip this space. Once the construction of this space is completed, all of our McLean, Virginia operations will be moved into this space. See "Use of Proceeds" and "Business -- Technology and Network Operations." LEGAL PROCEEDINGS In the ordinary course of business, we may be involved in legal proceedings from time to time. As of the date of this prospectus, there are no material legal proceedings pending against us. 55 61 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of Interliant are as follows:
NAME AGE TITLE - ---- --- ----- Leonard J. Fassler......................... 67 Co-Chairman, Director Bradley A. Feld............................ 33 Co-Chairman, Director Stephen W. Maggs........................... 45 Chief Executive Officer, President, Treasurer and Director James M. Lidestri.......................... 38 Executive Vice President Francis J. Alfano.......................... 37 Senior Vice President, Mergers and Acquisitions Rajat Bhargava............................. 26 Senior Vice President, Strategic Planning and Integration Jesse J. Bornfreund........................ 43 Senior Vice President, Business Development Edward A. Cavazos.......................... 30 Senior Vice President, Legal and Business Affairs and Assistant Secretary Paul E. Chollett........................... 39 Senior Vice President, Finance and Administration Bruce S. Klein............................. 39 Senior Vice President, General Counsel and Secretary Jennifer J. Lawton......................... 35 Senior Vice President, Consulting and Technology Kristian Nelson............................ 35 Senior Vice President, Service Development and Delivery William A. Wilson.......................... 53 Chief Financial Officer Merril M. Halpern.......................... 64 Director Thomas C. Dircks........................... 41 Director Patricia A. M. Riley....................... 57 Director Jay M. Gates............................... 34 Director Charles R. Lax............................. 39 Director
Each director holds office for a one-year term or until a successor has been duly elected and qualifies, or until his or her earlier death, resignation or removal. Our executive officers are appointed annually by our Board of Directors and serve at the discretion of the Board of Directors. Mr. Lax has been elected to the Board of Directors pursuant to a contractual arrangement. See "Description of Capital Stock -- The SOFTBANK Investment." Leonard J. Fassler is one of our co-founders and has been one of our Co-Chairmen and a Director since our formation in December 1997. Mr. Fassler was also our Secretary from December 1997 through April 1999. From 1992 to 1996, Mr. Fassler was a Co-Chairman of AmeriData Technologies, Inc. ("AmeriData"), a New York Stock Exchange-listed reseller of computer equipment and provider of computer consulting and other services that was acquired by General Electric Capital Corporation in 1996. Mr. Fassler was a co-founder of AmeriData which grew to a company with sales in excess of two billion dollars a year and locations in ten countries at the time that it was acquired. Mr. Fassler holds a bachelor's degree in business administration from City College of New York and a law degree from Fordham Law School. Bradley A. Feld is one of our co-founders and has been one of our Co-Chairmen and a Director since our formation in December 1997. Since 1995, Mr. Feld has been the President of Intensity Ventures Inc., a company that helps to establish, advise and operate software companies. From 1993 to 1995, Mr. Feld was the chief technology officer of AmeriData. From 1985 to 1993, he was president of Feld Technologies, Inc., a computer consulting firm founded by Mr. Feld to develop and implement information technology solutions for a wide variety of businesses, which was acquired by AmeriData in 1993. Mr. Feld earned a 56 62 bachelor of science degree and a master of science degree from Massachusetts Institute of Technology. Since 1997, Mr. Feld has been a General Partner of SOFTBANK Technology Ventures IV, L.P. and SOFTBANK Technology Advisors Fund, L.P., venture capital funds. Mr. Feld is a director and co-chairman of Message Media, Inc., and director of a number of privately held companies. Stephen W. Maggs is one of our co-founders has been our Chief Executive Officer, President, Treasurer and a Director since our formation in December 1997. From December 1993 to December 1996, Mr. Maggs held a variety of senior management positions with AmeriData, including serving as an executive vice president of operations of AmeriData and Chairman of AmeriData Canada. From February 1992 to December 1993, he was the owner of Mericom Systems Inc., a reseller of computer equipment and provider of computer consulting and other services, which was acquired by AmeriData in 1993. From 1984 to 1991, he held various executive positions at Inacom Information Systems, a provider of information technology products and services. Mr. Maggs received a bachelor of science degree from Hillsdale College, Hillsdale, Michigan and is a Certified Public Accountant. James M. Lidestri has served as our Executive Vice President since March 1999. From March 1996 to March 1999, Mr. Lidestri was the President and Chief Executive Officer of Interliant Texas. From February 1995 to March 1996, Mr. Lidestri was employed at IBM Corporation, a vendor of technology systems, products, services and software and financing where he served as Group Manager of the Collaborative Services Division. As Group Manager, Mr. Lidestri was responsible for developing market and product strategies for network-based collaborative services, with a primary focus on Lotus Notes. From November 1990 to February 1995, Mr. Lidestri served in a number of executive positions at Sprint Corporation, a global communications company, including Director of Business Operations. Mr. Lidestri holds a bachelor of science degree in computer science from Rensselaer Polytechnic Institute and a masters degree in business administration from New York University. Francis J. Alfano has served as our Senior Vice President, Mergers and Acquisitions since December 1998. From January 1997 to November 1998, Mr. Alfano was Vice President of Business Development at GE Capital Information Technology Solutions, Inc., formerly AmeriData. From July 1994 to December 1996, Mr. Alfano was Director of Taxes at GE Capital Information Technology Solutions, Inc. From January 1991 to June 1994, Mr. Alfano was employed by Ernst & Young, an accounting, tax and consulting firm, and was a senior manager in the tax department at the time of his departure. From 1984 to 1990, Mr. Alfano was employed as a Certified Public Accountant with various public accounting firms. Mr. Alfano holds a bachelor of science degree in business administration from the University of Arizona and is a Certified Public Accountant. Rajat Bhargava is one of our co-founders and has been our Senior Vice President, Strategic Planning and Integration since March 1999. He was our Chief Operating Officer from our formation in December 1997 through March 1999. During the period from January 1994 to June 1997, he served as Chairman, President and Chief Executive Officer of Net.Genesis Corp., an Internet software company which he founded. From 1991 to 1993, he worked in various engineering positions at Intel Corporation, a manufacturer of computer networking and communications technologies. Mr. Bhargava received a bachelor of science degree in electrical engineering and computer science from Massachusetts Institute of Technology in 1995. Jesse J. Bornfreund has served as our Senior Vice President, Business Development since March 1999. From July 1996 until he joined us, Mr. Bornfreund was Senior Vice President, Strategic Alliances of Interliant Texas. In such position, Mr. Bornfreund was responsible for managing the strategic alliances of Interliant Texas and the development of its business. From February 1996 through June 1996, Mr. Bornfreund served as a Corporate Strategy Consultant at IBM Corporation with primary responsibilities that included the development of corporate business and technology strategies and recommendations. From February 1994 to February 1996, Mr. Bornfreund was a Program Manager for the Collaborative Services Group of IBM Corporation. As Program Manager, Mr. Bornfreund was responsible for strategic planning, business and market development activities and development and management of 57 63 partner relationships. Mr. Bornfreund holds a bachelor of science degree in biology from Stockton State College. Edward A. Cavazos has served as Senior Vice President, Legal and Business Affairs of Interliant since March 1999. In April 1999, he became our Assistant Secretary. From March 1997 until he joined Interliant, Mr. Cavazos was Senior Vice President, General Counsel of Interliant Texas. From May 1994 until March 1997, Mr. Cavazos was an associate attorney at the law firm of Andrews & Kurth, L.L.P. In addition, Mr. Cavazos served as an Adjunct Professor at the University of Texas School of Law from January 1998 through May 1998 and as an Adjunct Professor at the University of Houston Law Center from September 1996 through December 1996 and September 1997 through December 1997. Mr. Cavazos holds a bachelor of arts degree in philosophy from the University of Texas and a law degree from the University of Texas. Paul E. Chollett has served as Senior Vice President, Finance and Administration of Interliant since March 1999. From July 1996 until he joined Interliant, Mr. Chollett was Senior Vice President and Chief Financial Officer of Interliant Texas. From July 1993 to July 1996, Mr. Chollett was the Director of Finance and Administration in the Audit Division of the accounting firm of Arthur Andersen, LLP. In this role, Mr. Chollett was responsible for managing the financial, risk management and quality control aspects of the firm's audit practice. Mr. Chollett holds a bachelor of science degree in accounting from the University of Houston at Clear Lake City. Mr. Chollett is a Certified Public Accountant. Bruce S. Klein has served as our Senior Vice President, General Counsel since December 1998. In April 1999, Mr. Klein became our Secretary. From April 1998 to November 1998, he was our General Counsel, Vice President. In addition, from June 1998 to present, Mr. Klein has been of counsel to the law firm of McCarthy, Fingar, Donovan, Drazen & Smith, L.L.P. From January 1996 through March 1998, Mr. Klein was of counsel to the law firm of Spitzer & Feldman P.C., prior to which he was partner at the law firm of Halperin Klein & Halperin, in each case engaged in the general practice of law, with experience in mergers and acquisitions and general corporate and business law. Mr. Klein is admitted to practice law in New York and Massachusetts and holds a bachelor's degree in business administration from Rutgers University and a law degree from Western New England College School of Law. Jennifer J. Lawton has served as our Senior Vice President, Consulting and Technology since February 1999. From May 1992 until she joined us, Ms. Lawton was the Chief Executive Officer of Net Daemons Associates, Inc., a provider of Web development and system integration activity for Internet and IT Networks which was acquired by Interliant in February 1999. Ms. Lawton is a co-founder of Net Daemons Associates, Inc. Ms. Lawton holds a bachelor of science degree in applied mathematics from Union College. Kristian Nelson has served as our Senior Vice President, Service Development and Delivery since March 1999. From July 1997 until he joined us, Mr. Nelson was Senior Vice President, Operations of Interliant Texas and was responsible for the direction and control of all operational aspects of Interliant Texas's business including product development, customer service and application and data center services. From June 1996 through May 1997, Mr. Nelson served as Vice President, Operations at GST Telecommunications, a full-service telecommunications provider. In this role, Mr. Nelson was responsible for the oversight and control of such company's Internet subsidiary, GST Internet Inc. From June 1995 to January 1996, Mr. Nelson was a Senior Management Consultant in the Technology Strategy Practice area at Gartner Group, Inc., a company which provides IT advisory services and consulting where his responsibilities included providing technical consulting services to Fortune 500 companies. From May 1986 to May 1995, Mr. Nelson was the Product Assurance Information Technology Director at Lockheed Martin Corporation, a diversified technology company. As such, Mr. Nelson was responsible for developing and implementing information technology strategic planning for the Product Assurance Group. Mr. Nelson holds a bachelor of science degree in management science from Orlando College. William A. Wilson has served as our Chief Financial Officer since September 1998. During the period from February 1998 to July 1998, Mr. Wilson served as Vice President, Finance and Chief Financial Officer at XCOM Technologies, Inc., a competitive local exchange carrier. From October 1997 to 58 64 February 1998, Mr. Wilson served as a consultant to several private companies. From June 1997 to October 1997, Mr. Wilson served as Senior Vice President, Finance and Chief Financial Officer of Computervision Corporation, a software publishing and development company. Prior thereto, Mr. Wilson was Executive Vice President and Chief Financial Officer of Arch Communications Group, Inc., a wireless messaging company, from June 1996 to June 1997 and was Vice President, Finance and Chief Financial Officer of Arch Communications Group, Inc. from January 1989 to June 1996. Mr. Wilson received a bachelor of arts degree from Luther College, a master of science degree from Northeastern University and a masters degree in business administration from Babson College. Mr. Wilson is a Certified Public Accountant. Merril M. Halpern has been one of our Directors since our formation in December 1997 and is Chairman and Chief Executive of Charterhouse Group International, Inc. ("Charterhouse"), which he founded in 1973. Mr. Halpern is a director of Microwave Power Devices, Inc., and United Road Services, Inc., as well as several private companies. He received a bachelor of science degree from Rutgers University and a masters degree in business administration from Harvard University. Thomas C. Dircks has been one of our Directors since our formation in December 1997 and is a Managing Director of Charterhouse. Mr. Dircks has been employed as an officer of Charterhouse since 1983. He was previously employed as a Certified Public Accountant at a predecessor of PricewaterhouseCoopers LLP. He holds a bachelor of science degree in accounting and a masters degree in business administration from Fordham University. He is a director of a number of privately-held companies. Patricia A. M. Riley has been one of our Directors since our formation in December 1997 and is a Managing Director of Charterhouse and has been an executive officer with the firm since 1977. She is a graduate of the Advanced Management Program at Harvard Graduate School of Business Administration and received a bachelor of arts degree from Hunter College. Jay M. Gates has been one of our Directors since our formation in December 1997 and is a Vice President of Charterhouse. He joined Charterhouse in 1994 as an Analyst. Mr. Gates was previously employed as a Senior Analyst in the Financial Consulting Advisory Group of the accounting firm of Arthur Andersen LLP. Prior to that he was an Assistant Treasurer at Bankers Trust Corporation. He holds a bachelor of arts degree from the State University of New York at Binghamton and a masters degree in business administration from New York University, Leonard N. Stern School of Business. He is also a director of a number of privately-held companies. Charles R. Lax has been one of our Directors since January 1999. He has been a General Partner of SOFTBANK Technology Ventures IV, L.P. since November 1997. From March 1996 to November 1997, Mr. Lax was a Vice President of SOFTBANK Holdings Inc. He was previously a venture partner at Vimac Partners LLC, a venture capital firm specializing in investments in the information technology and Internet-related industry. Mr. Lax holds a bachelor of science degree from Boston University. He is a director of a number of privately-held companies. DIRECTOR COMPENSATION Directors receive no remuneration for serving on our Board of Directors. COMMITTEES OF THE BOARD OF DIRECTORS Our Board of Directors has standing Audit and Compensation Committees. The Audit Committee consists of Mr. Thomas C. Dircks and Ms. Patricia A. M. Riley. Among other functions, the Audit Committee makes recommendations to our Board of Directors regarding the selection of independent auditors, reviews the results and scope of the audit and other services provided by our independent auditors, reviews our financial statements and reviews and evaluates our internal control functions. The Compensation Committee consists of Mr. Thomas C. Dircks, Ms. Patricia A. M. Riley and Mr. Charles R. Lax. The Compensation Committee determines executive compensation and stock option 59 65 grants and makes recommendations to our Board of Directors concerning salaries and incentive compensation for our employees and consultants. EXECUTIVE COMPENSATION Effective January 1, 1999, we entered into one-year employment agreements with each of Messrs. Fassler, Maggs and Bhargava pursuant to which they each will receive a salary of $180,000 for the period ending December 31, 1999. Effective January 1, 1999, we also entered into a one-year consulting agreement with Mr. Feld through Intensity Ventures, Inc. pursuant to which he will receive a consulting fee of $180,000. On March 10, 1999, we entered into an employment agreement with Mr. Lidestri for a term commencing on that date and terminating on March 1, 2001 unless either of us exercises our rights to terminate the agreement sooner. The agreement provides for a $150,000 signing bonus, two-thirds of which was paid in April 1999 and the balance of which is payable on March 10, 2000, an annual base salary of $180,000 and a performance-based annual bonus of up to $70,000. See "-- Employment Agreements." We also have employment agreements with certain other senior officers. The following table sets forth the total compensation for fiscal 1998 of our Chief Executive Officer and each of the other four most highly compensated executive officers whose total salary and bonus for fiscal 1998 is estimated to exceed $100,000: SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------ ---------------------------------- NUMBER OF OTHER SECURITIES ANNUAL UNDERLYING ALL OTHER NAME OF EXECUTIVE OFFICER AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION - ------------------------------------------------ ---- -------- ------- ------------ ------------ ------------ Stephen W. Maggs........................... 1998 $130,232(1) Chief Executive Officer,................. -- -- -- -- President, Treasurer and Director Francis J. Alfano.......................... 1998 $ 12,500(2) -- -- -- -- Senior Vice President, Mergers and Acquisitions Rajat Bhargava............................. 1998 $120,152 Senior Vice President,................... -- -- -- -- Strategic Planning and Integration Bruce S. Klein............................. 1998 $116,667(3) -- $15,635(4) -- -- Senior Vice President, General Counsel and Secretary William A. Wilson.......................... 1998 $ 48,894(5) -- -- -- -- Chief Financial Officer
- --------------- (1) Although Mr. Maggs commenced employment with us on December 8, 1997, he was not put on our payroll until January 1, 1998. As a result, Mr. Maggs was paid $10,000 in 1998 as compensation for his employment in 1997. (2) Reflects salary received by Mr. Alfano from the commencement of his employment with us on December 1, 1998 through December 31, 1998. (3) Reflects salary received by Mr. Klein from the commencement of his employment with us in April 1998 through December 31, 1998. (4) Reflects income received by Mr. Klein in his capacity as an independent consultant prior to becoming our employee. (5) Reflects salary received by Mr. Wilson from the commencement of his employment with us on September 22, 1998 through December 31, 1998. 60 66 OPTION GRANTS IN LAST FISCAL YEAR None of the named executive officers were granted options in the last fiscal year. On April 15, 1999, our Compensation Committee granted an aggregate of 375,000 options to senior management, including: - options to purchase 30,000 shares of common stock at an exercise price of $8.00 per share to Stephen W. Maggs; - options to purchase 30,000 shares of common stock at an exercise prices of $8.00 per share to Rajat Bhargava; - options to purchase 25,000 shares of common stock at an exercise price of $8.00 per share to Francis J. Alfano; - options to purchase 25,000 shares of common stock at an exercise price of $8.00 per share to Bruce S. Klein; and - options to purchase 25,000 shares of common stock at an exercise price of $8.00 per share to William A. Wilson. STOCK OPTION PLAN Our Board of Directors has adopted and our stockholders have approved the Interliant 1998 Stock Option Plan, under which stock options may be granted to our officers, employees and consultants and to officers, employees and consultants of our subsidiaries. Our stock option plan allows our Board of Directors to award up to an aggregate of 3,800,000 options to purchase an identical number of shares of our common stock to qualified recipients. As of the date of this prospectus, our Board has granted a total of 3,697,994 options. Any options which have been granted but which expire or terminate unexercised are returned to the plan and may be granted at a later date to any qualified recipient. Our stock option plan is administered by the Compensation Committee of the Board of Directors. The Committee has the authority to determine: - the persons to whom options will be granted; - when options will be granted; - the number of shares subject to each option; - the exercise price of each option; - the time or times at which the options will become exercisable; - the duration of the exercise period; and - provide for the acceleration of the exercise period. In addition, if we are involved in a merger, reorganization, stock split or other type of corporate transaction that would diminish the value of our outstanding options, the Compensation Committee may adjust the number of options granted and/or the exercise price of such options in order to ensure that option holders are treated equitably. Our stock option plan also permits the grant of stock options that qualify as incentive stock options ("ISOs") under Section 422 of the Internal Revenue Code and nonqualified stock options ("NSOs"), which do not so qualify. The exercise price of options granted under our stock option plan may not be less than 100% of the fair market value of the common stock on the date of grant. The maximum term of options granted under our stock option plan is 10 years from the date of grant. ISOs granted to any employee who is a 10% shareholder of Interliant are subject to special limitations relating to the exercise price and term of the options. The value of common stock subject to ISOs that become exercisable by any one employee in any one year is limited by the Internal Revenue Code to $100,000. For this purpose, the value of common 61 67 stock is determined at the time of grant. Options granted under our stock option plan will generally become vested and exercisable over a four-year period in equal annual installments. However, if any of the events listed below occurs and provided that no written provision has been made, in connection with any such event, for (1) the continuation of the stock option plan and/or the assumption of all outstanding options by a successor corporation, or (2) the substitution for such options of new options covering the stock of a successor corporation then each option that was not then vested prior to such event will become fully vested and immediately exercisable: - An acquisition by any person or group of related individuals of beneficial ownership of 30% or more of either the outstanding shares of our common stock or the combined voting power of our outstanding voting securities; - A change in the composition of our Board of Directors during any period of two consecutive years which results in the directors in office at the beginning of such period plus any newly elected or nominated directors no longer constituting at least a majority of our Board of Directors; - The approval by our stockholders of a merger, consolidation or reorganization in which outstanding shares of our common stock are converted into: - shares of stock of another company, unless our stockholders end up owning 80% or more of the voting power of such other company; - other securities of our company or another company unless our stockholders hold at least 80% of the voting power of our company or such other company; or - cash or other property; - The approval by our stockholders of the sale or other disposition of all or substantially all of our assets or our liquidation of dissolution; or - The adoption by our Board of Directors of a resolution to the effect that any person has acquired effective control of our business and affairs. All options granted under our stock option plan may not be transferred, except upon the death of the optionholder in accordance with his will or applicable law. In the event of an optionee's death or permanent and total disability, outstanding options that have become exercisable will remain exercisable for a period of one year, and the Committee will have the discretion to determine the extent to which any unvested options shall become vested and exercisable in connection with such death or disability. In the case of any other termination of employment, except for a termination for cause as described below, outstanding options that have previously become vested will remain exercisable for a period of 90 days. All unexercised options will be immediately forfeited by any employee who is terminated as a result of any of the following: - embezzlement or misappropriation of corporate funds; - conviction for a felony; - misconduct resulting in material injury to us; - significant activities harmful to our reputation of the reputation or any of our subsidiaries; - a significant violation of our corporate policies; - willful refusal to perform, or substantial disregard of, the duties properly assigned to the option holder; - a significant violation of any contractual, statutory or common law duty of loyalty to us or any of our subsidiaries. 62 68 Under our stock option plan, the exercise price of an option is payable in cash or, in the discretion of the Committee, in common stock or a combination of cash and common stock. An optionee must satisfy all applicable tax withholding requirements at the time of exercise. Our stock option plan has a term of 10 years, and all options granted under the Plan prior to its termination remain outstanding until they have been exercised or are terminated in accordance with their terms. Our Board of Directors may amend the Plan at any time. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Dircks and Ms. Riley served as members of our Compensation Committee during fiscal year 1998. During 1998, no committee member was an officer or employee of ours. In addition, no interlocking relationship exists between our Board of Directors or our Compensation Committee and the board of directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. EMPLOYMENT AGREEMENTS We have entered into employment agreements with Messrs. Fassler, Maggs and Bhargava, pursuant to which each will receive annual compensation of $180,000. The Agreements provide for a term of one year and will renew automatically for additional one-year terms unless we or the employee deliver a notice of non-renewal at least three months prior to termination of the term. Under the Agreements, the employees are also entitled to participate in our employee benefit plans which are generally available to our senior officers. The Agreements include provisions that are effective upon the termination of employment of the employees under certain circumstances. In general, the employees are entitled to severance upon termination by us without "cause". The severance shall be equal to the amount of the employee's base salary yet to be paid for the unexpired portion of the term of the Agreement, discounted based on a specified published interest rate. In the event of termination due to death or disability for a specified period of time, the employee or the employee's estate, as applicable, shall be entitled to receive one-year's base salary, discounted based on a specified published interest rate and we shall continue to provide the employee, his spouse and minor children, as applicable, with certain medical and other benefits through the end of the term of the Agreement. For our protection, the agreements prohibit Messrs. Fassler and Bhargava during and for periods of twenty-four and twelve months, respectively after the end of their individual employment, from: - Soliciting any customers which are in any way related to our business; - Competing with us in any way; or - Disclosing or enabling anyone else to use any information he obtains during his employment. Each Agreement also prohibits Messrs. Fassler and Bhargava from: - Interfering or attempting to disrupt our business relationship with customers or suppliers; or - Soliciting our employees. The prohibitions contained in Mr. Maggs's contract are identical to those contained in Mr. Fassler's contract, except Mr. Maggs is not prohibited from engaging in Internet related business activities through Channel Reps, Inc. or any of its subsidiaries or divisions or Channel Force, Inc. Mr. Feld, through Intensity Ventures, Inc., has entered into a one-year consulting agreement with us with substantially identical terms to the agreements described above, except that Mr. Feld is not prohibited from competing with us and is not entitled to participate in our employee benefit plans. His annual consulting fee of $180,000 will be paid to Intensity Ventures, Inc. on a gross basis as an independent contractor. 63 69 We have also entered into a two-year employment agreement with Mr. Lidestri which shall automatically be extended on a month-to-month basis from the end of the term unless we or Mr. Lidestri deliver a notice stating a desire to terminate the agreement. The agreement provides for an annual base salary of $180,000 and an annual bonus of up to $70,000 based upon whether Mr. Lidestri meets or exceeds specified performance objectives. In addition, under the agreement, We are obligated to pay Mr. Lidestri a signing bonus of $150,000 with $100,000 of such bonus having been paid in April 1999 and the remaining $50,000 of which is payable on the first anniversary of the agreement. Under the agreement, Mr. Lidestri is entitled to participate in our employee benefit plans which are generally available to our employees. The agreement states that upon termination of Mr. Lidestri's employment by us without cause or by Mr. Lidestri as allowed under the agreement, he shall be entitled to severance comprised of the following components: - any remaining unpaid portion of his signing bonus; plus - the greater of (A) the unpaid portion of his annual base salary and other compensation for the remainder of the term of the agreement, including a pro rata portion of the performance-based bonus for the year in which his employment is terminated, or (B) an amount equal to six months of his annual base salary and other compensation for the remainder of the term of the agreement plus a pro rata portion of the performance-based bonus for the year in which his employment is terminated. In addition, Mr. Lidestri shall be entitled to participate in our benefit programs for a minimum of six months from the date of termination. If we terminate the agreement for cause, Mr. Lidestri shall be entitled to receive only the unpaid portion of his base salary and all vested benefits under any benefit programs, in each case, through the date of termination. In the event of termination due to death or disability during the term of the agreement, Mr. Lidestri or Mr. Lidestri's estate, as applicable, shall be entitled to receive all accrued and unpaid portions of his annual base salary to the date of his death or disability and all employee benefits accrued but unpaid to the date of his death or disability. Under the terms of the agreement for a period of time following termination of Mr. Lidestri's employment with us, which shall be either one year from such termination, one year following the expiration of the agreement or two years following the date of the agreement depending upon the reason for termination, Mr. Lidestri is prohibited from engaging in the following activities: - Competing with us or any of our subsidiaries in any way, except as an officer, director, shareholder or employee of ours or any of our affiliates. - Soliciting or interfering with, or attempting to hire: - any person who was employed by us or one of our affiliates or subsidiaries during the 12 months before the end of the agreement; - any person who was a customer or client or requested or received a proposal from us or one of our affiliates or subsidiaries during the 12 months before the end of the agreement; or - Using, disclosing or publishing any confidential material related to our business or the business of any of our subsidiaries or affiliates which he acquired while employed with us, unless the material is publicly available, otherwise lawfully obtained or must be disclosed by law. 64 70 RELATED PARTY TRANSACTIONS Since our inception, Web Hosting Organization LLC, SOFTBANK Technology Ventures and SOFTBANK Technology Advisors Fund L.P. have each purchased securities from us. SALE OF STOCK TO THE SOFTBANK PURCHASERS In January 1999, the SOFTBANK Purchasers purchased from us an aggregate of 2,647,658 shares of our Redeemable Convertible Preferred Stock and 749,625 warrants to purchase shares of common stock for an aggregate purchase price of $13.0 million. In April 1999, the SOFTBANK Purchasers exercised the 749,625 warrants for an identical number of shares of common stock at an aggregate exercise price $5.0 million. SALE OF STOCK TO WEB HOSTING ORGANIZATION LLC WEB owns 25,200,000 shares of our common stock which were acquired from us in a series of six transactions in December 1997, May 1998, June 1998, September 1998, December 1998 and February 1999, in each case at a price, giving effect to the 3-for-1 stock split effected in July 1998, of $1.67 per share. The principal members of WEB are Charterhouse Equity Partners III, L.P. ("CEP III") and WHO Management LLC. Leonard J. Fassler and Bradley A. Feld, our Co-Chairmen, are the member managers of WHO. Bradley A. Feld is a general partner of the SOFTBANK Purchasers. See "Description of Capital Stock -- The WEB Hosting Investment" and " -- The SOFTBANK Investment." DISTRIBUTIONS BY OUR SIGNIFICANT STOCKHOLDER Pursuant to the terms of the Limited Liability Company Agreement of WEB dated as of November 26, 1997, as amended by Amendment No. 1, dated as of March 4, 1998, the members of WEB shall be entitled to receive a distribution of all cash funds or other property of WEB available from any source other than the ordinary operations of its subsidiaries, after payment of all expenses of WEB due at the time of such distribution ("Total Proceeds"). The Total Proceeds shall be distributed to the members of WEB in tranches with priority given to covering members' federal tax liability, followed by return of capital and then as necessary to achieve specified internal rates of return. Thereafter, portions of the Total Proceeds will be distributed to WHO for the benefit of our co-founders and the members of our senior management, other senior employees, employees who were hired shortly after our formation and consultants as described below. Of the management distributions to WHO, 70% are retained by WHO for distribution to our co-founders, who are Messrs. Fassler, Feld, Maggs and Bhargava, and 30% are distributed to SMI Fund LLC, a New York limited liability company, for distribution to its members. There are a total of 18 members of SMI, all of whom are either executive officers, senior employees, employees who were hired shortly after our formation or consultants. Following is a list of the six senior management members who are members of SMI. The percentage next to each of their names indicates the percentage of amounts distributed to SMI that flow through to such person: Mr. Frank Alfano...................................... 5.0% Mr. Edward A. Cavazos................................. 3.5% Mr. Paul E. Chollett.................................. 3.5% Mr. Bruce S. Klein.................................... 10.0% Mr. James M. Lidestri................................. 10.0% Mr. William A. Wilson................................. 6.7%
65 71 The management distributions to WHO described above increase as the members of WEB realize specified internal rates of return on their investment in WEB. The following diagram depicts the flow of the distribution of Total Proceeds to the members of WEB described above. No Total Proceeds have been distributed to date. [Flow Chart] INTERLIANT INC. WEB HOSTING ORGANIZATION LLC CEPIII WHO MANAGEMENT LLC CO-FOUNDERS SMI FUND LLC
FEES PAID BY US TO OUR SIGNIFICANT STOCKHOLDERS During 1999 and 1998, in connection with certain of our acquisitions, we paid or accrued transaction fees of approximately $361,000 and $337,000, respectively, to Charterhouse, which is an affiliate of CEP III. Such fees were paid pursuant to the terms of the WEB LLC Agreement which require WEB or its affiliates, which includes us, to pay Charterhouse two percent (2%) of the total transaction costs of each acquisition or investment by WEB or its affiliates, which includes us, in which Charterhouse or any of its affiliates directly or indirectly provide all or a portion of the equity financing therefor. Charterhouse will not receive any fees with respect to this arrangement in the future. CONSULTING AND EMPLOYMENTS AGREEMENTS WITH OUR CO-FOUNDERS During 1998, we paid consulting fees of $120,000 to each of Sage Equities, Inc. and Intensity Ventures Inc, whose principals are Messrs. Fassler and Feld, respectively, pursuant to consulting agreements with each of them. Effective January 1, 1999, we entered into employment agreements with Messrs. Fassler, Maggs and Bhargava and a consulting agreement with Mr. Feld, through Intensity Ventures, Inc., pursuant to which each will be paid annual compensation of $180,000. See "Management -- Employment Agreements." 66 72 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the common stock as of April 30, 1999 and as adjusted to reflect the sale of the shares of common stock offered hereby by (i) each person or entity known to us to own beneficially more than 5% of the outstanding shares of common stock, (ii) each of our directors, (iii) each of the named executive officers and (iv) all directors and executive officers as a group. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law.
SHARES BENEFICIALLY SHARES BENEFICIALLY OWNED PRIOR TO THE OWNED AFTER THE OFFERING(1) OFFERING(1) --------------------- --------------------- BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT - ---------------- ---------- ------- ---------- ------- Web Hosting Organization LLC(2).................. 25,200,000 79.4 25,200,000 60.5 c/o Charterhouse Group International, Inc. 535 Madison Avenue New York, NY 10022 Charterhouse Group International, Inc.(2)........ 25,200,000 79.4 25,200,000 60.5 535 Madison Avenue New York, NY 10022 Mathew Wolf(3)................................... 3,945,090 12.4 3,945,090 9.5 1001 Fannin Street Suite 2000 Houston, TX 77002 SOFTBANK Technology Ventures IV, L.P.(4)......... 3,397,283 9.9 3,397,283 8.2 333 West San Carlos Suite 1225 San Jose, CA Leonard J. Fassler(5)............................ 25,200,000 79.4 25,200,000 60.5 Bradley A. Feld(5)(6)............................ 25,200,000 79.4 25,200,000 60.5 Stephen W. Maggs(5).............................. 25,200,000 79.4 25,200,000 60.5 Francis J. Alfano................................ -- -- -- -- Rajat Bhargava(5)................................ 25,200,000 79.4 25,200,000 60.5 Bruce S. Klein................................... -- -- -- -- William A. Wilson................................ -- -- -- -- Merril M. Halpern(8)............................. -- -- -- -- Thomas C. Dircks(8)(9)(10)....................... -- -- -- -- Patricia A.M. Riley(8)(9)(10).................... -- -- -- -- Jay M. Gates(8).................................. -- -- -- -- Charles R. Lax(7)(9)............................. -- -- -- -- All Directors and Executive Officers as a Group (6), (7) and (8) (18 persons).................. 873,884 2.7 873,884 2.1
- --------------- * Less than 1% (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, based on factors including voting and investment power with respect to shares. Shares of common stock subject to options currently exercisable within 60 days of April 30, 1999 are deemed outstanding for the purpose of computing the percentage of ownership of the person holding such options, but are not deemed outstanding for computing the percentage ownership of any other person. (2) The principal members of WEB are CEP III, an affiliate of Charterhouse Group International, Inc., and WHO. Their respective ownership interest in WEB are as follows: CEP III: 95.2% and WHO 4.8%. Leonard J. Fassler and Bradley A. Feld are the member managers of WHO and Stephen W. Maggs and Rajat Bhargava are among the members. The general partner of CEP III is CHUSA 67 73 Equity Investors III, L.P., whose general partner is Charterhouse Equity III, Inc., a wholly-owned subsidiary of Charterhouse. As a result of the foregoing, all of the shares of Common Stock of Interliant held by the WEB would for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, be considered to be beneficially owned by Charterhouse. (3) Includes 398,845 shares of common stock owned by the Ann Weltchek Wolf 1995 Marital Trust, 797,690 shares of common stock owned by the Mathew D. Wolf Childrens Trust and 350,000 shares of common stock held in escrow until March 31, 2000. Mr. Wolf disclaims beneficial ownership of all the shares of common stock owned by both of the trusts named above. (4) Includes 2,647,658 shares of Series A Redeemable Convertible Preferred Stock which will be converted into an equal number of shares of common stock upon consummation of the offering. Of these shares, 49,776 are held by SOFTBANK Technology Advisors Fund, L.P., an affiliated entity. Also includes 14,093 shares of common stock held by SOFTBANK Technology Advisors Fund, L.P. (5) Includes 25,200,000 shares held by WEB. Messrs. Fassler, Feld, Maggs and Bhargava are members of WHO, which is a member of WEB. Each of Messrs. Fassler, Feld, Maggs and Bhargava disclaim beneficial ownership of such shares other than the shares attributable to each of them on a pro rata basis as a result of their membership in WHO. Mr. Feld is a general partner of Kodiak Technology Ventures II LLP. Kodiak received 5,176 shares of Common Stock in connection with our acquisition of Net Daemons Associates, Inc. On April 26, 1999, Kodiak distributed 2,288 shares of common stock to each of its general partners. (6) Excludes 3,333,414 shares held by SOFTBANK Technology Ventures IV, L.P. and 63,869 shares held by SOFTBANK Technology Advisors Fund, L.P. Mr. Feld, a Co-chairman and Director of Interliant, is a general partner of each of SOFTBANK Technology Ventures IV, L.P. and SOFTBANK Technology Advisors Fund, L.P. Mr. Feld disclaims beneficial ownership of such shares. (7) Excludes 3,333,414 shares held by SOFTBANK Technology Ventures IV, L.P. and 63,869 shares held by SOFTBANK Technology Advisors Fund, L.P. Mr. Lax, a director of Interliant, is a general partner of SOFTBANK Technology Ventures IV, L.P. Mr. Lax disclaims beneficial ownership of such shares. (8) Excludes 25,200,000 shares held by WEB. Messrs. Halpern, Dircks, Gates and Ms. Riley are directors and/or officers of Charterhouse. Charterhouse is an affiliate of CEP III which is a member of WEB. Each of Messrs. Halpern, Dircks, Gates and Ms. Riley disclaim beneficial ownership of such shares. (9) A member of the Compensation Committee of the Board of Directors. (10) A member of the Audit Committee of the Board of Directors. 68 74 DESCRIPTION OF CAPITAL STOCK AUTHORIZED STOCK; ISSUED AND OUTSTANDING SHARES Our authorized capital stock consists of 200,000,000 shares of common stock, par value $0.01 per share, and 1,000,000 shares of undesignated preferred stock, par value $0.01 per share. COMMON STOCK Following the offering 41,663,045 shares of common stock will be issued and outstanding based on the number of shares of common stock outstanding as of the date hereof and assuming the issuance of 2,647,658 shares of common stock upon the conversion of all outstanding Series A Redeemable Convertible Preferred Stock (see "-- The SOFTBANK Investment"). All of the issued and outstanding shares of common stock are, and the shares of common stock offered hereby will upon completion of this offering be fully paid and nonassessable. The following summarizes the rights of holders of our common stock: - each holder of shares of common stock is entitled to one vote per share on all matters to be voted on by stockholders generally, including the election of directors; - there are no cumulative voting rights; - the holders of our common stock are entitled to dividends which may be paid in cash, property or shares of our capital stock and other distributions as may be declared from time to time by the board of directors out of funds legally available for that purpose, if any; - upon our liquidation, dissolution or winding up, the holders of shares of common stock will be entitled to share ratably in the distribution of all of our assets remaining available for distribution after satisfaction of all our debts and liabilities and the payment of the liquidation preference of any outstanding preferred stock; and - upon completion of this offering, the holders of common stock have no preemptive or other subscription rights to purchase shares of our stock, nor will holders be entitled to the benefits of any redemption or sinking fund provisions. As of the date hereof, there were approximately 45 record owners of common stock. Certain stockholders of Interliant have been given the right to nominate persons for election as directors. See "-- The SOFTBANK Investment" and "-- The Interliant Acquisition." PREFERRED STOCK Our certificate of incorporation authorizes our board of directors to create and issue one or more series of preferred stock and determine the rights and preferences of each series within the limits set forth in our certificate of incorporation and applicable law. Among other rights, the board of directors may determine, without further vote or action by our stockholders: - the number of shares constituting the series and the distinctive designation of the series; - the dividend rate on the shares of the series, whether dividends will be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series; - whether the series will have voting rights in addition to the voting rights provided by law and, if so, the terms of such voting rights; - whether the series will have conversion privileges and, if so, the terms and conditions of conversion; - whether or not the shares of the series will be redeemable or exchangeable, and if so, the dates, terms and conditions of redemption or exchange, as the case may be; 69 75 - whether the series will have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of the sinking fund; and - the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series. Unless otherwise provided by our Board of Directors, the shares of all series of preferred stock will rank on a parity with respect to the payment of dividends and to the distribution of assets upon liquidation. Although we have no present plans to issue any shares of preferred stock, any future issuance of shares of preferred stock, or the issuance of rights to purchase preferred shares, may have the effect of delaying, deferring or preventing a change of control in our company or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock. Accordingly, the issuance of shares of preferred stock may discourage bids for the common stock at a premium or may otherwise adversely affect the market price of the common stock. Currently, excluding 2,647,658 shares of Series A Redeemable Convertible Preferred Stock that will be converted into an equal number of shares of common stock upon the consummation of this offering and which will then cease to exist (see "Description of Capital Stock -- The SOFTBANK Investment"), there are no shares of preferred stock issued or outstanding. THE WEB HOSTING ORGANIZATION INVESTMENT WEB owns 25,200,000 shares of our common stock, which will represent approximately 60.5% of our outstanding common stock following consummation of this offering. The shares were acquired for an aggregate purchase price of $42.0 million in a series of 6 transactions in December 1997, May 1998, June 1998, September 1998, December 1998 and February 1999, in each case at a price, giving effect to the 3-for-1 stock split effective in July 1998, of $1.67 per share. The terms of the sale and purchase of these shares are set forth in a subscription agreement dated December 8, 1997 between WEB and us. The principal members of WEB are (1) CEP III, which is an affiliate of Charterhouse and (2) WHO (collectively with CEP III, the "WEB Members"), of which Leonard J. Fassler and Bradley A. Feld are the member managers. The WEB Members have agreed that WEB shall be under the exclusive direction of a management committee comprised of seven members and will vote such member's interest in WEB so that a majority of the members of such management committee will be designees of Charterhouse. WEB has certain demand and incidental registration rights under the terms of an Investors Agreement dated as of January 28, 1999 and a Registration Rights Agreement dated as of December 8, 1997. See "Description of Capital Stock -- Registration Rights of Certain Holders." THE SOFTBANK INVESTMENT On January 28, 1999, the SOFTBANK Purchasers purchased from an aggregate of 2,647,658 shares of our Redeemable Convertible Preferred Stock and warrants to purchase 749,625 shares of our common stock for an aggregate purchase price of $13.0 million. On April 19, 1999, the SOFTBANK Purchasers exercised their warrants at an aggregate exercise price of $5.0 million and now own 749,625 shares of our common stock. Upon the consummation of this offering, all of the outstanding shares of Redeemable Convertible Preferred Stock will automatically be converted into an equal number of shares of our common stock, and the SOFTBANK Purchasers will own approximately 8.2% of our outstanding common stock. Bradley A. Feld, our Co-Chairman and director, is a general partner of the SOFTBANK Purchasers. See "Related Party Transactions." The SOFTBANK Purchasers have certain demand and incidental registration rights under the terms of the Investors Agreement. See "Registration Rights of Certain Holders." A majority in interest of the SOFTBANK Purchasers also have the right, under the Investors Agreement, to nominate one person for election to our Board of Directors and have the Board cause that director to be a member of the Compensation Committee and/or the Audit Committee of the 70 76 Board. Such director will be subject to removal by the SOFTBANK Purchasers at any time, with or without cause, and the SOFTBANK Purchasers will have the right to call a special meeting of stockholders at any time for the sole purpose of removing and replacing such director. WEB has agreed to vote its shares in a manner consistent with these and the other terms of the Investors Agreement. Mr. Charles R. Lax is currently serving as a director and a member of the Compensation Committee of our Board of Directors pursuant to such provisions. THE INTERLIANT ACQUISITION On March 10, 1999, pursuant to an Asset Purchase Agreement with Interliant Texas and the shareholders of Interliant Texas, we, partly through a wholly-owned subsidiary, acquired substantially all of the assets and assumed specified liabilities of Interliant Texas for $100,000 in cash, 4,091,642 shares of common stock and the assumption of promissory notes in favor of Mathew Wolf and Erving Wolf in the aggregate amount of $15.9 million. Upon the closing of the acquisition, the $7.9 million note in favor of Erving Wolf was paid in full and the $8.0 million note issued by Interliant Texas in favor of Mathew Wolf was canceled and replaced by the Wolf Note. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." The 4,091,642 shares of common stock issued in connection with the acquisition were delivered pursuant to an Agreement to Deliver Shares which provided, among other things, for 3,608,863 shares of common stock to be delivered at the closing of the acquisition to the shareholders of Interliant Texas, 114,644 shares of common stock to be delivered at the closing of the acquisition to Broadview Holdings LLP, 18,135 shares of common stock to be delivered on the first business day following January 1, 2000 and 350,000 shares of common stock to be placed in escrow to support the indemnification obligations of Interliant Texas and its shareholders under the Purchase Agreement. Unless we make a claim against the escrowed shares in accordance with the provisions of the Purchase Agreement, the shares of common stock placed in escrow will be distributed to Mathew Wolf, one of the shareholders of Interliant Texas, on March 31, 2000. In addition, under the Purchase Agreement, we issued 2,322,139 options to purchase shares of our common stock at an exercise price of $0.13 per share. All or a portion of such Interliant Options are fully vested and exercisable. The Shareholders have certain incidental registration rights under the terms of the Shareholders Agreement, dated as of March 10, 1999 by and among all of our shareholders. See "-- Registration Rights of Certain Holders." For so long as all of the parties who received shares of common stock pursuant to the Agreement to Deliver Shares and certain holders of our options own in the aggregate 5% of more of the issued and outstanding common stock, such parties shall have the right to nominate one person for election to our Board of Directors. To date, such parties have not exercised such rights. REGISTRATION RIGHTS OF CERTAIN HOLDERS We have granted the holders of an aggregate of 32,320,790 shares of common stock certain demand and incidental registration rights. The SOFTBANK Purchasers have such registration rights under the Investors Agreement with respect to 2,647,658 shares of common stock to be received upon the consummation of this offering from the conversion of an equal number of shares of Redeemable Convertible Preferred Stock and 749,625 shares of common stock received on April 19, 1999 upon the exercise of warrants. WEB has such registration rights under the terms of each of the Investors Agreement and the Registration Rights Agreement with respect to 25,200,000 shares of common stock purchased. The Seller Shareholders have incidental registration rights under the terms of the Shareholders Agreement with respect to 3,608,863 shares of common stock received as consideration for the sale of substantially all of the assets of Interliant Texas and Broadview Holdings LLP has incidental registration rights with respect to 114,644 shares owned by it. The Shareholders Agreement provides that it shall be amended as 71 77 necessary to include any additional shares of common stock issuable pursuant to the provisions in the Purchase Agreement regarding adjustment of purchase price. If we propose to file a registration statement under the Securities Act covering our common stock or any securities exercisable or exchangeable for or convertible into our common stock holders of piggyback registration rights may require us to include a requested amount of their common stock in our registered offering on the same terms and conditions applicable to the other equity securities included in such registration statement. We may reduce the number of shares to be registered if the managing underwriter determines that the inclusion of such shares would materially and adversely affect the success of this offering. These piggyback registration rights do not apply to the registration of securities in connection with our employee benefit plans or securities issuable in a merger, exchange offer or similar transaction. Demand registration rights entitle the holder to require us to include a requested amount of their common stock in a registration statement on Form S-1, Form S-2 or Form S-3 and to use our best efforts to register such shares under the Securities Act of 1933, as amended based on the advice of the managing underwriter. A majority of the SOFTBANK Purchasers may exercise two demand registration rights with respect to the registration of shares of common stock on Form S-1, and twenty percent of the SOFTBANK Purchasers may exercise two demand registration rights with respect to the registration of shares of common stock on Form S-3 at any time we become eligible to use Form S-3. WEB may exercise three demand registration rights with respect to the shares of common stock that it owns. However, we are not required to register shares under demand registration rights sooner than six months following the consummation of this offering. Each stockholder with the foregoing piggyback registration rights and demand registration rights whose shares of common stock are included in a registration statement must agree not to offer for public sale any shares of common stock or securities exercisable or exchangeable for or convertible into common stock, or effect any sale of securities pursuant to Rule 144 under the Securities Act of 1933, as amended, during the ten days prior to and the 180 days after the closing date of any underwritten offering unless such shares are covered by such registration statement or a shorter period is agreed to by the managing underwriter. We are required to bear all related registration expenses (excluding any underwriting discounts or commissions, if any), disbursements and fees in connection with the exercise of Piggyback Registration Rights and Demand Registration Rights. In addition, in connection with the issuance to Mr. Steven C. Dabbs of 150,000 shares of common stock in connection with the acquisition of substantially all of the assets of Clever Computers, Inc., we have agreed that in the event we grant registration rights with respect to shares of common stock to any other employee of Interliant or its affiliates, employed in a position comparable or junior to Mr. Dabbs, identical registration rights shall be given to Mr. Dabbs. LIMITATIONS ON DIRECTOR LIABILITY Our certificate of incorporation provides that, to the fullest extent permitted by the Delaware General Corporation Law, none of our directors will be personally liable to us or our stockholders for monetary damages. Section 102(b)(7) of the Delaware General Corporation Law currently provides that a director's liability for breach of fiduciary duty to a corporation may be eliminated, except for liability: - for any breach of the director's duty of loyalty to the corporation or its stockholders; - for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; - under Section 174 of the Delaware General Corporation Law, for unlawful dividends or unlawful stock repurchases or redemptions; and - for any transaction from which the director derives an improper personal benefit. Any amendment to these provisions of the Delaware General Corporation Law will automatically be incorporated by reference into our certificate of incorporation without any vote on the part of its 72 78 stockholders unless otherwise required, including this provision in our Amended and Restated Certificate may, however, discourage or deter stockholders or management from bringing a lawsuit against directors for a breach of their fiduciary duties, even though such an action, if successful, might otherwise have benefit us and our stockholders. The By-laws provide that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. Generally, we are required to indemnify our directors and officers for all: - judgments; - fines; - settlements; - legal fees; and - other expenses incurred in connection with pending or threatened legal proceedings because of the director's or officer's position with us. SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW We are subject to the provisions of Section 203 of the Delaware General Corporation Law. Under Section 203, business combinations between a Delaware corporation whose stock generally is publicly traded or held of record by more than 2,000 stockholders and an interested stockholder are generally prohibited for a three-year period following the date that such a stockholder became an interested stockholder, unless: - the corporation has elected in its original certificate of incorporation not to be governed by Section 203. We did not make this election; - the business combination was approved by the board of directors of the corporation before the other party to the business combination became an interested stockholder; - upon consummation of the transaction that made it an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the commencement of the transaction, excluding voting stock owned by directors who are also officers or held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan; or - the business combination was approved by the board of directors of the corporation and ratified by two-thirds of the voting stock not owned by the interested stockholder. The three-year prohibition also does not apply to some business combinations proposed by an interested stockholder following the announcement or notification of an extraordinary transaction involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of the majority of the corporation's directors. The term "business combination" is defined generally under Section 203 to include mergers or consolidations between a Delaware corporation and an interested stockholder, transactions with an interested stockholder involving the assets or stock of the corporation or its majority-owned subsidiaries and transactions which increase an interested stockholder's percentage ownership of stock. The term "interested stockholder" is defined generally under Section 203 as a stockholder who, together with affiliates and associates, owns or within three years prior did own 15% or more of a Delaware corporation's voting stock. Section 203 could prohibit or delay a merger, takeover or other change in control of us and therefore could discourage attempts to acquire us. Our Board approved both the acquisition of common stock by WEB as part of their approval of WEB Hosting Organization Investment and the acquisition of preferred stock and warrants by the SOFTBANK 73 79 Purchasers as part of their approval of the SOFTBANK Investment and, accordingly, the prohibitions under Section 203 will not apply to any business combination with either WEB or the SOFTBANK Purchasers. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the common stock is ChaseMellon Shareholder Services, L.L.C. SHARES ELIGIBLE FOR FUTURE SALE SHARES ELIGIBLE FOR FUTURE SALE Immediately following this offering, there will be 41,663,045 shares of our common stock issued and outstanding assuming that no option holder exercises any outstanding stock options after April 29, 1999. Of these shares, the 7,000,000 shares of common stock to be sold in this offering will be immediately eligible for sale in the public market. Of the remaining 34,663,045 issued and outstanding shares 34,621,085 will be restricted securities within the meaning of Rule 144 and may not be publicly resold, except in compliance with the registration requirements of the Securities Act pursuant to an exemption from registration, including that provided by Rule 144. All of the restricted shares are subject to the 180-day lock-up agreements described below. RULE 144 In general, under Rule 144, a person, or persons whose shares are aggregated, who has beneficially owned restricted securities for at least one year, including a person who may be deemed an affiliate, is entitled to sell within any three month period a number of our shares of common stock that does not exceed the greater of: - 1% of the then-outstanding shares of our common stock; or - the average weekly trading volume of our common stock on the NASDAQ National Market during the four calendar weeks preceding the date on which notice of sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are subject to restrictions relating to manner of sale, notice and the availability of current public information about us. Commencing 90 days after the date of this prospectus, 3,150,000 shares of common stock will be eligible for resale under Rule 144. All of such shares are subject to the 180-day Lock-up Agreements described below. A person who is not deemed an affiliate of ours at any time during the 90 days preceding a sale and who has beneficially owned shares for at least two years would be entitled to sell shares following this offering under Rule 144(k) without regard to the volume limitations, manner of sale provisions or notice requirements of Rule 144. RULE 701 Our employees, directors, officers or consultants who purchase our shares in connection with a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits non-affiliates to sell their Rule 701 shares without having to comply with the public information, holding period, volume limitation or notice provisions of Rule 144. Affiliates may sell their Rule 701 shares without having to comply with Rule 144's holding period restrictions. In each of these cases Rule 701 allows the shareholders to sell 90 days after the date of this prospectus. OPTIONS We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of Common Stock subject to outstanding stock options and Common Stock issuable 74 80 pursuant to our stock option plans. Shares covered by these registration statements will thereupon be eligible for sale in the public markets, subject to the 180-day Lock-up Agreements described below, to the extent applicable. LOCK-UP AGREEMENTS For a period of 180 days after the date of this prospectus, we, our executive officers, directors and substantially all of our stockholders, have agreed not to, without approval by Merrill Lynch: - sell, dispose of or transfer any shares of common stock or securities convertible into common stock; - enter into any agreement that transfers any part of the economic consequence of ownership of the common stock; or - seek or exercise any right to register any share of common stock or security convertible into common stock. Our stockholders do, however, have the right to: - transfer the securities as a gift, if the recipient agrees to be bound by the provisions of the lock-up agreement; or - pledge their securities to us in consideration for a loan from us. In addition, we do have the right to transfer common stock in connection with an acquisition, if any recipient of such shares agrees to be bound by the provisions of the lock-up agreement. EFFECT OF SALES OF SHARES No prediction can be made as to the effect, if any, that future sales of shares of common stock or the availability of shares for future sale will have on the prevailing market price for the common stock. Sales of substantial amounts of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for the common stock and could impair our future ability to raise capital through an offering of equity securities. 75 81 UNDERWRITING GENERAL We intend to offer our common stock in the United States and Canada through a number of U.S. underwriters as well as elsewhere through international managers. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette and CIBC World Markets Corp. are acting as U.S. representatives of each of the U.S. underwriters named below. Subject to the terms and conditions set forth in a U.S. purchase agreement among us and the U.S. underwriters, and concurrently with the sale of 875,000 shares of common stock to the international managers, we have agreed to sell to the U.S. underwriters, and each of the U.S. underwriters severally and not jointly has agreed to purchase from us, the number of shares of common stock set forth opposite its name below.
NUMBER OF SHARES U.S. UNDERWRITER --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated................................... Donaldson, Lufkin & Jenrette................................ CIBC World Markets Corp..................................... Total..........................................
We have also entered into an international purchase agreement with certain international managers outside the United States and Canada for whom Merrill Lynch International, Donaldson, Lufkin & Jenrette International and CIBC World Markets International Limited are acting as lead managers. Subject to the terms and conditions set forth in the international purchase agreement, and concurrently with the sale of 6,125,000 shares of common stock to the U.S. underwriters pursuant to the U.S. purchase agreement, we have agreed to sell to the international managers and the international managers severally have agreed to purchase from us an aggregate of 875,000 shares of common stock. The initial public offering price per share and the total underwriting discount per share of common stock are identical under the U.S. purchase agreement and the international purchase agreement. In the U.S. purchase agreement and the international purchase agreement, the several U.S. underwriters and the several international underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of common stock being sold pursuant to each such agreement if any of the shares of common stock being sold pursuant to such agreement are purchased. In the event of a default by an underwriter, the U.S. purchase agreement and the international purchase agreement provide that, in certain circumstances, the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreements may be terminated. The closings with respect to the sale of shares of common stock to be purchased by the U.S. underwriters and the international managers are conditioned upon one another. We have agreed to indemnify the U.S. underwriters and the international managers against some liabilities, including some liabilities under the Securities Act, or to contribute to payments the U.S. underwriters and the international managers may be required to make in respect of those liabilities. The shares of common stock are being offered by the several underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the underwriters and certain other conditions. The underwriters reserve the right to withdraw, cancel or modify such offer and reject orders in whole or in part. 76 82 COMMISSIONS AND DISCOUNTS The U.S. representatives have advised us that the U.S. underwriters propose initially to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus, and to certain dealers at such price less a concession not in excess of $ per share of common stock. The U.S. underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of common stock to certain other dealers. After the initial public offering, the public offering price, concession and discount may change. The following table shows the per share and total public offering price, underwriting discount to be paid by us to the U.S. underwriters and the international managers and the proceeds before expenses to us. This information is presented assuming either no exercise or full exercise by the U.S. underwriters and the international managers of their over-allotment options.
PER SHARE WITHOUT OPTION WITH OPTION --------- -------------- ----------- Public Offering Price.......................... $ $ $ Underwriting Discount.......................... $ $ $ Proceeds, before expenses, to Interliant....... $ $ $
The expenses of the offerings (exclusive of the underwriting discount and commissions) are estimated at $1.4 million and are payable by us. INTERSYNDICATE AGREEMENT The U.S. underwriters and the international managers have entered into an intersyndicate agreement that provides for the coordination of their activities. Under the terms of the intersyndicate agreement, the U.S. underwriters and the international managers are permitted to sell shares of our common stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the intersyndicate agreement, the U.S. underwriters and any dealer to whom they sell shares of our common stock will not offer to sell or sell shares of our common stock to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, and the international managers and any dealer to whom they sell shares of common stock will not offer to sell or sell shares of common stock to U.S. persons or to Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions under the terms of the intersyndicate agreement. OVER-ALLOTMENT OPTION We have granted options to the U.S. underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of 920,000 additional shares of common stock at the public offering price set forth on the cover page of this prospectus, less the underwriting discount. The U.S. underwriters may exercise this option solely to cover over-allotments, if any, made on the sale of the common stock offered hereby. To the extent that the U.S. underwriters exercise this option, each U.S. underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares of common stock proportionate to such U.S. underwriter's initial amount reflected in the foregoing table. We also have granted an option to the international managers, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of 130,000 additional shares of common stock to cover over-allotments, if any, on terms similar to those granted to the U.S. underwriters. The shares of common stock are being offered by the several underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the underwriters and certain other conditions. The underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. 77 83 RESERVED SHARES At our request, the underwriters have reserved for sale, at the initial public offering price, up to 350,000 shares, or 5%, of the shares offered hereby, to be sold to some of our directors, officers, employees, distributors, dealers, business associates and related persons. The number of shares of common stock available for sale to the general public will be reduced to the extent those persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other shares offered in this prospectus. NO SALES OF SIMILAR SECURITIES For a period of 180 days after the date of this prospectus, we, our executive officers, directors and substantially all of our stockholders, have agreed not to directly or indirectly, without approval by Merrill Lynch on behalf of the underwriters: - Offer, pledge, sell, dispose of or transfer any shares of common stock or securities convertible into common stock; - Enter into any agreement that transfers any part of the economic consequence of ownership of the common stock; or - Seek or exercise any right to register any share of common stock or security convertible into common stock. Our stockholders do, however, have the right to: - Transfer the securities as a gift, if the recipient agrees to be bound by the provisions of the lock-up agreement; or - Pledge their securities to us in consideration for a loan from us. In addition, we have the right to transfer common stock in connection with an acquisition, if any recipient of such shares agrees to be bound by the provisions of the lock-up agreement. QUOTATION ON THE NASDAQ NATIONAL MARKET Our common stock has been approved for quotation on the Nasdaq National Market, subject to official notice of issuance, under the symbol "INIT." Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations between us and the U.S. representatives and the lead managers. The factors to be considered in determining the initial public offering price, in addition to prevailing market conditions, are expected to be the valuation multiples of publicly traded companies that the U.S. representatives and the lead managers believe to be comparable to us, certain of our financial information, the history of, and the prospects for, our company and the industry in which we compete, and an assessment of our management, its past and present operations, the prospects for, and timing of, our future revenues, the present state of our development and the above factors in relation to market values and various value measures of other companies engaged in activities similar to ours. There can be no assurance that an active trading market will develop for our common stock or that our common stock will trade in the public market subsequent to this offering at or above the initial public offering price. The underwriters do not expect sales of the common stock to be made to any accounts over which they exercise discretionary authority to exceed 5% of the number of shares being offered in this offering. PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of the common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and certain selling group members to bid for and 78 84 purchase our common stock. As an exception to these rules, the U.S. representatives are permitted to engage in certain transactions that stabilize the price of our common stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock. If the underwriters create a short position in our common stock in connection with the offering contemplated hereby, i.e., if they sell more shares of our common stock than are set forth on the cover page of this prospectus, the U.S. representatives may reduce that short position by purchasing our common stock in the open market. The U.S. representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The U.S. representatives may also impose a penalty bid on our underwriters and selling group members. This means that if the U.S. representatives purchase shares of our common stock in the open market to reduce the underwriters' short position or to stabilize the price of the our common stock, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of our common stock to the extent that it discourages resales of our common stock. Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters makes any representation that the U.S. representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued. LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Dewey Ballantine LLP, New York, New York. Certain legal matters in connection with the offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The consolidated financial statements of Interliant, Inc. (formerly known as Sage Networks, Inc.) at December 31, 1997 and 1998, and for the period December 8, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998, and the financial statements of Rancher 1 Corp. (formerly known as Interliant, Inc. and referred to in this prospectus as Interliant Texas) at December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998, appearing in this prospectus and registration statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon the authority of such firm as experts in accounting and auditing. The balance sheets of B.N. Technology, Inc. dba Internet Communications, as of December 31, 1996 and 1997, and the related statements of operations and accumulated deficit, and cash flows for the period April 15, 1996 (inception) through December 31, 1996 and for the year ended December 31, 1997 included in this prospectus have been so included in reliance on the report of Frankel, Lodgen, Lacher, Golditch, Sardi & Howard, independent accountants given on the authority of said firm as experts in auditing and accounting. The balance sheet of Clever Computers, Inc., as of December 31, 1996 and 1997 and the related statements of income, retained earnings, and cash flows for the years then ended included in this prospectus have been so included in reliance on the report of BSC&E, independent accountants given on the authority of said firm as experts in auditing and accounting. 79 85 The statements of assets and liabilities as of December 31, 1996 and 1997, and the statements of revenue and expenses and of cash flows for each of the three years in the period ended December 31, 1997, of HostAmerica, a division of HomeCom Communications, Inc., included in this prospectus, have been included herein in reliance on the report, which includes an explanatory paragraph regarding basis of presentation, of PricewaterhouseCoopers LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. The financial statements of Net Daemons Associates, Inc., for the years ended December 31, 1997 and 1998 included in this prospectus and in the registration statement have been audited by Deloitte & Touche LLP, independent accountants as stated in their report appearing herein and elsewhere in the registration statement and is included in reliance upon the report of such firm given upon the authority of said firm as experts in auditing and accounting. The financial statements of Telephonetics International, Inc. and Affiliate included in this prospectus and registration statement have been audited by BDO Seidman, LLP, independent certified accountants to the extent and for the periods set forth in their report appearing elsewhere herein and in this registration statement and are included in reliance on such reports given upon the authority of said firm as experts in auditing and accounting. The balance sheets of Tri Star Web as of December 31, 1996 and 1997 and the related statements of operations, and changes in retained earnings, and cash flows for the years then ended, and the consolidated balance sheets of GEN International Inc. and subsidiaries as of December 31, 1995, 1996 and 1997, and the related consolidated statements of operations, changes in stockholders' deficiency, and cash flows for the period April 4, 1995 (inception) through December 31, 1995 and the years ended December 31, 1996 and 1997 and the balance sheets of Digiweb, Inc. as of December 31, 1997 and 1998 and the related statements of income, cash flows and changes in stockholders' equity for the years then ended included in this prospectus have been so included in reliance on the reports of Urbach Kahn & Werlin PC, independent accountants given on the authority of said firm as experts in auditing and accounting. AVAILABLE INFORMATION We have filed with the Commission, Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to us and the common stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the offices of the Commission in Washington, D.C. 20549, and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549 upon the payment of the fees prescribed by the Commission. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as Interliant, that file electronically with the Commission. We provide Web hosting services to a customer whose primary residence is located in Cuba, Mr. Osvaldo Martinez. This information is correct as of the date of this prospectus. Current information concerning business between any person located in Cuba or the government of Cuba and Interliant may be obtained from the Florida Department of Banking and Finance, Plaza Level, The Capitol, Tallahassee, Florida 32399-0350, telephone number (904) 488-6311. 80 86 INDEX TO FINANCIAL STATEMENTS
PAGE ---- INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) Report of Independent Auditors.............................. F-3 Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (unaudited)............................ F-4 Consolidated Statements of Operations for the Period December 8, 1997 (inception) to December 31, 1997 and the Year Ended December 31, 1998 and for the three months ended March 31, 1998 and 1999 (unaudited)................. F-5 Consolidated Statements of Stockholders' Equity for the period December 8, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998 and for the three months ended March 31, 1999 (unaudited)................... F-6 Consolidated Statements of Cash Flows for the Period December 8, 1997 (inception) to December 31, 1998 and the Year Ended December 31, 1998 and for the three months ended March 31, 1998 and 1999 (unaudited)................. F-7 Notes to Consolidated Financial Statements.................. F-8 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS Pro Forma Consolidated Statement of Operations.............. F-19 Pro Forma Consolidated Balance Sheet........................ F- Notes to Pro Forma Consolidated Financial Statements........ F- ACQUIRED COMPANY (CLEVER COMPUTERS, INC.) Independent Auditors' Report................................ F-22 Balance Sheets as of December 31, 1996 and 1997............. F-23 Statement of Income for the Years Ended December 31, 1996 and December 31, 1997..................................... F-24 Statement of Retained Earnings for the Years Ended December 31, 1996 and December 31, 1997............................ F-25 Statement of Cash Flows for the Years Ended December 31, 1996 and December 31, 1997................................ F-26 Notes to Financial Statements............................... F-27 ACQUIRED COMPANY (TRI STAR WEB CREATIONS, INC.) Independent Auditor's Report................................ F-29 Balance Sheets as of December 31, 1996 and 1997............. F-30 Statement of Operations and Changes in Retained Earnings For the Years Ended December 31, 1996 and 1997................ F-31 Statements of Cash Flows for the Years Ended December 31, 1996 and 1997............................................. F-32 Notes to Financial Statements............................... F-33 ACQUIRED COMPANY (HOSTAMERICA DIVISION OF HOMECOM COMMUNICATIONS, INC.) Report of Independent Accountants........................... F-35 Statements of Assets and Liabilities as of December 31, 1996 and 1997.................................................. F-36 Statements of Revenues and Expenses......................... F-37 Statements of Cash Flows for the Years Ended December 31, 1995, 1996 and 1997....................................... F-38 Notes to Financial Statements............................... F-39 ACQUIRED COMPANY (B.N. TECHNOLOGY, INC.) Independent Auditor's Report................................ F-42 Balance Sheets as of December 31, 1996 and 1997............. F-43 Statements of Operations and Accumulated Deficit for the Period from April 15, 1996 through December 21, 1996 and the Year Ended December 31, 1997.......................... F-44 Statements of Cash Flows for the Period from April 15, 1996 through December 21, 1996 and the Year Ended December 31, 1997...................................................... F-45 Notes to Financial Statements............................... F-46
F-1 87
PAGE ---- ACQUIRED COMPANY (GEN INTERNATIONAL, INC. AND SUBSIDIARIES) Independent Auditor's Report................................ F-49 Balance Sheets as of December 31, 1995, 1996 and 1997....... F-50 Statements of Operations for the Period April 4, 1995 (inception) through December 31, 1995 and the Years Ended December 31, 1996 and 1997................................ F-51 Statements of Cash Flows for the Period April 4, 1995 (inception) through December 31, 1995 and the Years Ended December 31, 1996 and 1997................................ F-52 Statements of Changes in Stockholders' Deficiency for the Period April 4, 1995 (inception) through December 31, 1995 and the Years Ended December 31, 1996 and 1997............ F-53 Notes to Financial Statements............................... F-54 ACQUIRED COMPANY (DIGIWEB, INC.) Independent Auditor's Report................................ F-57 Balance Sheets as of December 31, 1997 and 1998............. F-58 Statements of Income for the Years Ended December 31, 1997 and 1998.................................................. F-59 Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997 and 1998.......................... F-60 Statements of Cash Flows for the Years Ended December 31, 1997 and 1998............................................. F-61 Notes to Financial Statements............................... F-62 ACQUIRED COMPANY (TELEPHONETICS INTERNATIONAL, INC. AND STATE OF THE ART, INC.) Report of Independent Certified Public Accountants.......... F-65 Combined Balance Sheet as of December 31, 1998.............. F-66 Combined Statements of Operations for the Years Ended December 31, 1997 and 1998................................ F-67 Combined Statements of Capital Deficit for the Years Ended December 31, 1997 and 1998................................ F-68 Combined Statements of Cash Flows for the Years Ended December 31, 1997 and 1998................................ F-69 Summary of Significant Accounting Policies.................. F-70 Notes to Combined Financial Statements...................... F-72 ACQUIRED COMPANY (NET DAEMONS ASSOCIATES, INC.) Independent Auditor's Report................................ F-75 Balance Sheets as of December 31, 1997 and 1998............. F-76 Statements of Income for the Years Ended December 31, 1997 and 1998.................................................. F-77 Statements of Stockholders' Deficit for the Years Ended December 31, 1997 and 1998................................ F-78 Statements of Cash Flows for the Years Ended December 31, 1997 and 1998............................................. F-79 Notes to Financial Statements............................... F-80 ACQUIRED COMPANY (RANCHER 1 CORP. FORMERLY KNOWN AS INTERLIANT, INC., AND REFERRED TO IN THIS PROSPECTUS AS INTERLIANT TEXAS) Report of Independent Auditors.............................. F-85 Balance Sheets as of December 31, 1997 and 1998............. F-86 Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998....................................... F-87 Statements of Shareholders' Deficit for the Years Ended December 31, 1996, 1997 and 1998.......................... F-88 Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998....................................... F-89 Notes to Consolidated Financial Statements.................. F-90
F-2 88 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Interliant, Inc. (formerly known as Sage Networks, Inc.) We have audited the accompanying consolidated balance sheets of Interliant, Inc. (formerly known as Sage Networks, Inc.) (the Company) as of December 31, 1997 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for the period December 8, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interliant, Inc. (formerly known as Sage Networks, Inc.) at December 31, 1997 and 1998, and the consolidated results of its operations and its cash flows for the period December 8, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Boston, Massachusetts February 15, 1999, except for the second to last paragraph of Note 12, as to which the date is March 10, 1999 F-3 89 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------------- MARCH 31, 1997 1998 1999 ----------- ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................ $ 912,085 $ 6,813,360 $ 4,376,478 Cash-restricted.................................. 1,392,371 Accounts receivable, net of allowance of $320,000 and $691,629 at December 31, 1998 and March 31, 1999, respectively........................ 806,322 5,097,716 Prepaid expenses and other current assets........ 14,000 639,662 1,126,435 ----------- ----------- ------------ Total current assets..................... 926,085 8,259,344 11,993,000 ----------- ----------- ------------ Furniture, fixtures and equipment, net........... 27,063 5,103,123 11,467,239 Intangibles, net................................. 13,634,772 78,395,596 Other assets..................................... 222,172 575,738 ----------- ----------- ------------ Total assets............................. $ 953,148 $27,219,411 $102,431,573 =========== =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt.......................................... $ 8,136,195 Accounts payable................................. $ 84,389 $ 787,412 2,587,651 Accrued expenses................................. 26,507 2,301,507 3,268,667 Deferred revenue................................. 1,414,969 3,462,214 ----------- ----------- ------------ Total current liabilities................ 110,896 4,503,888 17,454,727 Long-term debt, less current portion............. 914,482 Series A, redeemable convertible preferred stock... 13,000,000 Stockholders' equity: Common stock, par value $.01; 100,000,000 shares authorized; 3,000,000, 19,217,197 and 30,998,802 shares issued and outstanding at December 31, 1997, 1998 and March 31, 1999, respectively.................................. 30,000 192,172 309,988 Additional paid-in capital....................... 4,970,000 34,160,334 89,067,255 Stock subscription receivable.................... (4,000,000) Deferred compensation............................ (1,769,429) (1,201,867) Accumulated deficit.............................. (157,748) (9,867,554) (17,113,012) ----------- ----------- ------------ Total stockholders' equity............... 842,252 22,715,523 71,062,364 ----------- ----------- ------------ Total liabilities and stockholders' equity................................. $ 953,148 $27,219,411 $102,431,573 =========== =========== ============
See accompanying notes. F-4 90 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD DECEMBER 8, 1997 THREE MONTHS ENDED (INCEPTION) TO YEAR ENDED MARCH 31, DECEMBER 31, DECEMBER 31, ---------------------------- 1997 1998 1998 1999 -------------- ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Service revenues...................... $ 4,905,027 $ 13,126 $ 5,434,162 Costs and expenses: Cost of service revenues............ 3,236,385 53,774 3,250,703 Sales and marketing................. 2,555,035 110,882 1,896,357 General and administrative.......... $ 155,898 5,120,595 256,019 3,699,847 Depreciation........................ 1,850 696,039 9,417 699,552 Amortization of intangibles......... 1,416,882 1,618 2,082,167 Start-up and acquisition integration costs............................ 1,727,970 134,106 1,063,458 ---------- ----------- ---------- ----------- 157,748 14,752,906 565,816 12,692,084 ---------- ----------- ---------- ----------- Operating loss........................ (157,748) (9,847,879) (552,690) (7,257,922) Interest income....................... 138,073 13,645 53,912 Other income (expense)................ (41,448) ---------- ----------- ---------- ----------- Net loss.............................. $ (157,748) $(9,709,806) $ (539,045) $(7,245,458) ========== =========== ========== =========== Net loss per share -- basic and diluted............................. $ (0.05) $ (1.10) $ (0.18) $ (0.29) ========== =========== ========== =========== Weighted average shares outstanding... 3,000,000 8,799,432 3,000,000 24,769,890 ========== =========== ========== ===========
See accompanying notes. F-5 91 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ----------------------- ADDITIONAL STOCK TOTAL PAR PAID-IN SUBSCRIPTION DEFERRED ACCUMULATED STOCKHOLDERS' SHARES VALUE CAPITAL RECEIVABLE COMPENSATION DEFICIT EQUITY ----------- --------- ----------- ------------ ------------ ------------ ------------- Sales of common stock........ 3,000,000 $ 30,000 $ 4,970,000 $(4,000,000) $ 1,000,000 Net loss..................... $ (157,748) (157,748) ----------- -------- ----------- ----------- ----------- ------------ ----------- Balance as of December 31, 1997....................... 3,000,000 30,000 4,970,000 (4,000,000) (157,748) 842,252 Sales of common stock...... 15,600,000 156,000 25,884,000 4,000,000 30,040,000 Deferred compensation...... 475,000 4,750 2,600,750 $(2,602,250) 3,250 Amortization of deferred compensation............. 832,821 832,821 Issuance of common stock in connection with acquisitions............. 142,197 1,422 705,584 707,006 Net loss................... (9,709,806) (9,709,806) ----------- -------- ----------- ----------- ----------- ------------ ----------- Balance as of December 31, 1998....................... 19,217,197 192,172 34,160,334 -- (1,769,429) (9,867,554) 22,715,523 Sales of common stock (unaudited)................ 6,600,000 66,000 10,934,000 11,000,000 Amortization of deferred compensation (unaudited)... 567,562 567,562 Issuance of common stock in connection with acquisitions (unaudited)... 5,181,605 51,816 34,009,486 34,061,302 Issuance of stock options in connection with acquisition (unaudited)................ 9,963,435 9,963,435 Net loss (unaudited)......... (7,245,458) (7,245,458) ----------- -------- ----------- ----------- ----------- ------------ ----------- Balance as of March 31, 1999 (unaudited)................ 30,998,802 $309,988 $89,067,255 $ -- $(1,201,867) $(17,113,012) $71,062,364 =========== ======== =========== =========== =========== ============ ===========
See accompanying notes. F-6 92 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD THREE MONTHS ENDED DECEMBER 8, 1997 MARCH 31, (INCEPTION) TO YEAR ENDED -------------------------- DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999 ----------------- ----------------- ----------- ------------ (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Net loss...................................... $ (157,748) $(9,709,806) $ (539,045) $ (7,245,458) Adjustments to reconcile net loss to net cash used in operating activities: Provision for uncollectible accounts........ 320,000 205,182 Depreciation and amortization............... 1,850 2,112,921 11,035 2,781,719 Amortization of deferred compensation....... 832,821 567,562 Changes in operating assets and liabilities: Accounts receivable....................... (980,391) (11,678) 56,124 Prepaid expenses and other current assets.................................. (14,000) (602,457) (51,497) (150,354) Accounts payable.......................... 84,389 639,607 75,831 (999,180) Accrued expenses.......................... 26,507 1,140,135 4,914 253,940 Deferred revenue.......................... 246,502 320,560 ---------- ----------- ----------- ------------ Net cash used in operating activities......... (59,002) (6,000,668) (510,440) (4,209,905) INVESTING ACTIVITIES Purchases of furniture, fixtures and equipment................................... (28,913) (4,321,577) (90,392) (984,320) Payments issued in connection with non-compete agreements.................................. (500,000) Transfers to restricted cash.................. (1,392,371) Acquisitions of businesses, net of cash acquired.................................... (13,597,558) (92,059) (18,930,098) ---------- ----------- ----------- ------------ Net cash used in investing activities......... (28,913) (17,919,135) (182,451) (21,806,789) FINANCING ACTIVITIES Proceeds from sale of common stock............ 1,000,000 30,043,250 4,040,000 11,000,000 Proceeds from issuance of Series A, redeemable convertible preferred stock................. 13,000,000 Repayment of debt............................. (66,621) Offering costs................................ (222,172) (353,567) ---------- ----------- ----------- ------------ Net cash provided by financing activities..... 1,000,000 29,821,078 4,040,000 23,579,812 ---------- ----------- ----------- ------------ Net increase in cash and cash equivalents..... 912,085 5,901,275 3,347,109 (2,436,882) Cash and cash equivalents at beginning of period...................................... -- 912,085 912,085 6,813,360 ---------- ----------- ----------- ------------ Cash and cash equivalents at end of period.... $ 912,085 $ 6,813,360 $ 4,259,194 $ 4,376,478 ========== =========== =========== ============ SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Stock and options issued in acquisitions...... $ 707,006 $ 44,024,737 Stock issued for compensation agreements...... 2,602,250 Stock subscription receivable................. $4,000,000
See accompanying notes. F-7 93 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM DECEMBER 8, 1997 (INCEPTION) TO DECEMBER 31, 1997, THE YEAR ENDED DECEMBER 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED) 1. BUSINESS Sage Networks, Inc. (the Company) was organized under the laws of the State of Delaware on December 8, 1997. Web Hosting Organization LLC (WEB), a Delaware Limited Liability Company, is the majority and controlling shareholder of the Company. WEB's investors are comprised of Charterhouse Equity Partners III, L.P. and Chef Nominees Limited (collectively, CEP Members) and WHO Management, LLC (WHO). As of December 31, 1998, CEP Members have invested $29,000,000, and WHO has invested $2,000,000 in WEB. WEB has, in turn, invested $31,000,000 in the Company. CEP Members have allocated an additional $11,000,000 to invest in WEB, and have funded the remaining amount pursuant to a stock subscription agreement (see Notes 7 and 12). Since its formation, the Company has been in the process of developing a Web hosting business. The Company continues to build its Web hosting business primarily through the acquisition of the Web hosting assets of Internet service providers, system integrators and Web hosting companies. The primary sources of revenue are from recurring fees charged to customers for hosting their Web sites on the Company's server systems. The Company focuses on delivering high-quality, reliable and flexible Web hosting services. Prior to 1998, the Company was in the development stage. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Unaudited Interim Financial Information The interim financial information as of March 31, 1999 and for the three months ended March 31, 1998 and 1999 is unaudited and has been prepared on the same basis as the audited financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the interim information. Operating results for the three months ended March 31, 1998 and 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. Cash Equivalents The Company considers all highly liquid investments purchased with an original maturity (at date of purchase) of three months or less to be the equivalent of cash for the purpose of balance sheet and statement of cash flows presentation. Cash equivalents, which consist primarily of money market accounts, are carried at cost, which approximates market value. Fair Value of Financial Instruments Carrying amounts of financial instruments held by the Company, which include cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate fair value due to their short duration. F-8 94 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk are comprised principally of cash, cash equivalents and accounts receivable. As of December 31, 1998, the Company's cash and cash equivalents are deposited with various domestic financial institutions. With respect to accounts receivable, the Company's customer base is dispersed across many geographic areas. The Company monitors customer payment history, generally does not require collateral and establishes reserves for uncollectible accounts as warranted. In addition to individual customers, the Company also provides Web hosting services to resellers, who, in turn, provide services to their own customers. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are stated at cost. Major additions and betterments are capitalized, while replacements, maintenance and repairs that do not improve or extend the life of the assets are charged to expense. Depreciation has been provided using the straight-line method over the estimated useful lives of the assets as follows: Network software and equipment............ 3 years Furniture, fixtures and office equipment............................... 3 years Leasehold improvements.................... Lesser of remaining lease-term or useful life
Internally Developed Software In 1998, the Company adopted Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1) issued by the American Institute of Certified Public Accountants. SOP 98-1 permits the capitalization of certain internally developed costs related to the development of internally used software. During 1998, the Company capitalized approximately $650,000 of project costs related to software developed internally. Intangible Assets Intangible assets consist primarily of customer lists, covenants not to compete, other identifiable intangibles and goodwill, which arose from the acquisitions of several Web hosting companies and are being amortized on a straight-line basis over periods ranging from one to ten years (see Note 4). Impairment of Long-Lived Assets The Company continually reviews amortization periods and the carrying value of long-lived assets, including furniture, fixtures and equipment, and intangible assets to determine whether there are any indications of reduction in useful lives or impairment losses. If indications of impairment are present in long-lived assets, the estimated future undiscounted cash flows associated with the corresponding assets would be compared to its carrying amount to determine if a change in useful life or a write-down to fair value is necessary. F-9 95 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition Through December 31, 1998 revenues consisted of Web hosting services and set-up fees. As a result of acquisitions in February and March 1999 (see Note 12) the Company began earning revenues from application hosting and related one time implementation fees and consulting services. The Company generally sells its Web hosting services for contractual periods ranging from one to twelve months. Revenues from these services are recognized ratably over the contractual period. Payments received and billings in advance of providing services are deferred until the period such services are provided. Set-up fees, which cover costs incurred by the Company to establish a customer's Web site and are non-refundable, are recognized when the set-up services are performed and the Company has no further obligation with respect to such set-up fees. Incremental fees for excess bandwidth and storage usage are billed and recorded as revenues as customers utilize such services. To date, such fees have been de minimus. Application hosting revenues are comprised of monthly usage fees per number of end users, including bandwidth fees and one-time implementation fees, all of which are recorded as revenue at the time the services are used by the customer. One time implementation fees which cover costs incurred by the Company to establish a customer's site and are nonrefundable, are recognized when the site is established and the Company has no further obligation with respect to such fees. To date such fees have been de minimus. Revenues from consulting services are recognized as the services are rendered, provided that no significant obligations remain and collection of the receivable is considered probable. Generally, contracts call for billings on a time and materials basis; however, in instances when a fixed fee contract is signed, revenue is recognized on a percentage-of-completion basis. Advertising Expenses All advertising costs are expensed as incurred. Advertising expenses for the year ended December 31, 1998 amounted to $672,000. No advertising costs were incurred in the period December 8, 1997 (inception) through December 31, 1997. Start-Up and Acquisition Integration Costs In connection with acquisitions made by the Company during the year ended December 31, 1998 (see Note 5), the Company incurred payroll, consulting and travel costs to start-up and integrate the acquisitions into the Company. Income Taxes The Company accounts for income taxes using the liability method under which deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Net Loss Per Share Net loss per share is presented in accordance with the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic net loss per share is computed based on the weighted average number of shares of common stock outstanding. Diluted loss per share does not differ from basic loss per share since potential common shares to be issued upon exercise of stock options are anti-dilutive for the periods presented. F-10 96 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock-Based Compensation The Company accounts for its stock-based compensation plan utilizing the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). The Company has adopted the disclosure provisions only of Statement of Financial Accounting Standards No. 123, Accounting For Stock-Based Compensation (SFAS 123). Reclassifications Certain 1997 amounts have been reclassified to conform to the 1998 presentation. 3. FURNITURE, FIXTURES AND EQUIPMENT Furniture, fixtures and equipment consist of the following:
DECEMBER 31, --------------------- MARCH 31, 1997 1998 1999 ------- ---------- ----------- (UNAUDITED) Network software and equipment.................. $18,073 $5,213,879 $10,056,274 Furniture, fixtures and office equipment........ 10,840 303,742 1,241,054 Leasehold improvements.......................... 283,391 1,596,724 ------- ---------- ----------- 28,913 5,801,012 12,894,052 Less accumulated depreciation and amortization............................... 1,850 697,889 1,426,813 ------- ---------- ----------- $27,063 $5,103,123 $11,467,239 ======= ========== ===========
Depreciation expense amounted to $1,850, $696,039, and $699,552 for the years ended 1997 and 1998, and the three months ended March 31, 1999, respectively. 4. INTANGIBLE ASSETS The Company has allocated the purchase price of acquired companies to identifiable tangible assets and liabilities and intangible assets based on the nature and the terms of the various purchase agreements and evaluation of the acquired businesses. Amounts not allocated to tangible assets and liabilities and identifiable intangible assets have been recorded as goodwill. Intangible assets consist of the following:
DECEMBER 31 MARCH 31, AMORTIZATION 1998 1999 PERIOD ----------- ----------- ------------ (UNAUDITED) Covenants not to compete..................... $ 3,759,202 $10,880,510 1-5 Years Customer lists............................... 3,295,369 12,129,003 10 Years Assembled work force......................... 1,127,031 4,540,000 5 Years Trade names.................................. 573,982 5,032,270 5 Years Goodwill..................................... 6,296,070 49,312,861 10 Years ----------- ----------- 15,051,654 81,894,644 Less accumulated amortization................ 1,416,882 3,499,048 ----------- ----------- $13,634,772 $78,395,596 =========== ===========
Amortization expense amounted to $1,416,882 in 1998 and $2,082,167 in the three months ended March 31, 1999. F-11 97 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. ACQUISITIONS During the year ended December 31, 1998, the Company made the following acquisitions, each of which was accounted for using the purchase method of accounting. The operations of each of the acquired companies are included in the operating results of the Company from the date of acquisition noted. On February 13, 1998, the Company purchased certain Web hosting assets of Omnetrix, Inc., dba DirectNet, a Web hosting provider, for cash of approximately $78,000. On April 7, 1998, the Company purchased the operating assets of Clever Computers, Inc., a Web hosting company, for cash of approximately $2,500,000. Pursuant to a three-year employment agreement, a shareholder of Clever received 150,000 shares of the Company's Common Stock, valued at $3.32 per share, which vests and is being accounted for as compensation expense over the term of the employment agreement. On April 30, 1998, the Company purchased certain Web hosting assets from KnowledgeLink Interactive, Inc. for cash of approximately $612,000. On May 1, 1998, the Company purchased the operating assets of Tri Star Web Creations, Inc., a Web hosting company, for cash of approximately $955,000 and 9,000 shares of the Company's Common Stock, having a valuation of $4.07 per share. On June 10, 1998, the Company purchased certain Web hosting assets of HostAmerica, the Web hosting division of HomeCom Communications, Inc., for cash of approximately $4,250,000. On June 29, 1998, the Company purchased the operating assets of All Information Systems, Inc., a Web hosting company, for cash of approximately $171,000 and 115,707 shares of the Company's Common Stock, having a valuation of $5.00 per share. On July 1, 1998, the Company purchased certain Web hosting assets of Software Business Technologies, Inc. for 12,000 shares of the Company's Common Stock, having a valuation of $5.00 per share. On July 1, 1998, the Company purchased certain Web hosting assets of DevCom, the Web hosting division of Nextron, Inc., for cash of approximately $600,000. On July 30, 1998, the Company purchased certain Web hosting assets of BestWare, Inc., dba Maikon, for cash of approximately $374,000 and 5,490 shares of the Company's Common Stock, having a valuation of $5.38 per share. On August 31, 1998, the Company purchased all of the outstanding stock of B.N. Technology, Inc., dba ICOM, a Web hosting company, for cash of approximately $2,000,000. The purchase agreement also provides for additional payments of cash of up to $2,000,000 to the shareholders of ICOM if certain earnings targets are achieved. As of December 31, 1998, the earnings targets for periods then ended had been achieved and $1,000,000 has been accrued. This amount has been recorded as an intangible asset and any future payments under this agreement will be similarly recorded. Pursuant to one-year employment agreements, two shareholders of ICOM received a total of 300,000 shares of the Company's Common Stock valued at $6.47 per share, which vest and is being accounted for as compensation expense over the terms of the agreements. On September 16, 1998, the Company purchased certain Web hosting assets of GEN International, Inc. (GEN) for cash of $455,000 and substantially all the assets of Global Entrepreneurs Network, Inc. (a wholly-owned subsidiary of GEN) for $295,000. Pursuant to a consulting agreement with a shareholder of GEN, the Company issued 25,000 shares of the Company's Common Stock, having a F-12 98 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) valuation of $6.66 per share, which vests and is being accounted for as compensation expense over the term of the consulting agreement. On December 17, 1998, the Company purchased certain Web hosting assets of Dialtone, Inc. a Web hosting company for cash of $375,000. The following unaudited condensed pro forma information presents the unaudited results of operations of the Company as if the above acquisitions had occurred on January 1, 1997:
YEAR ENDED DECEMBER 31, --------------------------- 1997 1998 ----------- ------------ Service revenues......................................... $ 5,891,222 $ 8,893,389 Net loss................................................. (6,255,102) (11,211,583) Net loss per share -- basic and diluted.................. $ (1.73) $ (1.23)
6. ACCRUED EXPENSES Accrued expenses consist of the following:
DECEMBER 31 --------------------- 1997 1998 MARCH 31, 1999 ------- ---------- -------------- (UNAUDITED) Amounts due to former owners under contingent consideration arrangements (see Note 5)...... $1,000,000 $ 500,000 Compensation................................... 226,641 574,740 Communications costs........................... 121,000 224,866 Other.......................................... $26,507 953,866 1,969,061 ------- ---------- ---------- $26,507 $2,301,507 $3,268,667 ======= ========== ==========
7. STOCKHOLDERS' EQUITY Common Stock Pursuant to a Stock Subscription Agreement dated December 8, 1997 between the Company and WEB, WEB purchased 15,600,000 shares of the Company's Common Stock during the year ended December 31, 1998 and 3,000,000 shares during the period December 8, 1997 (inception) to December 31, 1997, all at $1.67 per share. WEB is entitled to purchase an additional 6,600,000 shares at $1.67 pursuant to the Stock Subscription Agreement (see Note 12). The Board of Directors approved a three-for-one stock split of the Company's Common Stock on July 28, 1998. The accompanying financial statements have been retroactively restated to give effect to the stock split. Stock Option Plan On February 1, 1998, the Company adopted the Sage Networks, Inc. 1998 Stock Option Plan (the Plan), which is administered by the Board of Directors (the Committee). Under the terms of the Plan, the Committee may grant stock options to officers, employees and consultants of the Company. The Plan permits the grant of incentive stock options (ISOs) and nonqualified stock options (NSOs). As of December 31, 1998, the Company has reserved 1,500,000 shares of Common Stock for issuance under the Plan. Stock options may not be granted at less than 100% of the fair market value of the Common Stock on the date of the grant and may not expire more than ten years from the date of the grant. Options granted under the Plan generally will become exercisable over a four-year period in equal annual F-13 99 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) installments unless the Committee specifies a different vesting schedule. In the event of a change in control of the Company, each option becomes immediately vested and exercisable, provided that no written provision has been made, in connection with any such event, for (1) the continuation of the stock option plan and/or the assumption of all outstanding options by a successor corporation or (2) the substitution for such options of new options covering the stock of a successor corporation. The Plan has a term of ten years, subject to earlier termination or amendment by the Committee, and all options under the Plan prior to its termination remain outstanding until they have been exercised or terminated. During the year ended December 31, 1998, the Company granted 440,500 options at prices ranging from $1.67 to $6.67 per share. The weighted-average exercise price of the options granted was $4.11. No options were exercised, canceled or forfeited during the year ended December 31, 1998. No options are vested at December 31, 1998. Stock-Based Compensation As discussed in Note 2, the Company applies APB 25 and related interpretations in accounting for its stock option plan. Accordingly, since the Company grants stock options with exercise prices at least equal to fair value at the date of grant, no compensation expense has been recognized relating to option grants in 1998. As required under FAS 123, the following pro forma net loss and net loss per share presentations reflect the amortization of the option grant fair value as expense. For purposes of this disclosure, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows for the year ended December 31, 1998: Pro forma net loss.......................................... $(9,756,000) Pro forma net loss per share -- basic and diluted........... $ (1.11)
The weighted average grant date value was $0.83 for stock options issued in 1998, and the weighted-average remaining contractual life for options outstanding as of December 31, 1998 is 9.4 years. Significant assumptions used in determining this value include a risk free interest rate of 5.6%, expected life of the options of four years, and a dividend rate of zero. The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on pro forma disclosures in future years as the period presented includes only one year of option grants under the Plan. 8. INCOME TAXES As of December 31, 1998, the Company has federal and state net operating loss carryforwards of approximately $7,700,000. The net operating loss carryforwards will expire at various dates beginning in the years 2003 through 2018 if not utilized. Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes consist of the following at December 31, 1998: Deferred tax assets: Net operating loss carryforwards.......................... $3,063,000 Depreciation.............................................. (14,000) Other, net................................................ 813,000 ---------- Total deferred tax assets, net.............................. 3,862,000 Valuation allowance......................................... (3,862,000) ---------- Net deferred tax asset...................................... $ -- ==========
F-14 100 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that a full valuation allowance has been recorded. The Company will continue to assess the realization of the deferred tax assets based on actual and forecasted operating results. 9. LEASES The Company leases its data centers and certain office space under noncancelable operating leases, which expire at various dates through June 2009. Some of the leases contain renewal options. Total rent expense for all operating leases was approximately $7,000 and $420,000 for the period December 8, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998, respectively. In connection with one of the leases, the Company has given the landlord a standby letter of credit in the amount of approximately $100,000 in lieu of a security deposit. Future minimum lease commitments for noncancelable operating leases are as follows at December 31, 1998: 1999........................................................ $ 956,764 2000........................................................ 877,488 2001........................................................ 847,484 2002........................................................ 816,334 2003........................................................ 569,958 Thereafter.................................................. 2,079,107 ---------- Total minimum lease payments...................... $6,147,135 ==========
10. RELATED-PARTY TRANSACTIONS In connection with the acquisitions of certain Web hosting assets of various entities (see Note 5), the Company paid or accrued transaction fees of approximately $319,000 to Charterhouse Group International, Inc., a related party of WEB. These fees are included in the respective purchase price allocations as capitalized transaction costs. The Company receives consulting services from Sage Equities, Inc. and Intensity Ventures, Inc., whose principals are the co-chairmen of the Company and members of WHO, for the purpose of identifying and executing potential acquisitions. Sage Equities, Inc. and Intensity Ventures, Inc. are each paid fees of $10,000 (plus expenses) per month for such services. For the period December 8, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998, the Company incurred costs under these agreements of $25,000 and $120,000, respectively, for Sage Equities, Inc., and $17,000 and $232,000 (of which $112,000 were expenses), respectively, for Intensity Ventures. At December 31, 1997, these entities were owed a total of $84,959 by the Company for such consulting services, which was paid in 1998. The Company also receives consulting services from one other member of WHO. During the period December 8, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998, the Company incurred costs relating to these services totaling approximately $8,000 and $44,000, respectively. 11. EMPLOYEE BENEFIT PLAN In 1998, the Company instituted a 401k Plan for all employees who have attained age 21 and have been employed by the Company or by an acquired business for one month. Participating employees may make contributions to the plan up to 15% of their compensation. The Plan provides that the Company may F-15 101 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) make discretionary contributions to the Plan on behalf of participating employees. The Company did not make any such contributions for the year ended December 31, 1998. 12. SUBSEQUENT EVENTS On January 28, 1999, the Company's Board of Directors and Stockholders approved an amendment to the Company's certificate of incorporation (Charter) to increase the number of authorized shares to 35,000,000 shares of Common Stock and up to 2,647,658 shares of Preferred Stock, all of which is designated as Series A Convertible Preferred Stock (Series A Preferred). On January 28, 1999, pursuant to a Securities Purchase Agreement (the Purchase Agreement) the Company sold to Softbank Technology Ventures IV L.P. and one of its affiliates (the Series A Investors), 2,647,658 shares of its Series A Preferred at a price of $4.91 per Series A Preferred share and issued 749,625 Common Stock warrants of the Company for cash of $13,000,000. The Series A Preferred is convertible at any time, at the option of the holder, into the Company's Common Stock, subject to anti-dilution provisions as set forth in the Charter. In the event of a qualifying public offering (as defined in the Charter), however, the Series A Preferred is automatically converted into Common Stock. If the Series A Preferred is not converted before January 28, 2006, a majority in interest of the holders thereof may request the Company to redeem the Series A Preferred at $4.91 per share plus any accrued but unpaid dividends on such shares. Because of the redemption features of the Series A Preferred, it will not be reported as a component of stockholders' equity. The warrants are immediately exercisable at a price of $6.67 per share. The warrants expire on the earlier of three years subsequent to the consummation of the Company's initial public offering or January 28, 2003. The Company, the Series A Investors and WEB have entered into an Investors Agreement dated January 28, 1999, which provides the Series A Investors to nominate a director to the Company's Board of Directors and grants the Series A Investors preemptive rights and certain registration rights. On February 9, 1999, pursuant to its stock subscription agreement, WEB purchased the remaining 6,600,000 shares of the Company's Common Stock for an aggregate of $11,000,000 (see Note 7). The Company consummated the following acquisitions in the early part of February 1999, each of which will be accounted for using the purchase method of accounting: The purchase of certain assets of Telephonetics International, Inc., a provider of customized music and messages on hold recording services to businesses utilizing on-hold telephone equipment. The purchase price consists of cash of $3,000,000 and 140,000 shares of the Company's Common Stock valued at $6.67 per share. The purchase of all of the outstanding stock of Net Daemons Associates, Inc. (NDA), a provider of Web development and system integration activity for Internet and IP Networks. The purchase price consists of cash of $500,000 and 425,000 shares of the Company's Common Stock valued at $6.67 per share. In addition, the Company has agreed to pay certain officers of NDA $2,371,000 to induce them to enter into non-compete agreements and to pay approximately $436,000 to cancel certain NDA stock options. The agreement also provides for contingent purchase consideration of $500,000 in cash and 74,963 shares of the Company's Common Stock if specified gross revenue and gross margin targets are achieved in the twelve-month period following the acquisition. The payment of contingent consideration, if any, will be recorded as additional purchase price. The shares of stock and cash to be paid for the contingent purchase consideration have been deposited with an escrow agent. The purchase of the Web hosting assets of Digiweb, Inc., a Web hosting company. The purchase price consists of cash of approximately $5,000,000 and 450,000 shares of the Company's Common F-16 102 INTERLIANT, INC. (FORMERLY KNOWN AS SAGE NETWORKS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock valued at $6.67. The agreement provides for contingent purchase consideration of $1,000,000 if specified revenue and earnings targets are achieved in the year ending December 31, 1999. The payment of contingent consideration, if any, will be recorded as additional purchase price. In March 1999, the Company's stockholders approved an amendment to the Company's certificate of incorporation to increase the number of authorized shares of Common Stock to 100,000,000, and, on March 10, 1999, the Company acquired substantially all of the assets and assumed specified liabilities of Interliant, Inc., a provider of groupware hosting and application outsourcing services. The purchase price consisted of $100,000 in cash and 4,091,642 shares of the Company's Common Stock valued at $6.67 per share, and options to purchase up to 2,322,179 shares of the Company's Common Stock. In addition, the Company paid $7,900,000 on an outstanding note payable of Interliant, Inc. at closing and will pay the balance of the note ($8,000,000) at the earlier of the completion of an initial public offering of the Company's Common Stock or September 1999. The transaction will be accounted for using the purchase method of accounting. In connection with this acquisition, the Company changed its name to Interliant, Inc. The purchase consideration for the acquisitions referred to above is as follows: Cash, including estimated transaction costs and payments of $7,900,000 of seller's note............................... $20,287,000 Common stock (6,630,103 shares, including 1,523,461 shares issuable upon exercise of substitute options issued in connection with the acquisition of the net assets of Interliant, Inc.) ........................................ 44,025,000 ----------- 64,312,000 Seller debt paid............................................ 7,900,000 Allocated to intangible assets (see note 4)................. 65,967,000 ----------- Allocated to net tangible assets acquired................... $(9,555,000) ===========
The following unaudited condensed pro forma information presents the unaudited results of operations of the Company as if the acquisitions completed in 1999 had occurred on January 1, 1998:
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, 1998 MARCH 31, 1998 MARCH 31, 1999 ----------------- -------------- -------------- Service revenues.......................... $ 41,291,564 $ 9,534,050 $ 10,340,535 Net loss.................................. (29,410,759) (6,222,934) (11,385,295) Net loss per share -- basic and diluted... $ (1.86) $ (0.60) $ (0.40)
13. INFORMATION ABOUT PRODUCTS AND SERVICES For the three months ended March 31, 1999, revenues earned from Web hosting, application hosting, consulting and other services were 56.9%; 20.8%; 15.0%; and 7.3%, respectively of total revenues. For the three months ended March 31, 1999, 19.8% of total revenues were from sources outside the United States, primarily from Europe, Asia and South America. For the year ended December 31, 1998 all revenues were from Web hosting and 18.8% of revenues were from sources outside the United States, primarily from Europe and Asia. F-17 103 INTERLIANT, INC. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS During the period from inception through March 10, 1999, Interliant, Inc. (formerly, Sage Networks, Inc.) ("Interliant" or the "Company") completed numerous business combinations, whereby the Company acquired shares of common stock, or certain net assets of entities operating in the Internet industry. Business combinations are accounted for using the purchase method of accounting. The unaudited pro forma consolidated statement of operations for the year ended December 31, 1998 and the three months ended March 31, 1999 assumes that the acquisitions completed in 1998 and 1999 had occurred on January 1, 1998, and includes the historical consolidated statements of operations of Interliant, adjusted for the pro forma effects of the acquisitions. The unaudited pro forma consolidated statement of operations is not necessarily indicative of the results of operations that would actually have occurred if the transactions had been consummated as of January 1, 1998 and is not intended to indicate the expected results for any future period. These statements should be read in conjunction with the historical consolidated financial statements and related notes thereto of Interliant, and of certain acquired businesses, included elsewhere in this prospectus. The unaudited pro forma adjustments are based upon preliminary estimates and certain assumptions that management of Interliant believes are reasonable in the circumstances. The actual adjustments may be revised upon completion of the purchase price allocations. Except for additions to intangible assets on contingent purchase price payments based on the underlying purchase agreements, management of Interliant does not believe that actual adjustments will be materially different from preliminary estimates. PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1999
ACQUISITIONS COMPLETED IN 1999(2) -------------------------------------------------- INTERLIANT INTERLIANT PRO FORMA HISTORICAL TELEPHONICS NET DAEMONS DIGIWEB TEXAS ADJUSTMENTS PRO FORMA ------------ ----------- ----------- -------- ----------- ----------- ------------ Service revenues................ $ 5,434,162 $331,182 $836,289 $237,300 $ 3,501,602 $ 10,340,535 Costs and expenses: Cost of service revenues...... 3,250,703 47,387 466,929 62,003 2,149,276 5,976,298 Sales and marketing........... 1,896,357 69,711 12,122 1,508,576 3,486,766 General and administrative.... 3,699,847 201,261 285,395 82,979 1,289,018 5,558,500 Depreciation.................. 699,552 6,000 16,206 25,000 532,192 1,278,950 Amortization of intangibles... 2,082,167 $ 2,141,822(5) 4,223,989 Start up and acquisition costs....................... 1,063,458 1,063,458 ------------ -------- -------- -------- ----------- ----------- ------------ Total costs and expenses........ 12,692,084 324,359 780,652 169,982 5,479,062 2,141,822 21,587,961 ------------ -------- -------- -------- ----------- ----------- ------------ Operating income (loss)......... (7,257,922) 6,823 55,637 67,318 (1,977,460) (2,141,822) (11,247,426) Interest income (expense)....... 53,912 (1,873) (148,460) (96,421) Other income (expense).......... (41,448) (41,448) Income (loss) before income tax........................... (7,245,458) 6,823 53,764 67,318 (2,125,920) (2,141,822) (11,385,295) Provision for income tax........ (13,313) 13,313(6) -- ------------ -------- -------- -------- ----------- ----------- ------------ Net income (loss)............... $ (7,245,458) $ 6,823 $ 40,451 $ 67,318 $(2,125,920) $(2,128,509) $(11,385,295) ============ ======== ======== ======== =========== =========== ============ Net loss per share -- basic and diluted....................... $ (0.29) $ (0.40) Number of shares................ 24,769,890 28,626,240
F-19 104 PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998
ACQUISITIONS COMPLETED IN 1999 (2) ------------------------------------------------------ INTERLIANT 1998 COMPLETED INTERLIANT PRO FORMA HISTORICAL ACQUISITIONS(1) TELEPHONETICS NET DAEMONS DIGIWEB TEXAS ADJUSTMENTS ----------- --------------- ------------- ----------- ---------- ----------- ------------ Service revenues....... $ 4,905,027 $ 3,988,362 $2,769,606 $5,770,024 $2,685,676 $21,172,869 Costs and expenses: Cost of service revenues........... 3,236,385 1,266,435 823,161 3,211,532 923,310 11,880,983 $ (1,050,921)(3) Sales and marketing.......... 2,555,035 84,858 31,577 6,722,996 General and administrative..... 5,120,595 3,473,637 2,605,725 2,161,094 578,993 4,137,668 2,497,463(3)(4) Depreciation......... 696,039 142,099 74,758 135,129 246,329 2,525,530 Amortization of intangibles........ 1,416,882 13,048,086(5) Start up and acquisition costs.............. 1,727,970 ----------- ----------- ---------- ---------- ---------- ----------- ------------ Total costs and expenses............. 14,752,906 4,967,029 3,503,644 5,507,755 1,780,209 25,267,177 14,494,628 ----------- ----------- ---------- ---------- ---------- ----------- ------------ Operating income(loss)......... (9,847,879) (978,667) (734,038) 262,269 905,467 (4,094,308) (14,494,628) Interest income (expense)............ 138,073 (180,987) (7,369) (101,485) (16,829) (715,643) Equity in loss of joint venture.............. (144,735) Gain on litigation settlement........... 600,000 Income (loss) before income tax........... (9,709,806) (1,159,654) (741,407) 160,784 888,638 (4,354,686) (14,494,628) Provision for income tax.................. 100,800 (100,800)(6) ----------- ----------- ---------- ---------- ---------- ----------- ------------ Net income(loss)....... $(9,709,806) $(1,159,654) $ (741,407) $ 59,984 $ 888,638 $(4,354,686) $(14,393,828) =========== =========== ========== ========== ========== =========== ============ Net loss per share -- basic and diluted.... $ (1.10) Number of shares....... 8,799,432 PRO FORMA ------------ Service revenues....... $ 41,291,564 Costs and expenses: Cost of service revenues........... 20,290,885 Sales and marketing.......... 9,394,466 General and administrative..... 20,575,175 Depreciation......... 3,819,884 Amortization of intangibles........ 14,464,968 Start up and acquisition costs.............. 1,727,970 ------------ Total costs and expenses............. 70,273,348 ------------ Operating income(loss)......... (28,981,784) Interest income (expense)............ (884,240) Equity in loss of joint venture.............. (144,735) Gain on litigation settlement........... 600,000 Income (loss) before income tax........... (29,410,759) Provision for income tax.................. -- ------------ Net income(loss)....... $(29,410,759) ============ Net loss per share -- basic and diluted.... $ (1.86) Number of shares....... 15,829,762
F-20 105 NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (1) Set forth below are the pre acquisition operations of acquired businesses completed in 1998 from January 1, 1998 through the date of acquisition.
HOST AMERICA, DIVISION OF HOME- CLEVER COMPUTERS TRISTAR WEB COME COMMUN- B.N. TECHNOLOGY, GEN INTERNATIONAL INC. CREATIONS, INC. CATIONS, INC. DBA ICOM INC. ---------------- --------------- ----------------- ---------------- ----------------- Service revenues......... $554,020 $256,953 $ 533,159 $ 982,376 $ 776,503 -------- -------- --------- ---------- --------- Cost of service revenues............... 102,197 103,232 230,435 153,919 323,518 Sales and marketing...... 52,770 32,088 General and administrative......... 387,236 183,521 629,727 984,223 785,972 Depreciation............. 9,557 63,642 10,817 26,496 -------- -------- --------- ---------- --------- 489,433 296,310 976,574 1,148,959 1,168,074 -------- -------- --------- ---------- --------- Operating income(loss)... 64,587 (39,357) (443,415) (166,583) (391,571) Interest income (expense).............. (368) (156,399) (4,051) (12,557) -------- -------- --------- ---------- --------- Net income(loss)......... $ 64,587 $(39,725) $(599,814) $ (170,634) $(404,128) ======== ======== ========= ========== ========= OTHER TOTAL 1998 ACQUISITIONS ACQUISITIONS ------------------ ------------ Service revenues......... $885,351 $ 3,988,362 -------- ----------- Cost of service revenues............... 353,134 1,266,435 Sales and marketing...... 84,858 General and administrative......... 502,958 3,473,637 Depreciation............. 31,587 142,099 -------- ----------- 887,679 4,967,029 -------- ----------- Operating income(loss)... (2,328) (978,667) Interest income (expense).............. (7,612) (180,987) -------- ----------- Net income(loss)......... $ (9,940) $(1,159,654) ======== ===========
(2) Represents the results of operations for businesses acquired in 1999 for the year ended December 31, 1998 and from January 1, 1999 through the date of acquisition. (3) To reclassify Interliant Texas customer service costs to conform with Registrant's presentation. (4) To record amortization of stock based compensation awarded to employees and owners of acquired businesses in connection with employment and/or consulting agreements. (5) To record amortization of intangibles arising as a result of acquisitions for the period from January 1, 1998 to acquisition date based on amortization periods ranging from two to ten years.
YEAR ENDED THREE MONTHS DECEMBER 31, ENDED 1998 MARCH 31, 1999 ------------ -------------- Amortization: 1998 acquisitions from January 1, 1998 to respective dates of acquisition, (amortization period 2-10 years)......... $ 1,139,439 $ -- 1999 acquisitions for the year ended December 31, 1998 (amortization period 1 to 10 years)............................. 11,908,647 2,141,822 ----------- ---------- $13,048,086 $2,141,822 =========== ==========
(See Note 4 of Notes to Consolidated Financial Statements) (6) To record elimination of income tax provision due to consolidated pre tax loss. F-21 106 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholder Clever Computers, Inc. Atlanta, Georgia We have audited the accompanying balance sheet of Clever Computers, Inc. as of December 31, 1996 and 1997 and the related statements of income, retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Clever Computers, Inc. as of December 31, 1996 and 1997 and the results of their operations and their cash flows for the years then ended, in conformity with generally accepted accounting principles. BSC & E Atlanta, Georgia March 19, 1998 F-22 107 CLEVER COMPUTERS, INC. ATLANTA, GEORGIA BALANCE SHEET DECEMBER 31, 1996 AND 1997
DECEMBER 31, ---------------------- 1996 1997 --------- --------- ASSETS Current Assets Cash -- operating......................................... $ 72,263 $ 50,425 Cash -- payroll........................................... 50,655 42,693 Accounts receivable, net of allowance for doubtful accounts of $16,199 in 1997............................ 25,659 91,792 Prepaid expenses.......................................... 3,127 6,485 Prepaid income taxes...................................... 878 Deferred income taxes..................................... 4,050 --------- --------- Total current assets.............................. 151,704 196,323 --------- --------- Property and Equipment Furniture................................................. 1,868 2,617 Computer equipment........................................ 231,871 422,105 Computer software......................................... 30,101 34,365 --------- --------- 263,840 479,087 Accumulated depreciation and amortization................. (115,387) (231,264) --------- --------- 148,453 247,823 --------- --------- Other Assets Other assets.............................................. 14,782 4,668 Organization costs, net of accumulated amortization of $292 and $391.......................................... 196 97 --------- --------- 14,978 4,765 --------- --------- $ 315,135 $ 448,911 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable.......................................... $ 33,941 $ 66,808 Accrued consulting fee.................................... 34,000 100,000 Deferred revenues......................................... 95,536 127,324 Income taxes payable...................................... 15,906 Accrued payroll and payroll taxes......................... 42,363 35,249 Advances to stockholder................................... 22,520 2,358 --------- --------- Total current liabilities......................... 244,266 331,739 --------- --------- Stockholder's Equity Common stock, no par value; 10,000 shares authorized; 1,000 shares issued and outstanding.................... 5,000 5,000 Retained earnings......................................... 65,869 112,172 --------- --------- 70,869 117,172 --------- --------- $ 315,135 $ 448,911 ========= =========
The Notes to Financial Statements are an integral part of these statements. F-23 108 CLEVER COMPUTERS, INC. STATEMENT OF INCOME YEARS ENDED DECEMBER 31, 1996 AND 1997
1996 1997 ---------- ---------- Revenues.................................................... $1,128,108 $2,156,982 Operating expenses.......................................... 1,045,357 2,088,928 ---------- ---------- Income from operations.................................... 82,751 68,054 Other income and (expense).................................. 185 (937) ---------- ---------- Income before provision for income taxes.................. 82,936 67,117 Provision for income taxes.................................. 15,906 20,814 ---------- ---------- Net income................................................ $ 67,030 $ 46,303 ========== ==========
The Notes to Financial Statements are an integral part of these statements. F-24 109 CLEVER COMPUTERS, INC. STATEMENT OF RETAINED EARNINGS YEARS ENDED DECEMBER 31, 1996 AND 1997 Balance, December 31, 1995.................................. $ (1,161) Add net income............................................ 67,030 -------- Balance, December 31, 1996.................................. 65,869 Add net income............................................ 46,303 -------- Balance, December 31, 1997.................................. $112,172 ========
The Notes to Financial Statements are an integral part of these statements. F-25 110 CLEVER COMPUTERS, INC. STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996 AND 1997
1996 1997 --------- --------- Cash flows from operating activities: Net income................................................ $ 67,030 $ 46,303 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income taxes.................................. (4,050) Bad debts.............................................. 16,199 Gain on sale of assets................................. (1,426) Depreciation and amortization.......................... 61,884 117,401 Changes in operating assets and liabilities: Accounts receivable.................................. (24,218) (82,332) Prepaid expenses..................................... (3,127) (3,358) Prepaid income taxes................................. (878) Other assets......................................... (11,217) 10,114 Accounts payable..................................... 11,931 16,961 Accrued consulting fees.............................. 34,000 66,000 Deferred revenues.................................... 90,536 31,788 Income taxes payable................................. 15,906 Accrued payroll and payroll taxes.................... 30,454 (7,115) Advances to stockholder.............................. 12,436 (20,162) --------- --------- Net cash provided by operating activities......... 285,615 185,445 --------- --------- Cash flows from investing activities: Acquisition of property and equipment..................... (185,856) (219,206) Proceeds from sale of assets.............................. 3,961 --------- --------- Net cash used in investing activities............. (185,856) (215,245) --------- --------- Cash flows from financing activities........................ -- -- --------- --------- Increase (decrease) in cash................................. 99,759 (29,800) Cash, beginning of year..................................... 23,159 122,918 --------- --------- Cash, end of year........................................... $ 122,918 $ 93,118 ========= ========= Cash paid during the year for: Interest.................................................. $ 51 $ 2,500 Income taxes.............................................. -- 36,931
The Notes to Financial Statements are an integral part of these statements. F-26 111 CLEVER COMPUTERS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Nature of business Clever Computers, Inc. was incorporated October 25, 1993 in the State of Georgia. The Company is engaged in the business of Internet Web hosting. Property and equipment Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets by accelerated and straight line methods. Statement of cash flows The Company considers instruments with a maturity of three months or less to be cash equivalents for purposes of the statement of cash flows. Income taxes Income taxes are accounted for in accordance with provisions of Statement of Financial Accounting Standards No. 109. Deferred income taxes have been provided for the difference in bad debt expense for income tax and financial statement reporting purposes. Organization costs Organization costs are being amortized on a straight line basis over five years. Deferred revenues As part of their standard service agreements with customers, the Company bills for all services for three months in advance. As a result, a portion of revenues collected and billed for as of year end relates to services not yet performed. The deferred revenue associated with these services is recognized on the balance sheet as a current liability. Estimates Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. NOTE 2. LEASES The Company leases office facilities and certain equipment. Renewal options are available on some of these leases. Future minimum lease payments required on noncancelable operating leases having initial or remaining terms in excess of one year as of December 31, 1997, are as follows: 1998...................................................... $175,923 1999...................................................... 33,555 2000...................................................... 1,600 -------- $211,078 ========
F-27 112 CLEVER COMPUTERS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Rent expense of $40,508 and $97,655 in 1996 and 1997, respectively, is included in operating expenses in the accompanying statements of income. NOTE 3. INCOME TAXES The Company's provision for income taxes consisted of the following amounts:
YEARS ENDED DECEMBER 31 ------------------ 1996 1997 ------- ------- Current.................................................. $11,860 $24,864 Deferred benefit............................... (4,046) (4,050) ------- ------- Provision for income taxes..................... $15,906 $20,814 ======= =======
NOTE 4. SUBSEQUENT EVENTS Subsequent to December 31, 1997, the Company was approached by certain parties regarding the potential sale of the Company. As of the report date, no formal agreement was in place and negotiations were ongoing. F-28 113 INDEPENDENT AUDITOR'S REPORT To the Board of Directors Sage Networks, Inc. We have audited the accompanying balance sheets of Tri Star Web Creations, Inc. as of December 31, 1996 and 1997, and the related statements of operations, and changes in retained earnings, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tri Star Web Creations, Inc. as of December 31, 1996 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Urbach Kahn & Werlin PC New York, New York July 13, 1998 F-29 114 TRI STAR WEB CREATIONS, INC. BALANCE SHEETS DECEMBER 31, 1996 AND 1997
1996 1997 ------ -------- ASSETS Current Assets Cash...................................................... $ 391 $ 997 Accounts receivable, net of an allowance for doubtful accounts of $6,000 and $9,747.......................... 9,125 41,770 Prepaid expenses.......................................... -- 3,365 ------ -------- Total current assets.............................. 9,516 46,132 Other assets................................................ -- 4,182 Fixed assets, net of accumulated depreciation............... -- 95,036 ------ -------- Total assets...................................... $9,516 $145,350 ------ -------- LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities Notes payable to related parties, current................. $ -- $ 18,510 Equipment purchase/obligations............................ -- 55,236 Accounts payable.......................................... 1,500 42,771 Deferred revenue.......................................... 2,420 26,131 ------ -------- Total current liabilities......................... 3,920 142,648 ------ -------- Long-term Liabilities Note payable to related party, net of current portion..... -- 1,795 ------ -------- Total liabilities................................. 3,920 144,443 ------ -------- Stockholders' Equity Capital stock, no par value; 100 shares authorized, 3 shares issued and outstanding.......................... 100 100 Retained earnings......................................... 5,496 807 ------ -------- Total stockholder's equity........................ 5,596 907 ------ -------- Total liabilities and stockholder's equity........ $9,516 $145,350 ====== ========
See Notes to Financial Statements F-30 115 TRI STAR WEB CREATIONS, INC. STATEMENT OF OPERATIONS AND CHANGES IN RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
1996 1997 ------- -------- Service revenues............................................ $51,492 $178,251 ------- -------- Selling expenses............................................ 7,727 25,234 General and administrative expenses......................... 23,021 140,972 ------- -------- 30,748 166,206 ------- -------- Operating income............................................ 20,744 12,045 Interest expense............................................ -- 1,424 ------- -------- Net income........................................ 20,744 10,621 Retained earnings (accumulated deficit), beginning of year...................................................... (420) 5,496 Distributions............................................... (14,828) (15,310) ------- -------- Retained earnings, end of year.............................. $ 5,496 $ 807 ======= ========
See Notes to Financial Statements F-31 116 TRI STAR WEB CREATIONS, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
1996 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 20,744 $ 10,621 Adjustments to reconcile net income to net cash provided by operating activities: Bad debts.............................................. 6,000 3,747 Depreciation........................................... -- 4,337 Changes in: Accounts receivable.................................. (15,125) (36,392) Prepaid expenses..................................... -- (3,365) Other assets......................................... -- (4,182) Accounts payable..................................... 180 41,271 Deferred revenue..................................... 2,420 23,711 -------- -------- Net cash provided by operating activities......... 14,219 39,748 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of fixed assets.................................. -- (37,603) -------- -------- Net cash used in investing activities............. -- (37,603) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from related party borrowings.................... -- 25,000 Principal payments on related party borrowings and equipment purchase obligations......................... -- (11,229) Cash distributions paid................................... (14,828) (15,310) -------- -------- Net cash used in financing activities............. (14,828) (1,539) -------- -------- Net increase (decrease) in cash................... (609) 606 Cash, beginning of year..................................... 1,000 391 -------- -------- Cash, end of year........................................... $ 391 $ 997 ======== ======== Supplemental disclosures of cash flow information Cash payments for: Interest............................................... $ -- $ 1,424 -------- -------- Supplemental schedule of noncash investing and financing activities Equipment purchase obligations incurred for use of equipment.............................................. $ -- $ 61,770 -------- --------
See Notes to Financial Statements F-32 117 TRI STAR WEB CREATIONS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1. DESCRIPTION OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES Description of Operations: Tri Star Web Creations, Inc. (the "Company") is primarily engaged in the business of providing web hosting services for companies and individuals nationwide placing websites on the Internet. Summary of Significant Accounting Policies Revenue Recognition: The Company recognizes service revenues ratably as hosting services are provided. Concentrations of Credit Risk: The Company extends credit based on an evaluation of the customer's financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. Fixed Assets: Fixed assets are carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets which range from five to seven years. Income Taxes: The Company, with the consent of its stockholders, has elected to be taxed under sections of the federal and state income tax laws which provide that, in lieu of corporation income taxes, the stockholder separately accounts for the Company's items of income, deduction, losses and credits. Therefore, no provision or liability for Federal tax is reflected in the financial statements. A provision for state taxes is included in operating expenses. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. NOTE 2. FIXED ASSETS Fixed assets consist of the following at December 31:
1997 ------- Computers.......................................... $98,369 Furniture and fixtures............................. 1,004 ------- 99,373 Less accumulated depreciation...................... 4,337 ------- $95,036 =======
NOTE 3. NOTES PAYABLE, RELATED PARTIES Loans from related parties at December 31, 1997 are represented by a $15,305 obligation secured by substantially all assets of the Company with interest at 8.25% and an unsecured non-interest bearing obligation of $5,000. F-33 118 TRI STAR WEB CREATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Notes payable, related parties at December 31, 1997 mature as follows:
1997 ------- Total.............................................. $20,305 Less amounts due currently......................... 18,510 ------- Amounts maturing in 1999........................... $ 1,795 =======
NOTE 4. EQUIPMENT PURCHASE OBLIGATIONS The Company finances a portion of its computer equipment under twelve month equipment purchase obligations. NOTE 5. OPERATING LEASE The Company leases its office facility under an operating lease which expires in January 2003. In addition to base rent, the leasing arrangements obligate the Company to pay all taxes, insurance, utilities and maintenance costs. The future minimum base rent payments under the lease are as follows:
AMOUNT -------- 1998.............................................. $ 21,281 1999.............................................. 22,961 2000.............................................. 23,556 2001.............................................. 24,169 2002.............................................. 25,936 -------- $117,903 ========
NOTE 6. SUBSEQUENT EVENT In May 1998, the Company sold substantially all of its assets to Sage Networks, Inc. ("Sage") for cash and assumption of certain of its liabilities and common stock in Sage. The net consideration for this sale exceeded the carrying amounts of the related assets at December 31, 1997. F-34 119 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of HomeCom Communications, Inc. In our opinion, the accompanying statements of assets and liabilities and the related statements of revenues and expenses and of cash flows present fairly, in all material respects, the financial position of HostAmerica, a division of HomeCom Communications, Inc., at December 31, 1996 and 1997, and the results of its operations and its cash flows for the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards 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 the opinion expressed above. The accompanying financial statements have been carved out of the historical financial statements of HomeCom Communications, Inc. As such, these financial statements represent a lesser business component and are not intended to be a complete presentation of the financial position or the results of operations or cash flows of the Company were it to operate on a stand-alone basis. A description of the significant assumptions used to prepare the carve-out financial statements is included in Note 1 to the financial statements. As discussed in Note 1 to the financial statements, substantially all the assets of HostAmerica were sold to Sage Acquisition Corp. on June 9, 1998. PricewaterhouseCoopers LLP Atlanta, Georgia August 18, 1998 F-35 120 HOMECOM COMMUNICATIONS, INC. HOSTAMERICA DIVISION STATEMENTS OF ASSETS AND LIABILITIES AS OF DECEMBER 31, 1996 AND 1997
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ ASSETS Current assets: Accounts receivable, net of allowance for uncollectibles......................................... $ 54,306 $ 55,421 -------- -------- Total current assets.............................. 54,306 55,421 Computer equipment, net..................................... 62,610 83,662 -------- -------- Total assets...................................... $116,916 $139,083 ======== ======== LIABILITIES AND BUSINESS UNIT EQUITY (DEFICIT) Current liabilities: Deferred revenue.......................................... $ 62,063 $173,458 -------- -------- Total current liabilities......................... 62,063 173,458 -------- -------- Commitments and contingencies Business unit equity (deficit).............................. 54,853 (34,375) -------- -------- Total liabilities and business unit equity (deficit)....................................... $116,916 $139,083 ======== ========
The accompanying notes are an integral part of these financial statements F-36 121 HOMECOM COMMUNICATIONS, INC. HOSTAMERICA DIVISION STATEMENTS OF REVENUES AND EXPENSES FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 -------- --------- ----------- Hosting revenues........................................ $ 26,191 $ 304,399 $ 692,140 Cost of hosting revenues................................ 32,298 163,767 407,785 -------- --------- ----------- Gross margin............................................ (6,107) 140,632 284,355 -------- --------- ----------- Operating expenses: Sales and marketing................................... 7,187 99,005 407,375 General and administrative............................ 13,617 183,524 876,121 Depreciation.......................................... 23,877 83,586 -------- --------- ----------- Total operating expenses...................... 20,804 306,406 1,367,082 -------- --------- ----------- Operating loss.......................................... (26,911) (165,774) (1,082,727) Other expenses (income): Interest expense...................................... 278 6,789 130,660 Other expense (income), net........................... (868) (22,431) -------- --------- ----------- Excess of expenses over revenues........................ $(27,189) $(171,695) $(1,190,956) ======== ========= ===========
The accompanying notes are an integral part of these financial statements F-37 122 HOMECOM COMMUNICATIONS, INC. HOSTAMERICA DIVISION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 -------- --------- ----------- Cash flows from operating activities: Excess of expenses over revenues...................... $(27,189) $(171,695) $(1,190,956) Adjustments to reconcile excess of expenses over revenues to net cash used in operating activities: Depreciation....................................... 23,877 83,586 Provision for bad debts............................ 1,014 26,090 198,364 Changes in assets and liabilities: Accounts receivables............................. (6,032) (73,274) (201,583) Unearned revenue................................. 4,899 57,164 111,396 -------- --------- ----------- Net cash used in operating activities......... (27,308) (137,838) (999,193) -------- --------- ----------- Cash flows from investing activities: Purchase of computer equipment........................ -- (77,147) (55,589) -------- --------- ----------- Net cash used in investing activities......... -- (77,147) (55,589) -------- --------- ----------- Cash flows from financing activities Allocated charges paid by HomeCom Communications, Inc., net of cash transferred...................... 27,308 214,985 1,054,782 -------- --------- ----------- Net cash provided by financing activities..... 27,308 214,985 1,054,782 -------- --------- ----------- Net increase (decrease) in cash......................... 0 0 0 Cash and cash equivalents at beginning of period........ 0 0 0 -------- --------- ----------- Cash and cash equivalents at end of period.............. $ 0 $ 0 $ 0 ======== ========= ===========
The accompanying notes are an integral part of these financial statements F-38 123 HOMECOM COMMUNICATIONS, INC. HOSTAMERICA DIVISION NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Description of Business HostAmerica is a trade name of HomeCom Communications, Inc. ("HomeCom") under which HomeCom provides full service Internet Web site hosting services. The Web hosting operations of HomeCom conducted under the HostAmerica trade name are herein referred to as "HostAmerica" or "the Division". On June 9, 1998, HomeCom sold certain assets of the Division, consisting principally of hosting contracts, equipment and the trade name "HostAmerica" to Sage Acquisition Corp. for $4,500,000. Pursuant to the terms of the Asset Purchase Agreement (the "Agreement"), HomeCom retained all of the accounts receivable of HostAmerica existing as of May 31, 1998, and retained certain hosting contracts, and the right to perform hosting services in the future for companies in the financial services industry. The Agreement required the deposit of $250,000 of the proceeds to be held in escrow until May 1, 1999, for the purpose of indemnifying Sage Acquisition Corp. for representations and warranties made by HomeCom under the Agreement. Basis of Presentation Historically, financial statements were not prepared for the Division. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles and have been "carved out" of the financial statements of HomeCom for each of the periods, and as of each of the dates presented. As such, these statements represent a lesser business component and are not intended to be a complete presentation of the financial position or the results of operations or cash flows of the Division were it to operate on a stand-alone basis. The accompanying financial statements exclude the assets, liabilities and revenues related to certain premium hosting accounts referred to as Excluded Customers in the Agreement. The statements of revenues and expenses of the Division include all revenues and costs directly attributable to the Division and also include allocations of corporate overhead from HomeCom. Expenses have been allocated based on a variety of methods depending on the nature of the expense. Such allocation methods include proportional HostAmerica revenues to total HomeCom revenues, headcount equivalents and management estimates. The cost of providing hosting services represents direct payroll and related costs of those employees involved in providing hosting services and an allocation of Internet connection services. An allocation of corporate marketing expenses and corporate administrative functions (including data services, employee benefits, legal, insurance, accounting and other corporate overhead) has been included in the selling and marketing and general and administrative operating expenses in the statements of revenues and expenses. Depreciation has been computed based upon a computation of the direct expenses related to the assets sold under the terms of the Agreement plus an allocation of general corporate depreciation. Management believes these allocations are reasonable. These allocations are not necessarily indicative of the costs and expenses that would have resulted if the Division had been operated as a separate entity. Accounts Receivable, Net Accounts receivable represent amounts receivable from the class of hosting customer subject to the Agreement and are shown net of the allowance for doubtful accounts. The allowance was approximately $27,000 and approximately $90,000 at December 31, 1996 and 1997, respectively. F-39 124 HOMECOM COMMUNICATIONS, INC. HOSTAMERICA DIVISION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Computer Equipment, Net Computer equipment is recorded at cost less accumulated depreciation, which is computed using the straight-line method over the estimated useful lives of the related assets (three years). Maintenance and repairs are charged to expense as incurred. Upon sale, retirement or other disposition of these assets, the cost and the related accumulated depreciation are removed from the respective accounts and any gain or loss on the disposition is included in income. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition HostAmerica recognizes revenues ratably over the period for which the Web site hosting services are provided. Deferred revenue, as reflected on the accompanying statements of assets and liabilities, represents the amount of billings recorded in advance of services being provided. Advertising Expenses All advertising costs are expensed when incurred. Advertising expenses allocated to the Division were approximately $1,000, $32,000, and $384,000 for the years ended December 31, 1995, 1996 and 1997, respectively. Income Taxes The Division is not a legal entity. The Division has been included in HomeCom's consolidated federal income tax returns for all periods prior to June 9, 1998. The Division was not a party to any tax sharing agreement and, accordingly, no benefit for income taxes has been reflected in the accompanying statements of revenues and expenses. 2. COMPUTER EQUIPMENT Computer equipment, net, represents the specific assets defined in the agreement used in the provision of hosting services and is comprised of the following as of:
DECEMBER 31, DECEMBER 31, 1996 1997 ------------ ------------ Computer equipment......................... $ 77,147 $132,736 Less: accumulated depreciation............. (14,537) (49,074) -------- -------- $ 62,610 $ 83,662 ======== ========
3. COMMITMENTS AND CONTINGENCIES The Division's software and equipment are vulnerable to computer viruses or similar disruptive problems caused by customers or other Internet users. Computer viruses or problems caused by third parties could lead to interruptions, delays or cessation in service to the Division's customers. Moreover, F-40 125 HOMECOM COMMUNICATIONS, INC. HOSTAMERICA DIVISION NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) customers of the Division could use computer files and information stored on or transmitted to Web server computers maintained by the Division to engage in illegal activities that may be unknown or undetectable by the Division, including fraud and misrepresentation, and unauthorized access to computer systems of others. Furthermore, inappropriate use of the Internet by third parties could also jeopardize the security of customers' confidential information that is stored in the Division's computer systems. Any such actions could subject the Division to liability to third parties. The Division does not have errors and omissions, product liability or other insurance to protect against risks caused by computer viruses or other misuse of software or equipment by third parties. Although the Division attempts to limit its liability to customers for these types of risks through contractual provisions, there can be no assurance that these provisions will be enforceable. Various legal proceedings may arise in the normal course of business. Management does not believe that there are currently any asserted or unasserted claims that will have a material adverse effect on the statements of assets and liabilities, statements of revenues and expenses or cash flows of the Division. 4. CONCENTRATION OF CREDIT RISKS Financial instruments that potentially subject the Division to significant concentrations of credit risk consist principally of accounts receivable. Concentration of credit risk with respect to trade receivables is monitored by the Division through ongoing credit evaluations of its customers' financial condition. No customer accounted for more than 10% of the revenues of the Division during 1995, 1996 or 1997. F-41 126 INDEPENDENT AUDITOR'S REPORT Board of Directors B.N. Technology, Inc. dba Internet Communications Los Angeles, California We have audited the accompanying balance sheets of B.N. Technology, Inc. dba Internet Communications as of December 31, 1996 and 1997, and the related statements of operations and accumulated deficit, and cash flows for the period April 15, 1996 (inception) through December 31, 1996 and for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amount and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material aspects, the financial position of B.N. Technology, Inc. as of December 31, 1996 and 1997, and the results of its operations and its cash flows for the period April 16, 1996 (inception) through December 31, 1996 and the year ended December 31, 1997. Encino, California FRANKEL, LODGEN, LACHER, GOLDITCH, SARDI & HOWARD September 11, 1998 F-42 127 B.N. TECHNOLOGY, INC. DBA INTERNET COMMUNICATIONS BALANCE SHEETS DECEMBER 31, 1996 AND 1997
1996 1997 -------- --------- ASSETS Cash........................................................ $ 6,138 $ 14,982 Property and equipment, net................................. 20,076 33,861 Deposit..................................................... 1,100 1,100 Organization costs, net..................................... 1,445 1,105 Intangible costs, net....................................... 14,000 7,000 -------- --------- $ 42,759 $ 58,048 ======== ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deferred revenue............................................ $ 15,787 $ 102,417 Accounts payable and accrued expenses....................... 7,217 36,883 Accrued payroll............................................. 8,861 Contract payable............................................ 5,664 4,033 Shareholders' loans......................................... 13,051 10,551 -------- --------- 41,719 162,745 -------- --------- Shareholders' equity (deficit): Common stock; no par value; 100,000 shares authorized, issued and outstanding................................. 50,100 50,100 Accumulated deficit....................................... (49,060) (154,797) -------- --------- 1,040 (104,697) -------- --------- $ 42,759 $ 58,048 ======== =========
See accompanying notes to financial statements. F-43 128 B.N. TECHNOLOGY, INC. dba INTERNET COMMUNICATIONS STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
PERIOD FROM APRIL 15, 1996 (INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, 1996 1997 ------------------- ------------ Revenue..................................................... $ 47,597 $ 497,445 Operating expenses.......................................... 94,974 601,278 -------- --------- Loss from operations........................................ (47,377) (103,833) -------- --------- Interest expense............................................ (883) (1,104) -------- --------- Loss before provision for income tax........................ (48,260) (104,937) Franchise tax............................................... (800) (800) -------- --------- Net loss.................................................... (49,060) (105,737) Accumulated deficit, beginning of period.................... (49,060) -------- --------- Accumulated deficit, end of period.......................... $(49,060) $(154,797) ======== =========
See accompanying notes to financial statements. F-44 129 B.N. TECHNOLOGY, INC. dba INTERNET COMMUNICATIONS STATEMENTS OF CASH FLOWS
PERIOD FROM APRIL 15, 1996 (INCEPTION) YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ---------------- Net loss.................................................... $(49,060) $(105,737) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation.............................................. 5,020 13,484 Amortization.............................................. 7,255 7,340 Increase (decrease) in cash due to changes in operating assets and liabilities: Deposits............................................... (1,100) Deferred revenue....................................... 15,787 86,630 Accounts payable and accrued expense................... 7,217 29,666 Accrued payroll........................................ 8,861 -------- --------- Net cash provided (used) by operating activities............ (14,881) 40,244 -------- --------- Cash flows from investing activities: Acquisition of property and equipment..................... (18,518) (27,269) Purchase of customer list................................. (21,000) Organizational costs...................................... (1,700) -------- --------- Net cash provided (used) by investing activities............ 21,933 (27,269) -------- --------- Cash flows from financing activities: Repayment of contract payable............................. (914) (1,631) Proceeds from issuance of common stock.................... 50,100 Proceeds from shareholder loan............................ 13,051 Repayment of shareholder loan............................. (2,500) -------- --------- Net cash provided (used) by financing activities:........... 62,237 (4,131) -------- --------- Net increase in cash........................................ 6,138 8,844 Cash, beginning of period................................... 6,138 -------- --------- Cash, end of period......................................... $ 6,138 $ 14,982 ======== ========= Supplemental disclosure: Interest paid............................................. $ 883 $ 1,104 ======== ========= Income tax paid........................................... $ $ 1,600 ======== ========= Supplemental schedule of non-cash investing and financing activities: During 1996, a contract payable in the amount of $6,578 was incurred to purchase a vehicle.
See accompanying notes to financial statements. F-45 130 B.N. TECHNOLOGY, INC. dba INTERNET COMMUNICATIONS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The summary of significant accounting policies of B.N. Technology, Inc. (the Company) is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, which is responsible for their integrity and objectivity. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Business activity The Company was incorporated on April 16, 1996, and is located in Los Angeles, California. The Company is an Internet Web hosting service provider. Revenue recognition Revenue consists primarily of fees for hosting Web sites. Fees received are earned according to the subscription period sold. Subscription periods are sold on a monthly, quarterly and annual basis. Deferred revenue represents fees received from quarterly and annual subscriptions which extend beyond the current balance sheet date. Property and equipment Property and equipment is carried at cost. The cost is depreciated over the estimated useful lives of the related assets. Depreciation is computed on the straight-line method for financial reporting purposes and on the accelerated cost recovery system method for income tax purposes. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Advertising Advertising costs are expensed as incurred. Advertising expense was $8,818 and $98,484 for the period ended December 31, 1996 and the year ended December 31, 1997, respectively. Use of estimates in preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue and expenses. Actual results may differ from these estimates. Income taxes Current income taxes are based on the taxable income for the year, as measured by the current year's tax returns. Deferred income taxes arise primarily due to differences between the basis of deferred revenue used for financial statements versus cash basis used for income tax reporting purposes. F-46 131 B.N. TECHNOLOGY, INC. dba INTERNET COMMUNICATIONS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. PROPERTY AND EQUIPMENT Major classes of fixed assets are as follows:
ESTIMATED LIVES 1996 1997 --------- ------- ------- Equipment and software........................ 5 years $10,677 $34,774 Furniture................................... 5 years 850 4,022 Automobile.................................. 5 years 13,569 13,569 ------- ------- 25,096 52,365 Accumulated depreciation.................... (5,020) (18,504) ------- ------- $20,076 $33,861 ======= =======
Depreciation expense totaled $5,020 and $13,484 for 1996 and 1997, respectively. 3. INTANGIBLE COSTS In 1996, the Company purchased from the majority stockholder a customer listing and goodwill for $21,000. The cost is being amortized over a three year period. 4. CAPITAL STOCK TRANSACTIONS Capital stock transactions in 1996 are as follows:
ISSUED SHARES AMOUNT ------- ------- Sale of common stock..................................... 100,000 $50,100 ======= =======
5. CONTRACT PAYABLE
1996 1997 ------ ------ The Company has a contract payable dated May 1996, payable in monthly installments at $222, including interest at 20.98%, commencing May 1996 through October 1999. The contract is secured by the Company automobile. ........... $5,664 $4,033 Less current portion........................................ 1,631 2,008 ------ ------ $4,033 $2,025 ====== ======
The following are maturities of contract payable:
DECEMBER 31: - ------------ 1998...................................................... $2,008 1999...................................................... 2,025 ------ $4,033 ======
6. RELATED PARTY TRANSACTIONS The Company has transactions with certain shareholders and officers who receive compensation in the form of wages from the Company. Officers' salaries aggregated $0 and $84,591 for 1996 and 1997, respectively. F-47 132 B.N. TECHNOLOGY, INC. dba INTERNET COMMUNICATIONS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) In 1996, the Company entered into an agreement with the majority shareholder to purchase certain equipment, goodwill, and a customer listing for $25,000. Shareholders' loans payable are unsecured, non-interest bearing and due on demand. 7. COMMITMENTS The Company leases its office and marketing sales office under an operating lease, commencing April 16, 1996 and expiring June 15, 1998. Under the terms of the lease agreement, the Company has the option to extend the lease for an additional three years. The Company is responsible to pay property taxes. The expected future minimum lease payments are as follows: 1998....................................................... $28,682 1999....................................................... 29,137 2000....................................................... 30,012 2001....................................................... 10,102 ------- $97,933 =======
Rent expense totaled $6,295 and $15,346 for 1996 and 1997, respectively. 8. SALE OF SHAREHOLDERS' INTERESTS On August 31, 1998, the Company's shareholders entered into an agreement to sell their respective stock to Sage Networks, Inc. 9. INCOME TAXES The Company has $12,538 of a net operating loss available to offset future federal taxable income through 2012. Valuation allowances are established to reduce deferred tax assets to the amount expected to be realized. Provision for income taxes are as follows:
1996 1997 ------- -------- Current................................................. $ 800 $ 800 Deferred benefit........................................ (2,368) (15,932) Less valuation allowance................................ 2,368 15,932 ------- -------- Total provision for income taxes........................ $ 800 $ 800 ======= ========
10. YEAR 2000 COMPLIANCE (UNAUDITED) The Company's management believes that all information technology included in the operating system, together with all products and services provided to its customers or for internal use, in coordination with technology shared with customers, suppliers or vendors, will accurately process transactions from 1999 and through the Twenty-First Century, including leap year calculations. Neither performance nor functionality of such technology will be affected by the year 2000 issue. F-48 133 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders GEN International, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of GEN International, Inc. and Subsidiaries (formerly Global Entrepreneurs Network, Inc.) as of December 31, 1995, 1996 and 1997, and the related consolidated statements of operations, changes in stockholders' deficiency, and cash flows for the period April 4, 1995 (inception) through December 31, 1995, and the years ended December 31, 1996 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GEN International, Inc. and Subsidiaries as of December 31, 1995, 1996 and 1997, and the results of their operations and their cash flows for the period April 4, 1995 (inception) to December 31, 1995, and the years ended December 31, 1996, and 1997, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 9 to the financial statements, the Company has incurred net losses, and has a working capital deficiency and a stockholders' deficiency as of December 31, 1997. In March 1998, Global Entrepreneurs Network, Inc., a wholly-owned subsidiary filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans with regard to these matters are discussed in Note 9. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Urbach Kahn & Werlin PC New York, New York September 4, 1998 F-49 134 GEN INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY GLOBAL ENTREPRENEURS NETWORK, INC.) BALANCE SHEETS DECEMBER 31, 1995, 1996 AND 1997
1995 1996 1997 -------- --------- ----------- ASSETS Current Assets Cash.................................................. $ 362 $ 888 $ Prepaid expenses and other current assets............. 3,080 10,471 687 -------- --------- ----------- Total current assets.......................... 3,442 11,359 687 -------- --------- ----------- Equipment, net of related depreciation.................. 23,243 271,649 -------- --------- ----------- Security deposit........................................ 2,252 4,154 5,834 -------- --------- ----------- $ 5,694 $ 38,756 $ 278,170 -------- --------- ----------- LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current Liabilities Line of credit........................................ $ 50,000 Capital lease obligations -- current portion.......... 76,421 Accounts payable...................................... $ 45,425 147,524 Advances from stockholder............................. 12,260 82,319 Deferred revenue...................................... $ 12,624 93,185 237,378 Accrued interest -- stockholder....................... 7,611 Accrued expenses and other current liabilities........ 12,355 53,368 174,380 -------- --------- ----------- Total current liabilities..................... 24,979 204,238 775,633 -------- --------- ----------- Capital lease obligations -- non-current portion........ 112,632 -------- --------- ----------- Commitments Stockholders' deficiency Common stock, no par value, 25,000,000 shares......... 4,000 20,000 409,545 authorized (1,000,000 -- 1995; 5,325,000 -- 1996 and 11,816,943 -- 1997) issued and outstanding Accumulated deficit................................... (23,285) (185,482) (1,019,640) -------- --------- ----------- (19,285) (165,482) (610,095) -------- --------- ----------- $ 5,694 $ 38,756 $ 278,170 ======== ========= ===========
See Notes to Financial Statements F-50 135 GEN INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY GLOBAL ENTREPRENEURS NETWORK, INC.) STATEMENTS OF OPERATIONS PERIOD APRIL 4, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 AND YEARS ENDED DECEMBER 31, 1996 AND 1997
PERIOD APRIL 4, 1995 (INCEPTION) THROUGH YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------------- ------------ ----------------- Net revenues.................................. $198,503 $ 828,652 $1,130,764 Cost of revenues.............................. 68,558 345,502 914,093 -------- --------- ---------- Gross profit........................ 129,945 483,150 216,671 -------- --------- ---------- Operating expenses: Selling, advertising and promotion.......... 76,741 301,978 425,621 General and administrative.................. 76,489 268,369 608,265 Interest expense............................ -- -- 16,943 Bad debt expense............................ -- 75,000 -- -------- --------- ---------- 153,230 645,347 1,050,829 -------- --------- ---------- Net loss............................ $(23,285) $(162,197) $ (834,158) ======== ========= ==========
See Notes to Financial Statements F-51 136 GEN INTERNATIONAL, AND SUBSIDIARIES (FORMERLY GLOBAL ENTREPRENEURS NETWORK, INC.) STATEMENTS OF CASH FLOWS PERIOD APRIL 4, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 AND YEARS ENDED DECEMBER 31, 1996 AND 1997
PERIOD APRIL 4, 1995 (INCEPTION) THROUGH YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1996 1997 ------------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss....................................... $(23,285) $(162,197) $(834,158) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Common stock issued for services provided... 6,000 45,834 Depreciation expense........................ 1,977 33,924 Bad debt expense............................ 75,000 Changes in assets and liabilities: Due from related parties.................... (75,000) Prepaid expenses and other current assets... (3,080) (7,391) 9,784 Accounts payable............................ 45,425 102,099 Deferred revenue............................ 12,624 80,561 144,193 Accrued interest stockholder............... 7,611 Accrued expenses and other current liabilities............................... 12,355 41,013 121,012 -------- --------- --------- Net cash provided by (used in) operating activities................. (1,386) 5,388 (369,701) -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Security deposit............................... (2,252) (1,902) (1,680) Purchase of equipment.......................... (25,220) (58,982) -------- --------- --------- Net cash used in investing activities........................... (2,252) (27,122) (60,662) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings from line of credit............. 50,000 Payments on capital lease obligations.......... (34,295) Proceeds from sale of common stock............. 4,000 10,000 343,711 Advances from stockholder...................... 12,260 70,059 -------- --------- --------- Net cash provided by financing activities........................... 4,000 22,260 429,475 -------- --------- --------- Net increase (decrease) in cash........ 362 526 (888) CASH Beginning of period............................ 362 888 End of period.................................. $ 362 $ 888 $ ======== ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES In 1997, the Company entered into capital lease arrangements aggregating $223,300 for the purchase of equipment. Cash paid for interest was approximately $16,900 in 1997. F-52 137 GEN INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY GLOBAL ENTREPRENEURS NETWORK, INC.) STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY PERIOD APRIL 4, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995 AND YEARS ENDED DECEMBER 31, 1996 AND 1997
COMMON STOCK ---------------------- ACCUMULATED SHARES AMOUNT DEFICIT TOTAL ---------- -------- ----------- --------- April 4, 1995.............................. Sale of common stock for cash to founding stockholder.............................. 1,000,000 $ 4,000 $ 4,000 Net loss -- 1995........................... $ (23,285) (23,285) ---------- -------- ----------- --------- Balance, December 31, 1995................. 1,000,000 4,000 (23,285) (19,285) Sale of common stock for cash.............. 5,000 10,000 10,000 Issuance of common stock for services...... 60,000 6,000 6,000 Additional shares of common stock in connection with stock split.............. 4,260,000 Net loss -- 1996........................... (162,197) (162,197) ---------- -------- ----------- --------- Balance, December 31, 1996................. 5,325,000 $ 20,000 $ (185,482) $(165,482) Exchange of Global Entrepreneurs Network, Inc. common stock -- Note 1.............. (2,662,500) Sale of common stock for cash.............. 586,590 242,709 242,709 Issuance of common stock for services...... 557,853 45,834 45,834 Shares issued on exercise of options....... 1,010,000 101,000 101,000 Acquisition of GEN Events, Inc., GEN Network Operations, Inc., and GEN Europe, Inc...................................... 7,000,000 2 2 Net loss -- 1997........................... (834,158) (834,158) ---------- -------- ----------- --------- Balance, December 31, 1997................. 11,816,943 $409,545 $(1,019,640) $(610,095) ========== ======== =========== =========
See Notes to Financial Statements F-53 138 GEN INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY GLOBAL ENTREPRENEURS NETWORK, INC.) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 NOTE 1. ORGANIZATION, BUSINESS COMBINATIONS AND ACQUISITIONS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: GEN International, Inc. (the "Company"), a successor entity to Global Entrepreneurs Network, Inc. (Global), is located in St. Petersburg, Florida and is a global network and information provider connected to the Internet. The Company also offers storage, transfer, and Web hosting services to its members worldwide, primarily small and medium sized businesses. The Company was organized as a shell in June 1997. In this connection, Global, originally incorporated in April 1995 exchanged its then outstanding common stock (5,325,000 shares) for the common stock (2,662,500 shares) of the Company. The Company also issued options to the former stockholders of Global. The financial statements from inception (April 4, 1995) through the exchange in June 1997, represent the accounts and activities of Global. In connection with this exchange, Global became a wholly-owned subsidiary of the Company. The Company also acquired in June 1997, the outstanding common stock of GEN Events, Inc., GEN Network Operations Center, Inc., and GEN Europe, Inc., shell entities with no assets, liabilities or operations, whose shares were also substantially owned by the principal shareholder of Global. Nominal consideration was assigned to the 7,000,000 shares issued by the Company in this connection. Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries as follows: - Global Entrepreneurs Network, Inc. - GEN Network Operations Center, Inc. - GEN Europe, Inc. - GEN Events, Inc. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Revenue Recognition: Recurring revenues consist primarily of monthly fees charged to members for Web hosting services and are recognized at the beginning of each month for which services are rendered. Other revenues generally represent one-time set up fees and are recorded as earned. Deferred revenue consists primarily of the unexpired portion of annual prepaid membership fees. Property and Equipment: Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the assets, generally three years for computers and computer related equipment and five years for other non-computer furniture and equipment. Leasehold improvements are amortized over the term of the lease. Capital Leases: The Company leases certain of its phone and other computer related equipment under capital lease agreements. The assets and liabilities under capital leases are recorded at the lesser of the present value of future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets under lease. Assets under capital lease are amortized over the lesser of their estimated useful lives of three to five years or the term of the lease. Income Taxes: Income taxes are computed using the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and F-54 139 GEN INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY GLOBAL ENTREPRENEURS NETWORK, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. There were no deferred taxes in 1995, 1996 and 1997. Advertising: The Company expenses advertising costs as they are incurred. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1996 and 1997:
1996 1997 ------- -------- Furniture and fixtures.................................. $ 1,482 $ 2,472 Computer equipment...................................... 23,736 303,455 Leasehold improvements.................................. -- 1,623 ------- -------- 25,218 307,550 Less: accumulated depreciation.......................... 1,975 35,901 ------- -------- $23,243 $271,649 ======= ========
NOTE 3. LINE OF CREDIT The Company has a line of credit with a financial institution amounting to $50,000. The line bears interest at 2% above the prime lending rate and is due on demand. NOTE 4. ADVANCES FROM STOCKHOLDER Advances from stockholder originally due in September 1996, bear interest at 18% per annum. Repayment of the advances was extended until such time as the Company has sufficient resources to satisfy the obligations. Interest expense for the year ended December 31, 1997 was $7,611. Interest in 1996 was not material. NOTE 5. STOCK-BASED COMPENSATION During 1997, the Company issued options to purchase 3,715,000 shares of common stock of the Company to certain officers, directors, stockholders and employees at exercise prices ranging from $0.10 to $1.00. The options are exercisable upon certain vesting requirements and/or in the event the Company has a public offering. During 1997, 1,010,000 options not subject to vesting requirements were exercised for $101,000. Options to purchase 2,705,000 shares of common stock were outstanding at December 31, 1997 at a weighted average exercise price of approximately $1.00. All outstanding options were exercisable at December 31, 1997. In accordance with Accounting Principles Board Statement No. 25 (APB 25), no compensation cost has been recognized in accounting for the stock options issued during 1997. Because the Company's stock options have characteristics significantly different than those of traded options, compensation cost for the Company's 1997 grants, based upon the fair value method consistent with Financial Accounting Statement No. 123, is not determinable. F-55 140 GEN INTERNATIONAL, INC. AND SUBSIDIARIES (FORMERLY GLOBAL ENTREPRENEURS NETWORK, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 6. COMMITMENT Lease: The Company had an operating lease for its corporate office, which expired in January 1998, and was renewed through October 1998. Rent expense for the years ending December 31, 1997 and 1996, and for the period April 4, 1995 (inception) through December 31, 1995 was $27,000, $29,445 and $5,524, respectively. NOTE 7. INCOME TAXES At December 31, 1997, the Company had net operating loss carryforwards of approximately $1,020,000, which expire in 2010 through 2012. At December 31, 1997, the expected tax benefit from the future realization of this operating loss carryforward of approximately $401,000 has been offset by an equivalent valuation allowance, in view of the uncertainty as to ultimate realization. NOTE 8. CAPITAL LEASES During 1997, the Company entered into capital lease arrangements for computer equipment and other office equipment. The leases, which expire in 1999 through 2000, require the Company to pay taxes, maintenance and insurance. Annual minimum commitments under the lease arrangements are as follows:
YEARS ENDING DECEMBER 31, - ------------------------- 1998........................................................ $ 91,540 1999........................................................ 88,550 2000........................................................ 24,678 2001........................................................ 5,592 2002........................................................ 3,741 -------- Total minimum payments...................................... 214,101 Less amount representing interest at approximately 10%...... 25,048 Present value of future lease payments...................... 189,053 Less current portion........................................ 76,421 -------- $112,632 --------
NOTE 9. GOING CONCERN As indicated in the accompanying financial statements, the Company and its wholly-owned subsidiaries, have incurred net operating losses, and as of December 31, 1997, has a working capital deficiency of approximately $775,000 and a stockholders' deficiency of approximately $610,000. During March 1998, Global Entrepreneurs Network, Inc. filed a voluntary petition for reorganization under Chapter 11 of the Federal Bankruptcy Code, and was authorized to continue managing and operating the business as debtor in possession subject to the control and supervision of the Bankruptcy Court. Management of the Company is aggressively seeking additional sources of capital and financing, and in August, 1998, the Company entered into a contract with Sage Networks, Inc. for the sale of certain of its assets for cash and assumption of certain of its liabilities, which sale was subsequently consummated in September 1998. The ability of the Company to continue as a going concern is dependent upon obtaining additional capital and financing. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. NOTE 10. SUBSEQUENT EVENTS In March 1998, the Company effected a 2 for 1 stock split. F-56 141 INDEPENDENT AUDITOR'S REPORT To the Stockholders Digiweb, Inc. We have audited the accompanying balance sheets of Digiweb, Inc. as of December 31, 1997 and 1998, and the related statements of income, cash flows, and changes in stockholders' equity for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Digiweb, Inc. as of December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. Urbach Kahn & Werlin PC New York, New York January 24, 1999 F-57 142 DIGIWEB, INC. BALANCE SHEETS DECEMBER 31, 1997 AND 1998
1997 1998 -------- -------- ASSETS Current Assets Cash...................................................... $115,643 $134,343 Accounts receivable, net of allowance for doubtful accounts of $12,075 and $43,431........................ 36,728 50,939 Prepaid expenses and other current assets................. -- 19,365 -------- -------- Total current assets.............................. 152,371 204,647 -------- -------- Equipment, net of related depreciation...................... 505,946 653,493 -------- -------- OTHER ASSETS Restricted cash............................................. 50,000 50,000 Security deposit............................................ 3,376 9,685 Other assets, net of amortization of $462 and $219.......... 2,220 1,977 -------- -------- Total other assets................................ 55,596 61,662 -------- -------- $713,913 $919,802 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Note payable -- current portion........................... $ 17,411 $ 41,637 Capital lease obligations -- current portion.............. 2,910 13,030 Accounts payable.......................................... 44,834 121,673 Advances from stockholder................................. 4,966 4,966 Deferred revenue.......................................... 20,239 66,381 Accrued expenses and other current liabilities............ 12,344 6,087 -------- -------- Total current liabilities......................... 102,704 253,774 -------- -------- Note payable -- non-current portion......................... 83,627 42,605 Capital lease obligations -- non-current portion............ 30,661 55,232 -------- -------- Total long-term liabilities....................... 114,288 97,837 -------- -------- Commitments Stockholders' equity Common stock, no par value, 1,000 shares authorized, issued and outstanding................................. 20,000 20,000 Retained earnings......................................... 476,921 548,191 -------- -------- 496,921 568,191 -------- -------- $713,913 $919,802 ======== ========
See Notes to Financial Statements F-58 143 DIGIWEB, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998 ---------- ---------- Net revenues................................................ $1,768,322 $2,685,676 Cost of revenues............................................ 729,157 1,118,913 ---------- ---------- Gross profit...................................... 1,039,165 1,566,763 ---------- ---------- Operating expenses: Selling, advertising and promotion........................ 17,997 31,577 General and administrative................................ 397,691 586,288 Interest expense.......................................... 10,020 16,829 Bad debt expense.......................................... 12,075 43,431 ---------- ---------- 437,783 678,125 ---------- ---------- Net income........................................ $ 601,382 $ 888,638 ========== ==========
See Notes to Financial Statements F-59 144 DIGIWEB, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997 AND 1998
COMMON STOCK ----------------- RETAINED SHARES AMOUNT EARNINGS TOTAL ------ ------- --------- --------- Balance, December 31, 1996........................ 1,000 $20,000 $ 39,470 $ 59,470 Stockholder distributions......................... (163,931) (163,931) Net income -- 1997................................ 601,382 601,382 ----- ------- --------- --------- Balance, December 31, 1997........................ 1,000 $20,000 $ 476,921 $ 496,921 Stockholder distributions......................... (817,368) (817,368) Net income -- 1998................................ 888,638 888,638 ----- ------- --------- --------- Balance, December 31, 1998........................ 1,000 $20,000 $ 548,191 $ 568,191 ===== ======= ========= =========
See Notes to Financial Statements F-60 145 DIGIWEB, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998 --------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 601,382 $ 888,638 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense.................. 138,210 246,329 Bad debt expense....................................... 12,075 31,356 Changes in assets and liabilities: Accounts receivable.................................... (9,873) (45,567) Prepaid expenses and other current assets.............. 9,308 (19,365) Accounts payable....................................... (44,505) 76,839 Deferred revenue....................................... (23,821) 46,142 Accrued expenses and other current liabilities......... 14,337 (6,257) --------- ---------- Net cash provided by operating activities......... 697,113 1,218,115 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Costs paid for trademark.................................. (1,655) -- Security deposits paid.................................... (1,981) (6,309) Deposits into cash reserve................................ (50,000) -- Purchase of equipment..................................... (302,257) (347,394) --------- ---------- Net cash used in investing activities............. (355,893) (353,703) --------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on shareholder loans................... (136,578) -- Principal payments on capital lease obligations........... (5,054) (11,548) Principal payments on notes payable....................... (9,931) (16,796) Shareholder distributions................................. (163,931) (817,368) --------- ---------- Net cash used in financing activities............. (315,494) (845,712) --------- ---------- Net increase in cash.............................. 25,726 18,700 CASH: Beginning of period....................................... 89,917 115,643 --------- ---------- End of period............................................. $ 115,643 $ 134,343 ========= ========== Supplemental Disclosure of Cash Flow Information Cash payments for interest................................ $ 10,020 $ 16,829 --------- ---------- Capital Lease Obligations Incurred for Purchase of Equipment................................................. $ 39,303 $ 85,542 --------- ---------- Note Payable Incurred for Leasehold Improvements............ $ 76,444 $ -- --------- ----------
F-61 146 DIGIWEB, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1998 NOTE 1. ORGANIZATION, BUSINESS COMBINATIONS AND ACQUISITIONS, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization: Digiweb, Inc. ("Digiweb" or the "Company") is a provider of Web hosting and co-located services catering to small and medium sized businesses. Based in College Park, Maryland, Digiweb offers three core services: shared server Web hosting, dedicated server Web hosting and co-located. Revenue Recognition: Recurring revenues consist primarily of monthly fees charged to members for Web hosting services and are recognized ratably over the periods for which services are rendered. Other revenues generally represent one-time set up fees and are recorded as earned. Deferred revenue consists primarily of the unexpired portion of annual prepaid membership fees. Property and Equipment: Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful life of the assets, generally three to five years for computers and computer related equipment and seven years for other non-computer furniture and equipment. Leasehold improvements are amortized over the term of the lease. Capital Leases: The Company leases certain of its autos and other computer related equipment under capital lease agreements. The assets and liabilities under capital leases are recorded at the lesser of the present value of future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets under lease. Assets under capital lease are amortized over the lesser of their estimated useful lives of three to five years or the term of the lease. Income Taxes: No provision for income taxes has been recorded in the financial statements due to the Company's S Corporation status. Individual stockholders are taxed on their respective shares of the entities' income and receive the benefits of the entities' income tax credits. Advertising: The Company expenses advertising costs as they are incurred. Use of Estimates in the Preparation of Financial Statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2. PROPERTY AND EQUIPMENT Property and equipment consist of the following at December 31, 1997 and 1998:
1997 1998 -------- ---------- Leasehold improvements............................... $ 76,444 $ 76,444 Office equipment..................................... 37,318 71,053 Furniture and fixtures............................... 11,006 13,703 Computer equipment................................... 488,363 799,325 Equipment under capital leases....................... 39,303 85,542 Auto................................................. 36,262 36,262 -------- ---------- 686,696 1,082,329 Less: accumulated depreciation....................... 182,750 428,836 -------- ---------- $505,946 $ 653,493 ======== ==========
F-62 147 DIGIWEB, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3. NOTE PAYABLE
1997 1998 ------- ------- Note payable (auto) in 42 monthly payments of $615, including interest at 11.15% and one balloon payment of $22,142 maturing in December 1999. The loan is collateralized by the automobile ......................... $30,753 $27,160 Note payable (leasehold improvements) in 60 monthly installments of $1,596, including interest at 9.25% maturing June 2002. ...................................... 70,285 57,082 ------- ------- Total............................................. 101,038 84,242 Less amounts due currently........................ 17,411 41,637 ------- ------- $83,627 $42,605 ------- -------
Future maturities of notes payable are as follows: 1999....................................................... $41,637 2000....................................................... 15,875 2001....................................................... 17,407 2002....................................................... 9,323 ------- $84,242 -------
NOTE 4. CAPITAL LEASES During 1996 and 1997, the Company entered into capital lease arrangements for computer equipment and automobiles. These leases expire in 1999 through 2000. Annual minimum commitments under these arrangements are as follows:
YEARS ENDING DECEMBER 31, - ------------ 1999........................................................ $18,528 2000........................................................ 58,503 ------- Total minimum payments...................................... 77,031 Less amount representing interest at approximately 10%...... (8,769) ------- Present value of future lease payments...................... 68,262 Less current portion........................................ 13,030 ------- $55,232 =======
NOTE 5. COMMITMENT Lease: The Company has an operating lease for its corporate office, which expires in May 2004. Rent expense for the years ending December 31, 1997 and 1998, was $47,395 and $69,764, respectively, including tenant charges for building improvements in 1998. In January 1999, the Company executed an additional lease for office expense which expires in December 2004. The Company also has leases with two internet line service providers, expiring in April 2000 and January 2002. Internet line service expense for the years ending December 31, 1997 and 1998, was $199,746 and $325,787, respectively. F-63 148 DIGIWEB, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Future minimum rental payments under these leases are as follows:
YEARS ENDED DECEMBER 31, AMOUNTS - ------------ ---------- 1999..................................................... $ 301,645 2000..................................................... 216,808 2001..................................................... 191,209 2002..................................................... 139,668 2003..................................................... 143,859 Thereafter............................................... 148,174 ---------- $1,141,363 ==========
Total rental expense was $47,395 and $69,764 for the years ending December 31, 1997 and 1998, respectively. NOTE 6. SUBSEQUENT EVENTS In January 1999, the Company entered into a non-binding Letter of Intent with Sage Networks, Inc. (Sage) for the sale of certain of its assets, at amounts in excess of their carrying values, and assumption of certain of its liabilities, for cash and stock in Sage. F-64 149 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Telephonetics International, Inc. and State of the Art, Inc. Miami, Florida We have audited the accompanying combined balance sheet of Telephonetics International, Inc. and Affiliate as of December 31, 1998, and the related combined statements of operations, capital deficit and cash flows for each of the two years in the period then ended. These combined financial statements are the responsibility of the Companies management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Telephonetics International, Inc. and Affiliate as of December 31, 1998, and the results of their operations and their cash flows for each of the two years in the period then ended in conformity with generally accepted accounting principles. BDO Seidman, LLP Miami, Florida January 15, 1999 F-65 150 TELEPHONETICS INTERNATIONAL, INC. AND AFFILIATE COMBINED BALANCE SHEET
DECEMBER 31, 1998 ------------ ASSETS Current assets Cash and cash equivalents................................. $ 106,812 Accounts receivable, net of $94,100 allowance for doubtful accounts (Notes 2 and 5)............................... 538,845 Inventories............................................... 50,836 Prepaid expenses and other current assets................. 34,197 ----------- Total current assets.............................. 730,690 Property and equipment, net (Note 1)........................ 68,598 ----------- $ 799,288 =========== LIABILITIES AND CAPITAL DEFICIT Current liabilities Note payable to bank (Note 2)............................. $ 90,000 Note payable to shareholder (Note 3)...................... 50,000 Accounts payable and accrued expenses..................... 137,610 ----------- Total current liabilities......................... 277,610 Deferred income............................................. 1,583,570 ----------- Total liabilities................................. 1,861,180 ----------- Commitments and Subsequent Event (Notes 7 and 10) CAPITAL DEFICIT (Note 9) Common stock, $.001 par value; 15,000,000 shares authorized; 6,000,000 shares issued and outstanding, Telephonetics International, Inc....................... 6,000 Common stock, $1.00 par value; 1,000 shares authorized, issued and outstanding, State of the Art, Inc.......... 1,000 Additional paid-in capital................................ 557,815 Deficit................................................... (1,626,707) ----------- Total capital deficit............................. (1,061,892) ----------- $ 799,288 ===========
See accompanying summary of accounting policies and notes to combined financial statements. F-66 151 TELEPHONETICS INTERNATIONAL, INC. AND AFFILIATE COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------ 1997 1998 ---------- ---------- Revenues (Note 5)........................................... $2,991,849 $2,769,606 Cost of sales............................................... 1,023,946 823,161 ---------- ---------- Gross profit................................................ 1,967,903 1,946,445 Selling, general and administrative (Notes 4 and 8)......... 2,561,887 2,687,852 ---------- ---------- Net loss.................................................... $ (593,984) $ (741,407) ========== ==========
See accompanying summary of accounting policies and notes to combined financial statements. F-67 152 TELEPHONETICS INTERNATIONAL, INC. AND AFFILIATE COMBINED STATEMENTS OF CAPITAL DEFICIT (NOTE 9)
SUBSCRIBED ADDITIONAL TOTAL COMMON COMMON PAID-IN TREASURY CAPITAL STOCK STOCK CAPITAL DEFICIT STOCK DEFICIT ------- ---------- ---------- ----------- -------- ----------- Balance at December 31, 1996... $ 8,375 $ -- $ 92,625 $ (71,139) $(31,185) $ (1,324) Stock subscription............. -- 100 494,900 -- -- 495,000 Dividends -- cash.............. -- -- -- (220,177) -- (220,177) Net loss....................... -- -- -- (593,984) -- (593,984) ------- ----- -------- ----------- -------- ----------- Balance at December 31, 1997... 8,375 100 587,525 (885,300) (31,185) (320,485) Retirement of treasury stock, 1,475,000 shares at cost..... (1,475) -- (29,710) -- 31,185 -- Issuance of common stock....... 100 (100) -- -- -- -- Net loss....................... -- -- -- (741,407) -- (741,407) ------- ----- -------- ----------- -------- ----------- Balance at December 31, 1998... $ 7,000 $ -- $557,815 $(1,626,707) $ -- $(1,061,892) ======= ===== ======== =========== ======== ===========
See accompanying summary of accounting policies and notes to combined financial statements. F-68 153 TELEPHONETICS INTERNATIONAL, INC. AND AFFILIATE COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ---------------------- 1997 1998 --------- --------- Operating Activities: Net loss.................................................. $(593,984) $(741,407) Adjustments to reconcile net loss to net cash used in operating activities: Provision for losses on accounts and notes receivable............................................ 20,850 110,000 Depreciation and amortization.......................... 31,451 74,758 (Increase) decrease in: Accounts receivable.................................. (128,543) (135,292) Inventories.......................................... 21,276 88,164 Prepaid expenses and other current assets............ 5,639 (24,232) Other assets......................................... (1,840) 1,840 Increase in: Accounts payable and accrued expenses................ 52,096 (96,962) Deferred income...................................... 224,400 552,511 --------- --------- Net cash used in operating activities....................... (368,655) (170,620) --------- --------- Investing Activities: Proceeds from disposition of investments.................. 161,523 -- Additions to property and equipment....................... (5,960) (4,943) Issuance of note receivable............................... (110,000) -- --------- --------- Net cash (used in) provided by investing activities......... 45,563 (4,943) --------- --------- Financing Activities: Proceeds from stock subscription.......................... 495,000 -- Proceeds from notes payable............................... 45,000 209,690 Payment of notes payable.................................. (44,889) (70,000) Dividends................................................. (220,177) -- --------- --------- Net cash provided by financing activities................... 274,934 139,690 --------- --------- Net decrease in cash and cash equivalents................... (48,158) (35,873) Cash, and cash equivalents at beginning of year............. 190,843 142,685 --------- --------- Cash, and cash equivalents at end of year................... $ 142,685 $ 106,812 ========= ========= Supplemental information: Cash paid for: Interest............................................... $ 2,600 $ 7,400 ========= =========
See accompanying summary of accounting policies and notes to combined financial statements. F-69 154 TELEPHONETICS INTERNATIONAL, INC. AND AFFILIATE SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Telephonetics International, Inc. (Telephonetics) and State of the Art, Inc. were incorporated in the State of Florida in 1982 and 1980, respectively, for the purpose of providing customized audio programming for telephone hold lines and other telecommunication applications. Presently such applications include automated attendant, voice mail, integrated voice response and computer/telephone integration applications, which collectively comprise the Companies' sole business segment. The Companies' principle administrative, production and sales facility is located in Miami, Florida. PRINCIPLES OF COMBINATION The combined financial statements include the accounts of Telephonetics International, Inc. and its substantially inactive affiliate corporation, State of the Art, Inc., collectively, the Companies. Telephonetics' majority shareholder owns 85% of State of the Art, Inc.'s common stock and substantially controls its operations. Intercompany advances and transactions have been eliminated. CASH AND CASH EQUIVALENTS For the purpose of the statements of cash flows, the Companies consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. REVENUE RECOGNITION A typical sales agreement for services entitles a customer to receive and requires the Companies to provide upon customer request specified programming services over a one year period. Billings to customers for such services are rendered at the date of the agreement and recognized as revenue on a straight-line basis over the term of the agreement. Revenue from telephone answering devices and accessory sales are recognized upon shipment to the customer. INVENTORIES Inventories are stated at the lower of cost or market using the first in, first-out method. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation and amortization is computed by the straight line method based on the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the life of the asset or the lease. INCOME TAXES The Companies, with the consent of all of their shareholders, have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions, the Companies do not provide for or pay Federal and certain State corporate income taxes on their taxable income. Instead, the stockholders are liable for individual Federal and State income taxes, if any, on their share of the Companies taxable income. PREPARATION OF COMBINED FINANCIAL STATEMENTS The preparation of the combined financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the combined financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from estimated amounts. F-70 155 TELEPHONETICS INTERNATIONAL, INC. AND AFFILIATE SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) CONCENTRATION OF CREDIT RISK The Companies' credit risk relates to cash and cash equivalents and accounts receivable. Cash and cash equivalents are primarily held in bank accounts and overnight investments. These banks are insured up to $100,000 by the FDIC. Periodically, cash balances may exceed this amount. The credit risk associated with accounts receivable is minimal due to the Companies' customer base and ongoing control procedures which monitor the credit worthiness of customers. NEW ACCOUNTING PRONOUNCEMENT SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The statement applies to all entities and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Companies did not engage in derivative instruments or hedging activities in any periods presented in the financial statements. F-71 156 TELEPHONETICS INTERNATIONAL, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS 1. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
ESTIMATED USEFUL DECEMBER 31, LIFE(YEARS) 1998 ----------- ------------ Office and other equipment................... 7 94,757 Studio and production equipment.............. 7 204,579 Furniture and fixtures....................... 7 82,120 Art work..................................... -- 5,475 --------- 386,931 Less: accumulated depreciation and amortization............................... (318,333) --------- $ 68,598 =========
2. NOTES PAYABLE At December 31, 1998, the Companies have a financing agreement with a financial institution which provides for a demand revolving line of credit with maximum borrowings of $150,000. Outstanding amounts under this facility bear annual interest at 1% over the prime rate (8.75% at December 31, 1998), payable monthly. Amounts borrowed under this facility are collateralized by Telephonetics International, Inc.'s accounts receivable and guaranteed by the Company's President and principal shareholder. At December 31, 1998, amounts outstanding under the line of credit aggregate $90,000. The revolving line of credit agreement, requires the Companies to comply with certain covenants, the most restrictive of which requires the Companies to maintain tangible net worth (as defined) of at least $500,000. At December 31, 1998, the Companies were not in compliance with this covenant and accordingly, the obligation could be called for repayment. 3. NOTE PAYABLE TO SHAREHOLDER On May 28, 1998, the Companies' principal shareholder loaned $70,000 to the Companies for working capital purposes. The note bears interest at 10% annually payable in monthly principal installments of $3,000 beginning September 1998. At December 31, 1998, outstanding amount due to the principal shareholder aggregated $50,000. 4. RELATED PARTY TRANSACTIONS During 1997 and 1998, the Companies paid rent to companies owned by the Companies' principal officers in the amount of $38,500 and $104,000, respectively. 5. SIGNIFICANT CUSTOMER For the years ended December 31, 1997 and 1998, one customer accounted for 47% and 55% of revenues, respectively; at December 31, 1998, accounts receivable from this customer amounted to approximately $337,600. 6. FINANCIAL INSTRUMENTS The carrying amounts of financial instruments including certificates of deposit, accounts receivable, accounts payable and debt approximated fair value due to the relatively short maturity. F-72 157 TELEPHONETICS INTERNATIONAL, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS The Companies rent office space and warehouse under non-cancelable leases. The minimum future rental commitment for leases in effect at December 31, 1998, including leases to related parties, approximates the following:
YEAR ENDING DECEMBER 31, - ------------------------ 1999...................................................... $ 98,700 2000...................................................... 92,600 2001...................................................... 72,000 2002...................................................... 72,000 2003...................................................... 54,000 -------- $389,300 ========
Rent expense in 1997 and 1998 aggregated approximately $102,000 and $160,000, including $38,500 and $104,000 to related parties, respectively. The Companies are required to pay a fee for the use of custom audio production. During 1997 and 1998, approximately $33,000 and $40,000 of royalties were paid, respectively. 8. DEFERRED COMPENSATION PLAN The Companies have a defined contribution plan established pursuant to Section 401(k) of the Internal Revenue Code. Employees contribute to the plan a percentage of their salaries, subject to certain dollar limitations and the Companies match a portion of the employees' contributions. The Companies' contributions to the plan for the years ended December 31, 1997 and 1998 aggregated $16,200 and $17,000, respectively. 9. CAPITAL DEFICIT On December 15, 1997 at a special meeting of the stockholders, an action was approved to recapitalize Telephonetics by reducing the par value of each share of common stock from $1 per share to $.001 per share and increasing the number of authorized shares of common stock from 100,000 shares to 15,000,000 shares. The then issued 100,000 shares of $1 par value common stock (comprised of 80,000 outstanding shares and 20,000 shares of Treasury stock) were subsequently exchanged (at a ratio of 73.75 to 1) for 7,375,000 shares of $.001 par value common stock, comprised of 5,900,000 outstanding shares and 1,475,000 shares of Treasury stock. All share and per share data in the accompanying financial statements have been retroactively restated to give effect to the recapitalization. In July 1997, an investor subscribed for the purchase of 100,000 shares of Telephonetics' recapitalized $.001 par value common stock for aggregate consideration of $495,000. The shares were issued during 1998 following consummation of the recapitalization. During the year ended December 31, 1997, Telephonetics temporarily acquired all of the outstanding shares of common stock of Quicklab Multimedia Centers, Inc. in exchange for 2,950,000 shares of common stock. To facilitate the transaction, for which the Company did not then have sufficient authorized and unissued shares of common stock, the Company's then sole stockholder contributed 2,950,000 shares owned by him to the Company which were issued to the seller. The acquisition was subsequently rescinded and the 2,950,000 shares of common stock were returned to the stockholder. In connection with the rescinded transaction, the Company loaned Quick Lab Multimedia Centers, Inc. $110,000 under the terms of an unsecured note receivable bearing interest at prime plus 1% (8.75% at F-73 158 TELEPHONETICS INTERNATIONAL, INC. AND AFFILIATE NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) December 31, 1998). During the year ended December 31, 1998, the Company recorded a $110,000 provision for possible losses on the note. 10. SUBSEQUENT EVENT In January 1999, the Companies entered into a letter of intent with Sage Networks, Inc. (Sage) for the sale of substantially all their assets and assumption of substantially all of their liabilities in exchange for $3,000,000 in cash and 140,000 shares of Sage common stock. 11. YEAR 2000 ISSUES (UNAUDITED) Like other companies, the Companies could be adversely affected if the computer systems we, our suppliers or customers use do not properly process and calculate date-related information and data from the period surrounding and including January 1, 2000. This is commonly known as the "Year 2000" issue. Additionally, this issue could impact non-computer systems and devices such as production equipment, elevators, etc. The Companies are implementing a plan to modify their business technologies to be ready for the year 2000 and are in the process of converting critical data processing systems. The project is expected to be substantially complete by June, 1999 and to cost between $125,000 and $150,000. The Companies do not expect this effort to have a significant effect on operations. F-74 159 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Net Daemons Associates, Inc.: We have audited the accompanying balance sheets of Net Daemons Associates, Inc. (the "Company") as of December 31, 1997 and 1998, and the related statements of income, stockholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1997 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Boston, Massachusetts Deloitte & Touche LLP February 2, 1999 (February 17, 1999 as to Note 10) F-75 160 NET DAEMONS ASSOCIATES, INC. BALANCE SHEETS DECEMBER 31, 1997 AND 1998
1997 1998 ---------- ---------- ASSETS Current Assets: Cash and equivalents...................................... $ 47,659 $ 274,100 Accounts receivable, net of allowance of $19,400 for 1997 and $36,500 for 1998................................... 804,290 882,664 Notes receivable.......................................... 9,988 4,979 Stockholders' receivable.................................. 35,759 5,936 Prepaid expenses and other................................ 11,071 20,901 Deferred income taxes..................................... 19,700 53,000 ---------- ---------- Total current assets.............................. 928,467 1,241,580 Property and Equipment, Net................................. 310,200 222,749 Deposits.................................................... 39,419 38,650 ---------- ---------- Total............................................. $1,278,086 $1,502,979 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Note payable -- bank...................................... $ 150,000 $ -- Accounts payable.......................................... 129,297 263,317 Accrued salaries, wages and related benefits.............. 76,137 189,291 Accrued profit sharing.................................... 26,000 30,000 Accrued expenses.......................................... 15,590 83,612 Current portion of long-term debt......................... 20,375 38,411 Current portion of subordinated stockholder debt.......... 135,960 -- Deferred revenue.......................................... 62,910 52,127 Accrued income taxes...................................... 84,552 102,955 ---------- ---------- Total current liabilities......................... 700,821 759,713 ---------- ---------- Long-Term Liabilities: Long-term debt............................................ 91,855 107,998 Subordinated stockholder debt............................. 804,040 885,214 ---------- ---------- Total long-term liabilities....................... 895,895 993,212 ---------- ---------- Deferred Income Taxes....................................... 12,800 21,500 ---------- ---------- Total liabilities................................. 1,609,516 1,774,425 ---------- ---------- Commitments (Note 8) Stockholders' Deficit: Preferred stock, $.01 per share par value, 21,389 shares authorized............................................. -- -- Common stock, $.01 per share par value, 2,500,000 shares authorized for 1997 and 2,578,611 shares authorized for 1998; 2,062,500 shares issued (Note 6)................. 20,625 20,625 Additional paid-in capital................................ 149,267 149,267 Retained earnings......................................... 438,678 498,662 Treasury stock, at cost -- 855,000 shares................. (940,000) (940,000) ---------- ---------- Total stockholders' deficit....................... (331,430) (271,446) ---------- ---------- Total............................................. $1,278,086 $1,502,979 ========== ==========
See notes to financial statements. F-76 161 NET DAEMONS ASSOCIATES, INC. STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998 ---------- ---------- Revenues.................................................... $4,656,975 $5,770,024 Costs of revenues........................................... 2,457,264 3,211,532 ---------- ---------- Gross profit................................................ 2,199,711 2,558,492 General and administrative expenses......................... 2,021,064 2,293,060 ---------- ---------- Income from operations...................................... 178,647 265,432 Other income (expense): Interest income........................................... 408 4,350 Loss on sale of equipment................................. (503) (3,163) Interest expense.......................................... (31,708) (105,835) ---------- ---------- Earnings before provision for income taxes.................. 146,844 160,784 Provision for income taxes.................................. 69,510 100,800 ---------- ---------- Net income.................................................. $ 77,334 $ 59,984 ========== ==========
See notes to financial statements. F-77 162 NET DAEMONS ASSOCIATES, INC. STATEMENTS OF STOCKHOLDERS' DEFICIT YEARS ENDED DECEMBER 31, 1997 AND 1998
COMMON STOCK ACCUMULATED TOTAL ------------------- ADDITIONAL OTHER TREASURY STOCK STOCKHOLDERS' PAR PAID-IN RETAINED COMPREHENSIVE -------------------- EQUITY SHARES VALUE CAPITAL EARNINGS INCOME SHARES COST (DEFICIT) --------- ------- ---------- -------- ------------- -------- --------- ------------- Balance, January 1, 1997..... 2,000,000 $20,000 $ 24,892 $361,344 $ -- -- $ -- $ 406,236 --------- ------- -------- -------- -------- -------- --------- --------- Comprehensive income -- net income................... -- -- -- 77,334 -- -- -- 77,334 Issuance of common shares................... 62,500 625 124,375 -- -- -- -- 125,000 Purchase of common stock... -- -- -- -- -- (855,000) (940,000) (940,000) --------- ------- -------- -------- -------- -------- --------- --------- Balance, December 31, 1997... 2,062,500 20,625 149,267 438,678 -- (855,000) (940,000) (331,430) Comprehensive income -- net income................... -- -- -- 59,984 -- -- -- 59,984 --------- ------- -------- -------- -------- -------- --------- --------- Balance, December 31, 1998... 2,062,500 $20,625 $149,267 $498,662 $ -- (855,000) $(940,000) $(271,446) ========= ======= ======== ======== ======== ======== ========= =========
See notes to financial statements. F-78 163 NET DAEMONS ASSOCIATES, INC. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997 AND 1998
1997 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 77,334 $ 59,984 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 104,245 135,129 Loss on sale of equipment.............................. 503 3,163 Accrued interest on subordinated stockholder debt...... -- 81,174 Deferred income taxes.................................. (10,390) (24,600) Changes in assets and liabilities: Accounts receivable.................................. (63,693) (78,374) Prepaid expenses and other........................... 2,144 (9,830) Accounts payable..................................... 61,626 134,020 Accrued salaries, wages and related benefits......... (33,863) 113,154 Accrued profit sharing............................... (39,000) 4,000 Accrued expenses..................................... (71,382) 68,022 Deferred revenue..................................... (30,270) (10,783) Accrued income taxes................................. (18,528) 18,403 --------- --------- Net cash provided by (used in) operating activities...................................... (21,274) 493,462 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of equipment.................................... (228,985) (51,792) Proceeds from sale of equipment........................... 6,200 951 Deposits.................................................. (39,419) 769 --------- --------- Net cash used in investing activities............. (262,204) (50,072) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings undernote payable -- bank..... 195,108 (150,000) Notes and stockholder receivable.......................... (13,025) 34,832 Proceeds from long-term borrowings........................ -- 54,892 Repayments of subordinated stockholder and long-term debt................................................... (4,138) (156,673) Proceeds from issuance of common stock.................... 100,000 -- --------- --------- Net cash (used in) provided by financing activities...................................... 277,945 (216,949) --------- --------- Increase (decrease) in cash and equivalents................. (5,533) 226,441 Cash and equivalents, beginning of year..................... 53,192 47,659 --------- --------- Cash and equivalents, end of year........................... $ 47,659 $ 274,100 ========= ========= Supplemental disclosures: Fiscal year 1997 noncash financing activities: Issuance of 12,500 common shares for a $25,000 note receivable from stockholder Repurchase of 855,000 common shares from stockholder for $940,000 note payable Cash paid during the year for: Interest............................................... $ 31,708 $ 22,303 ========= ========= Taxes.................................................. $ 98,428 $ 108,997 ========= =========
See notes to financial statements. F-79 164 NET DAEMONS ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND 1998 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Net Daemons Associates, Inc. ("NDA" or the "Company") specializes in providing business with team-based network and system administration solutions. NDA network and system services include outsourced network/system administration; LAN/WAN design and implementation; network growth and transition planning; Internet connectivity; security consulting; and customized network solutions. In addition, NDA provides Web site development and network consulting services. NEW ACCOUNTING PRONOUNCEMENTS -- During the year, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 130, "Reporting Comprehensive Income." Statement No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Comprehensive income encompasses all changes in stockholders' equity (except those arising from transactions with stockholders). The Company had no other components of comprehensive income. As this new standard only requires additional information in the financial statements, it does not affect the Company's financial position or results of operations. USE OF ESTIMATES -- The preparation of financial statements in accordance with generally accepted accounting principles requires the use of estimates. These estimates include the allowance for doubtful accounts and certain accruals and are based upon assumptions developed by management about the appropriate carrying value of assets and liabilities. Actual results could differ from these estimates. REVENUE RECOGNITION -- Revenue from consulting services is recognized as the services are rendered, provided that no significant obligations remain and collection of the receivable is considered probable. Generally, contracts call for billings on a time and materials basis; however, in instances when a fixed fee contract is signed, revenue is recognized on a percentage-of-completion basis. At December 31, 1997 and 1998, NDA had $62,910 and $52,127 of deferred revenue recorded, respectively. CONCENTRATION OF CREDIT RISK -- The majority of NDA's revenue is from customers in high technology industries, who are not required to provide collateral. NDA's customers are dispersed over a wide geographic area and are subject to periodic review under the Company's credit policies. The Company does not believe that it is subject to any unusual credit risks, other than the normal level of risk attendant to operating its business. PROPERTY AND EQUIPMENT -- Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives (three to seven years). Leasehold improvements are amortized over the life of the lease. INCOME TAXES -- Deferred income taxes are provided for the tax consequences of differences in bases between assets and liabilities for book and tax purposes. Deferred taxes are measured using currently enacted tax rates which are expected to be in effect when such differences reverse. STOCK-BASED COMPENSATION -- Compensation cost associated with awards of stock or options to employees is measured using the intrinsic-value method prescribed by Accounting Principles Board Opinion No. 25 (see Note 6). RECLASSIFICATIONS -- Certain amounts in the financial statements have been reclassified to conform with the 1998 presentation. F-80 165 NET DAEMONS ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. STOCKHOLDERS' RECEIVABLE At December 31, 1998, stockholders' receivable consisted of $5,936 in notes from NDA officers. The December 31, 1997 stockholders' receivable balance consisted of a $25,000 note relating to the purchase of 12,500 shares of NDA's common stock (paid on February 19, 1998) and $10,759 in notes from NDA officers. 3. PROPERTY AND EQUIPMENT Property and equipment consisted of the following at December 31:
1997 1998 --------- --------- Computer equipment and software...................... $ 329,241 $ 372,753 Furniture and fixtures............................... 50,632 54,194 Leasehold improvements............................... 13,939 13,939 Office equipment..................................... 28,405 33,124 Automobiles.......................................... 62,580 56,841 --------- --------- Total...................................... 484,797 530,851 Less accumulated depreciation........................ (174,597) (308,102) --------- --------- Property and equipment, net.......................... $ 310,200 $ 222,749 ========= =========
4. NOTE PAYABLE -- BANK Note payable -- bank represents the outstanding balance under a $400,000 working capital line of credit and a $100,000 line with a term conversion feature ("the conversion line"). Interest on the lines are payable monthly based on prime (7.75% at December 31, 1998). The lines are secured by and cross- collateralized by substantially all assets of NDA, are personally guaranteed by NDA's stockholders, and require the maintenance of customary financial covenants including minimum retained earnings of $475,000. The lines are subject to renewal annually and expires on July 1, 1999. The conversion line is to be utilized to finance 80% of the purchase price of new equipment and converts to a term loan in July 1999. After conversion, the loan will be payable in 48 equal monthly installments of principal plus interest at the bank's then prime rate. Amounts available under the lines were $500,000 at December 31, 1998. 5. LONG-TERM DEBT EQUIPMENT LOAN -- The equipment loan requires monthly principal and interest payments with principal payments based on a four-year straight-line amortization schedule. Interest is based on prime (7.75% at December 31, 1998). The equipment loan is secured by substantially all assets of NDA and is personally guaranteed by NDA's stockholders. TERM LOAN -- In connection with the acquisition of an automobile in June 1996, NDA entered into a term loan (the "term loan") with a bank for $23,504. The term loan requires monthly payments of principal and interest (at 8.75%) through May 2001. STOCKHOLDER DEBT -- In connection with the repurchase of 855,000 shares of common stock in December 1997, the Company entered into a $940,000 note payable agreement (the "note payable"). This agreement calls for principal payments in the amount of $125,333 to be made annually in 1999 through 2003 with a balloon payment in 2004. However, NDA is only obligated to make payments, subject to certain limitations, based on net profit as of the end of the fiscal year preceding the relevant payment date. The note payable has an attached interest rate of prime plus 1% (8.75% at December 31, 1998). The principal balance is increased annually for the accrual of interest. The note payable is secured on a pro F-81 166 NET DAEMONS ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) rata basis by a security interest in the noted stock. Principal payments due under the equipment loan, term loan and stockholder debt are as follows:
EQUIPMENT STOCKHOLDER YEAR ENDING DECEMBER 31, LOAN TERM LOAN DEBT TOTAL - ------------------------ --------- --------- ----------- ---------- 1999......................... $ 33,453 $ 4,958 $ -- $ 38,411 2000......................... 33,453 5,376 125,333 164,162 2001......................... 33,453 2,264 125,333 161,050 2002......................... 33,452 -- 125,333 158,785 2003......................... -- -- 125,333 125,333 Thereafter................... -- -- 383,882 383,882 -------- ------- -------- ---------- Total.............. $133,811 $12,598 $885,214 $1,031,623 ======== ======= ======== ==========
6. STOCKHOLDERS' DEFICIT COMMON STOCK -- During fiscal year 1997, NDA issued 62,500 common shares at a price of $2.00 per share. Of the $125,000 in proceeds due from the sale of these shares, $100,000 had been collected, leaving an outstanding balance of $25,000 at December 31, 1997. On February 19, 1998, the outstanding balance was collected. TREASURY STOCK -- In December 1997, NDA purchased 855,000 shares of common stock. NDA's purchases of shares of common stock are recorded as "Treasury Stock" and result in a reduction of "Stockholders' Deficit." STOCK OPTION PLAN -- NDA's Incentive Stock Option Plan (the "Plan"), established in December 1996, provides for grants of options to purchase up to 200,000 shares of common stock. Grants may be in the form of incentive stock options or nonqualified options. Exercise prices and vesting periods are determined by the Board on the date of grant. Options generally vest ratably over a four-year period. A summary of activity in the Plan is as follows:
WEIGHTED- AVERAGE NUMBER EXERCISE OF SHARES PRICE --------- --------- Outstanding at January 1, 1997.............................. 77,900 $0.20 Granted..................................................... 106,100 2.00 Cancelled................................................... (41,000) 0.20 ------- Outstanding at December 31, 1997............................ 143,000 $1.54 Granted..................................................... 116,560 3.08 Cancelled................................................... (60,300) 1.96 ------- Outstanding at December 31, 1998............................ 199,260 $2.31 =======
F-82 167 NET DAEMONS ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth information regarding options outstanding at December 31, 1998:
WEIGHTED- NUMBER NUMBER AVERAGE OF EXERCISE CURRENTLY REMAINING OPTIONS PRICE EXERCISABLE LIFE - ------- -------- ----------- --------- 32,900 $0.20 23,800 8.0 years 66,160 2.00 33,784 8.6 100,200 3.20 35,600 9.5 - ------- ------ 199,260 93,184 ======= ======
PRO FORMA DISCLOSURE -- As described in Note 1, NDA uses the intrinsic-value method to measure compensation for equity awards to employees. Had NDA used the fair-value method to measure compensation, reported net income would have been $64,577 in 1997 and $9,097 in 1998. The minimum-value method was used to measure the fair value of equity awards in this disclosure. Key assumptions used to apply this pricing model were average risk-free rates of 6% and expected option lives of ten years. The estimated fair value of awards made in 1997 and 1998 were $94,710 and $190,332, respectively. RESERVED SHARES -- At December 31, 1997 and 1998, 200,000 shares of common stock were reserved for issuance upon exercise of options. 7. INCOME TAXES The provision for income taxes consisted of the following for the years ended December 31:
1997 1998 -------- -------- Current: Federal.............................................. $ 58,900 $112,000 State................................................ 21,000 26,500 -------- -------- Total........................................ 79,900 138,500 -------- -------- Deferred: Federal.............................................. (9,039) (28,800) State................................................ (1,351) (8,900) -------- -------- Total........................................ (10,390) (37,700) -------- -------- Provision for income taxes............................. $ 69,510 $100,800 ======== ========
Significant components of the Company's deferred tax assets and liabilities at December 31 were as follows:
1997 1998 -------- -------- Deferred tax assets -- current: Accrued vacation and benefits........................ $ 12,000 $ 38,000 Allowance for doubtful accounts...................... 7,700 15,000 -------- -------- Net deferred tax asset -- current...................... $ 19,700 $ 53,000 ======== ======== Deferred tax liability -- noncurrent: Depreciation......................................... $(12,800) $(21,500) ======== ========
F-83 168 NET DAEMONS ASSOCIATES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation between the statutory and effective tax rates for the years ended December 31 were as follows:
1997 1998 ---- ---- Statutory tax rate.......................................... 34.0% 34.0% State income taxes -- net of federal benefit................ 6.2 6.2 Nondeductible expenses...................................... 7.1 6.4 Change in prior year's tax estimate......................... -- 16.1 ---- ---- 47.3% 62.7% ==== ====
8. COMMITMENTS OPERATING LEASES -- The Company leases its office facilities and certain equipment under noncancelable operating leases. Total rent expense was $169,609 and $200,098 for the years ended December 31, 1997 and 1998, respectively. Future minimum payments under noncancelable operating leases for the years ending December 31 are as follows: 1999.............................................. $222,523 2000.............................................. 44,918 2001.............................................. 13,375
9. PROFIT-SHARING PLAN NDA has a profit-sharing plan (the "plan") pursuant to Section 401(k) of the Internal Revenue Code (the "Code"). The plan allows participants to make pretax contributions not in excess of the maximum allowed under the Code. The plan does not provide matching contributions by the employer. The profit-sharing portion of the plan consists of contributions made by NDA at the discretion of the Board. Profit-sharing expense was approximately $26,000 in 1997 and $30,000 in 1998. 10. SUBSEQUENT EVENT On February 12, 1999 Sage Networks, Inc. ("Sage") agreed to purchase all the outstanding stock of the Company. The purchase price consists of cash of $500,000 and 425,000 shares of Sage common stock. In addition Sage has agreed to pay certain officers of the Company $2,417,000 for non-compete agreements and to pay approximately $441,000 for outstanding stock options of the Company. The Agreement also provides for contingent consideration of $500,000 in cash and 74,963 shares of Sage common stock if certain gross revenue and gross margin targets are met in the twelve months period following the acquisition. The transaction closed on February 17, 1999. As a result of the acquisition, on February 12, 1999, the Company paid all of its outstanding bank debt. In connection with the repayment, all bank credit facilities and borrowing availability was cancelled. The Company had service revenue from Sage of approximately $94,000 in 1998. * * * * * * F-84 169 REPORT OF INDEPENDENT AUDITORS To Shareholder Rancher 1 Corp. (formerly known as Interliant, Inc.) We have audited the accompanying balance sheets of Rancher 1 Corp. (formerly known as Interliant, Inc.) (the "Company") as of December 31, 1997 and 1998, and the related statements of operations, shareholder's deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Rancher 1 Corp. (formerly known as Interliant, Inc.) at December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Houston, Texas February 26, 1999, except for Note 11, as to which the date is March 10, 1999 F-85 170 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) BALANCE SHEETS
DECEMBER 31 -------------------------- 1997 1998 ----------- ----------- ASSETS Current assets: Cash...................................................... $ 917,566 $ 972,467 Accounts receivable, net of allowance of $103,940 in 1997 and $150,276 in 1998................................... 1,860,152 1,775,939 Unbilled revenue.......................................... 1,758,012 1,748,234 Prepaid expenses and other................................ 168,428 391,359 ----------- ----------- Total current assets........................................ 4,704,158 4,887,999 Property and equipment, net................................. 5,693,201 5,661,351 Investment in and advances to joint venture................. 72,145 149,067 ----------- ----------- Total assets................................................ $10,469,504 $10,698,417 =========== =========== LIABILITIES AND SHAREHOLDER'S DEFICIT Current liabilities: Accounts payable and accrued expenses..................... $ 1,597,521 $ 1,909,514 Notes payable to shareholder and related party............ 10,825,000 15,125,000 Current portion of capital lease obligations.............. 30,083 27,919 ----------- ----------- Total current liabilities................................... 12,452,604 17,062,433 Capital lease obligations................................... 136,238 110,009 Commitments and contingencies Shareholder's deficit: Common stock, $.01 par value; 40,000,000 shares authorized; 10,000,000 shares issued and outstanding... 100,000 100,000 Additional paid-in capital................................ 400,000 400,000 Accumulated deficit....................................... (2,619,338) (6,974,025) ----------- ----------- Total shareholder's deficit................................. (2,119,338) (6,474,025) ----------- ----------- Total liabilities and shareholder's deficit................. $10,469,504 $10,698,417 =========== ===========
See accompanying notes. F-86 171 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 ---------------------------------------- 1996 1997 1998 ---------- ----------- ----------- Revenues: Network service fees............................... $8,401,463 $15,316,756 $18,886,503 Consulting......................................... -- 1,423,071 2,020,598 Other.............................................. 4,504 136,037 265,768 ---------- ----------- ----------- 8,405,967 16,875,864 21,172,869 Costs and expenses: Cost of service revenue............................ 5,056,552 9,414,476 11,880,983 General and administrative......................... 1,523,209 2,866,509 4,137,668 Sales and marketing................................ 1,697,214 4,408,597 6,722,997 Depreciation and amortization...................... 783,208 1,642,140 2,525,530 ---------- ----------- ----------- 9,060,183 18,331,722 25,267,178 ---------- ----------- ----------- Operating loss....................................... (654,216) (1,455,858) (4,094,309) Other income (expense): Equity in losses of joint venture.................. (15,767) (214,735) (144,735) Interest expense................................... (218,394) (469,817) (715,643) Gain on settlement of litigation................... -- 1,351,630 600,000 ---------- ----------- ----------- (234,161) 667,078 (260,378) ---------- ----------- ----------- Net loss............................................. $ (888,377) $ (788,780) $(4,354,687) ========== =========== ===========
See accompanying notes. F-87 172 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) STATEMENTS OF SHAREHOLDER'S DEFICIT
COMMON STOCK ADDITIONAL ---------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ---------- -------- ---------- ----------- ----------- Balance at December 31, 1995........................ 2,500,000 $ 25,000 $475,000 $ (942,181) $ (442,181) Stock split effected as a stock dividend........... 7,500,000 75,000 (75,000) -- -- Net loss.................... -- -- -- (888,377) (888,377) ---------- -------- -------- ----------- ----------- Balance at December 31, 1996........................ 10,000,000 100,000 400,000 (1,830,558) (1,330,558) Net loss.................... -- -- -- (788,780) (788,780) ---------- -------- -------- ----------- ----------- Balance at December 31, 1997........................ 10,000,000 100,000 400,000 (2,619,338) (2,119,338) Net loss.................... -- -- -- (4,354,687) (4,354,687) ---------- -------- -------- ----------- ----------- Balance at December 31, 1998........................ 10,000,000 $100,000 $400,000 $(6,974,025) $(6,474,025) ========== ======== ======== =========== ===========
See accompanying notes. F-88 173 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ----------------------------------------- 1996 1997 1998 ----------- ----------- ----------- OPERATING ACTIVITIES Net loss............................................ $ (888,377) $ (788,780) $(4,354,687) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation...................................... 734,331 1,403,842 1,952,629 Amortization...................................... 48,877 525,391 572,901 Loss on disposals of property and equipment....... 115,037 14,856 3,783 Provision for doubtful accounts................... 50,178 97,433 150,966 Equity in losses of joint ventures................ 15,767 214,735 144,735 Changes in operating assets and liabilities: Accounts receivable and unbilled revenue....... (1,338,004) (1,660,351) (56,975) Prepaid expenses and other..................... (207,233) 91,727 (222,931) Accounts payable and accrued liabilities....... 1,378,521 (136,301) 311,993 ----------- ----------- ----------- Net cash used in operating activities............... (90,903) (237,448) (1,497,586) INVESTING ACTIVITIES Proceeds from sale of property and equipment........ 16,889 8,281 4,000 Expenditures for property and equipment............. (4,082,093) (2,834,563) (2,501,463) Investments in and advances to joint venture........ (55,561) (247,086) (221,657) ----------- ----------- ----------- Net cash used in investing activities............... (4,120,765) (3,073,368) (2,719,120) FINANCING ACTIVITIES Net proceeds from notes payable from shareholder and related party..................................... 4,423,623 3,901,698 4,271,607 ----------- ----------- ----------- Net cash provided by financing activities........... 4,423,623 3,901,698 4,271,607 ----------- ----------- ----------- Increase in cash.................................... 211,955 590,882 54,901 Cash at beginning of year........................... 114,729 326,684 917,566 ----------- ----------- ----------- Cash at end of year................................. $ 326,684 $ 917,566 $ 972,467 =========== =========== ===========
See accompanying notes. F-89 174 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Interliant, Inc. (the "Company") was organized under the laws of the State of Texas on July 12, 1993, under the name Wolf Communications Company. The Company's name was changed to Interliant, Inc., effective January 20, 1997. Interliant, Inc., is a privately owned company that provides secure network-based hosting and messaging services on a Lotus Notes platform, enabling worldwide continuously available remote access to business-critical applications and data. The Company also provides vertical solutions for various markets including distance learning, sales force automation, legal, and mortgage banking. It is also developing hosting solutions for Microsoft Exchange and Microsoft's Commercial Internet System, as well as a remote server management solution. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's financial instruments, except notes payable to shareholder and related party and the capital lease obligation, approximate fair value. The fair value of notes payable to shareholder and related party and the capital lease obligation are not determinable as the Company's borrowings are from the shareholder and a related party and the capital lease obligation is guaranteed by the shareholder. 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 and accompanying notes. Actual results could differ from those estimates. STOCK-BASED COMPENSATION The Company grants stock options to employees for shares with an exercise price no less than the value of the shares at the date of grant. The company accounts for such stock option grants in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). REVENUE RECOGNITION Revenues consist primarily of network service and related fees for services, generally provided under contractual periods ranging from one to twelve months. Revenues from these services are generally recognized when the services are performed. Revenues in excess of amounts billed are accrued and presented as unbilled revenue in the accompanying balance sheets. ADVERTISING EXPENSES All advertising costs are expensed as incurred. Advertising expenses were approximately $122,000, $415,000, and $571,000 for the years ended December 31, 1996, 1997, and 1998, respectively. COST OF SERVICE REVENUE Cost of service revenue includes internally-funded research and development costs, which are expensed as incurred. Research and development costs were approximately $600,000, $1,100,000, and $1,500,000 in 1996, 1997, and 1998, respectively. F-90 175 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets as follows: Computer equipment and software............................. 3 years Furniture, fixtures and office equipment.................... 5 to 7 years
Amortization of leasehold improvements is provided using the straight-line method over the shorter of the remaining estimated useful lives or the lease terms. Depreciation expense in 1997 of approximately $287,000 is presented on the statements of operations as an offset to the gain on settlement of litigation. The costs of ordinary maintenance and repairs are charged to expense while renewals and replacements are capitalized. INCOME TAXES The shareholder has elected S corporation status for the Company for federal income tax purposes. Under S corporation regulations, revenues and expenses of the Company are reportable for federal income tax purposes in the income tax return of the shareholder. Accordingly, no provision for federal income tax is included in the accompanying financial statements. CONCENTRATION OF CREDIT RISK Financial instruments which subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company provides credit, in the normal course of business, to a number of geographically dispersed customers, primarily within the United States. Collateral is generally not required on these receivables. The Company maintains allowances for potential credit losses, and customers can be denied access to services in the event of non-payment. During 1997 and 1998, the Company's largest customer represented approximately 10% of total revenues. RECENTLY ISSUED ACCOUNTING STANDARDS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components. Certain items which were previously required to be reported separately in shareholder's equity, such as unrealized gains or losses on available-for-sale securities, minimum pension liability adjustments and foreign currency translation adjustments, are now required to be included in other comprehensive income. For 1996, 1997, and 1998 the Company's comprehensive income was the same as net income, and the adoption of SFAS 130 had no impact on the presentation of the financial statements. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS 131 requires disclosure of certain information regarding operating segments, products, services, geographic areas of operation and major customers. The disclosures prescribed by SFAS 131 are effective for the year ended December 31, 1998. The Company has determined that it does not have separately reportable segments, as defined by SFAS 131, and thus no segment disclosures have been presented. In March 1998, the AICPA issued Statement of Position 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (SOP 98-1), which is effective for the financial statements for fiscal years beginning after December 15, 1998. SOP 98-1 will result in the capitalization of F-91 176 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) certain qualifying costs incurred in the development of software for internal use; however, the adoption of SOP 98-1 is not expected to have a material impact on the Company's earnings or financial position. 2. INVESTMENT IN AND ADVANCES TO JOINT VENTURE The Company is a 50% partner in TITLELINK, L.L.C., a joint venture which offers a network-based service to facilitate the closing of real estate transactions within the financial community. The Company provides working capital requirements as needed. The Company has provided an allowance against its advances to the joint venture of approximately $30,000 and $114,000 at December 31, 1997 and 1998, respectively, which is included in investment in and advances to joint venture. 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31:
1997 1998 ---------- ----------- Computer equipment and software............................ $4,926,000 $ 7,298,000 Furniture, fixtures and office equipment................... 1,559,000 1,682,000 Leasehold improvements..................................... 2,659,000 2,665,000 ---------- ----------- 9,144,000 11,645,000 Less accumulated depreciation and amortization............. 3,451,000 5,984,000 ---------- ----------- $5,693,000 $ 5,661,000 ========== ===========
4. NOTES PAYABLE TO SHAREHOLDER AND RELATED PARTY Notes payable to shareholder and related party includes unsecured borrowings from the Company's shareholder totaling $4,310,000 and $7,910,000 at December 31, 1997 and 1998, respectively, and unsecured borrowings from a related party totaling $6,515,000 and $7,215,000 at December 31, 1997 and 1998, respectively. These advances have been used to fund the Company's operations. These notes bear interest, payable monthly, at annual rates ranging from 5.5% to 6.1% in 1997, and 4.3% to 5.6% in 1998. The borrowings mature on March 31, 1999. The Company paid interest associated with the notes payable to affiliates of approximately $199,000, $449,000, and $696,000 in 1996, 1997, and 1998, respectively. 5. RELATED PARTY TRANSACTIONS The Company has an informal agreement with a related party whereby the Company provides certain administrative services to the related party. The related party compensates the Company for these services on a monthly basis, which totaled $12,000, $48,000, and $48,000 in 1996, 1997, and 1998, respectively. The amount due to the Company for these services totaled $12,000 at December 31, 1998, and there was no related amount due to the Company at December 31, 1997. 6. EMPLOYEE BENEFIT PLAN Substantially all of the Company's employees are participants in a discretionary, defined contribution plan with salary deferral contributions as provided under Section 401(k) of the Internal Revenue Code. Voluntary salary deferral contributions are made by employees, subject to a maximum of 15% of annual compensation and are matched 100% of the first 5% by Company contributions. The charge to expense for F-92 177 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) the Company's contributions was $109,000, $254,000, and $404,000 for the years ended December 31, 1996, 1997, and 1998, respectively. 7. STOCK SPLIT Effective December 16, 1996, the Board of Directors approved a four-for-one split of the Company's common stock effected in the form of a stock dividend, resulting in a total of 10,000,000 shares outstanding. All references in the financial statements which relate to the number of shares of Common Stock have been restated to reflect the stock split. 8. EMPLOYEE STOCK OPTION PLAN In 1995, the Company's sole director (the "Director") adopted the 1995 Employee Stock Option Plan (the "Option Plan"), pursuant to which options to purchase up to an aggregate of 4,000,000 shares of the Company's common stock may be granted. The Option Plan is administered by the Director. Among other things, the Director determines which employees will receive options, the number of shares covered by any option granted, and the exercise price and other terms and conditions of each such option. All options granted under the Option Plan are nontransferable except by the laws of descent and distribution. All options also expire ten years after the date of grant or upon earlier termination of employment unless due to death, disability, or retirement, in which case the option remains exercisable for an additional three months in the case for Incentive Options and one year for Non-Qualified Options. Options granted vest over periods ranging from immediate vesting to vesting in equal increments over four years from the date of grant. The exercise price of the options approximated the fair value of the common stock on the date of grant, and accordingly, no compensation expense has been recorded. The weighted-average remaining contractual life of options at December 31, 1996, 1997, and 1998 was 9.7 years, 8.8 years, and 8.0 years, respectively. F-93 178 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A summary of the Option Plan as of December 31, 1996, 1997, and 1998 and changes during the years ended on those dates are as follows:
WEIGHTED- AVERAGE EXERCISE SHARES PRICES --------- --------- Options outstanding January 1, 1996......................... 340,000 $.05 Granted................................................... 2,242,000 $.05 Exercised................................................. -- -- Surrendered............................................... -- -- --------- ---- Options outstanding December 31, 1996....................... 2,582,000 $.05 Granted................................................... 646,100 $.05 Exercised................................................. -- -- Surrendered............................................... (214,000) $.05 --------- ---- Options outstanding December 31, 1997....................... 3,014,100 $.05 Granted................................................... 801,100 $.05 Exercised................................................. -- -- Surrendered............................................... (173,200) $.05 --------- ---- Options outstanding December 31, 1998....................... 3,642,000 $.05 ========= ==== Exercisable at: December 31, 1996......................................... 2,468,000 $.05 ========= ==== December 31, 1997......................................... 2,620,000 $.05 ========= ==== December 31, 1998......................................... 2,847,000 $.05 ========= ====
At December 31, 1996, 1997, and 1998, the Company had reserved 4,000,000 shares of common stock for issuance in connection with the exercise of stock options. The Company has elected to follow APB 25 and related interpretations in accounting for employee stock options. Accordingly, no compensation expense has been recognized for these stock options. Pro forma information regarding net income and earnings per share is required by FASB Statement No. 123, Accounting for Stock-Based Compensation ("FAS 123"), which also requires that the information be determined as if the Company had accounted for its employee stock options under the fair value method of FAS 123. The fair value for these options was estimated at the date of grant using a minimum value option pricing model with the following weighted-average assumptions:
1996 1997 1998 ------- ------- ------- Risk-free interest rate................................. 6.5% 5.6% 4.8% Dividend yield.......................................... 0.0% 0.0% 0.0% Weighted-average expected life of options............... 5 years 5 years 5 years
The minimum value method calculated the fair value of these options as zero; therefore, pro forma net loss is the same as net loss for each year presented. 9. COMMITMENTS AND CONTINGENCIES The Company leases various office space and equipment under noncancelable operating leases expiring on various dates through 2001, generally with options to renew under terms consistent with the original F-94 179 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) leases. The gross balance of assets recorded under capital leases which are included in property and equipment at December 31, 1997 and 1998 was approximately $287,000 and $291,000, respectively. Associated accumulated depreciation was approximately $95,000 and $165,000 at December 31, 1997 and 1998, respectively. At December 31, 1998, future lease payments are as follows:
CAPITAL OPERATING LEASES LEASES -------- ---------- 1999........................................................ $ 41,000 $ 983,000 2000........................................................ 41,000 898,000 2001........................................................ 41,000 524,000 2002........................................................ 35,000 -- 2003........................................................ -- -- -------- ---------- Total minimum lease payments................................ 158,000 $2,405,000 ========== Less amount representing interest........................... 20,000 -------- Present value of capital lease obligations.................. 138,000 Less current portion of capital lease obligations........... 28,000 -------- Long-term capital lease obligations......................... $110,000 ========
Total rent expense for operating leases for the years ended December 31, 1996, 1997, and 1998 was $797,000, $1,700,000, and $1,449,000, respectively. The Company has a facility with a bank for letters of credit totaling $541,000 at December 31, 1998 relating to the Company's data center operating lease. There were no amounts outstanding under the letter of credit facility at December 31, 1998. 10. LITIGATION In 1997 and 1998, the Company received proceeds of $2,500,000 and $600,000, respectively, from the settlement of legal claims relating to a trademark dispute. These amounts are presented in the statements of operations net of costs related to the settlement of $1,148,000 in 1997. The Company is involved in various lawsuits and legal proceedings which have arisen in the normal course of business. While the ultimate results of these matters cannot be predicted with certainty, management does not expect them to have a material adverse effect on the financial position of the Company. 11. SUBSEQUENT EVENT In February 1999, the shareholder reached an agreement in principle to sell substantially all of the assets and certain liabilities of the Company. The transaction closed on March 10, 1999. The Company has obtained approval of the proposed transaction with the holders of outstanding borrowings. On March 10, 1999, the Company changed its name to Rancher 1 Corp. 12. YEAR 2000 ISSUE (UNAUDITED) Currently, many computer and software products are coded to accept two-digit entries in the date code field. These date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems, including the Company's, may need to be upgraded or replaced in order to comply with Year 2000 requirements. We F-95 180 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) recognize the need to ensure that our operations will not be adversely impacted by Year 2000 software and computer system failures. State of Readiness The Company has made a preliminary assessment of the Year 2000 readiness of its information technology ("IT") systems, including the hardware and software that enable it to provide and deliver its solutions, and its non-IT systems. The Company's plan consists of (i) quality assurance testing of its internally developed proprietary software and systems; (ii) contacting third-party suppliers, vendors and licensors of material hardware, software and services that are both directly and indirectly related to the delivery of the Company's solutions to it customers; (iii) assessment of repair or replacement requirements; (iv) repair or replacement; (v) implementation; and (vi) creation of contingency plans in the event of Year 2000 failures. The Company is currently assessing the materiality of its IT and non-IT systems and will seek assurances of Year 2000 compliance from providers of material systems. Until such testing is complete and such vendors and providers are contacted, the Company will not be able to completely evaluate whether its IT systems or non-IT systems will need to be revised or replaced. The Company plans to complete its Year 2000 evaluation during the second half of 1999. Costs To date, the Company has not incurred any material expenditures in connection with identifying or evaluating Year 2000 compliance issues. Most of its expenses have related to, and are expected to continue to relate to, the internal staffing costs associated with the evaluation process and Year 2000 compliance matters generally. At this time, the Company does not possess the information necessary to estimate the potential costs of revisions to its software and systems should such revisions be required or the replacement of third party software, hardware or services that are determined not to be Year 2000 compliant. Although the Company does not anticipate that such expenses will be material, such expenses if higher than anticipated, could have a material adverse effect on the Company's business, financial condition and results of operations. Risks The Company is not currently aware of any Year 2000 compliance problems relating to its IT or non-IT systems that would have a material adverse effect on the Company's business, results of operations and financial condition. There is no assurance that the Company will not discover Year 2000 compliance problems in its software and systems that will require substantial revisions. In addition, there is no assurance that third party software, hardware or services incorporated into the Company's material IT and non-IT systems will not need to be revised or replaced, all of which could be time consuming and expensive. The failure of the Company to fix or replace its software, hardware or services on a timely basis could result in lost revenues, increased operating costs and the loss of customers and other business interruptions, any of which could have a material adverse effect on the Company's business, results of operations and financial condition. Moreover, the failure to adequately address Year 2000 compliance issues in its IT and non-IT systems could result in claims of mismanagement, misrepresentation or breach of contract and related litigation, which could be costly and time-consuming to defend. In addition, there can be no assurance that governmental agencies, utility companies, telecommunication companies, other Internet service providers, third party service providers, hardware and software manufacturers and others outside Interliant control will be Year 2000 compliant. The failure by such entities to be Year 2000 compliant could result in a systemic failure beyond the control of the Company such as a prolonged Internet, telecommunications or electrical failure, which could also prevent the Company from delivering its services to its customers, decrease the use of the Internet or prevent users from accessing the Web sites F-96 181 RANCHER 1 CORP. (FORMERLY KNOWN AS INTERLIANT, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) of its customers. Any of these occurrences could have a material adverse effect on the Company's business, financial condition and results of operations. Contingency Plan As discussed above, the Company is engaged in an ongoing Year 2000 assessment and has not yet developed any contingency plans. The responses received from third-party vendors and service providers will be taken into account in determining the nature and extent of any contingency plans. F-97 182 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THROUGH AND INCLUDING , 1999 (THE 25(TH) DAY AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 7,000,000 SHARES [INTERLIANT LOGO] COMMON STOCK ----------------------- PROSPECTUS ----------------------- MERRILL LYNCH & CO. DONALDSON, LUFKIN & JENRETTE CIBC WORLD MARKETS , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 183 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED MAY 13, 1999 PROSPECTUS 7,000,000 SHARES [INTERLIANT LOGO] COMMON STOCK ------------------------ This is Interliant's initial public offering of common stock. The international managers are offering 875,000 shares outside the United States and Canada and the U.S. underwriters are offering 6,125,000 shares in the United States and Canada. We expect the public offering price to be between $9.00 and $11.00 per share. After pricing this offering, we expect that the common stock will be quoted on the Nasdaq National Market under the symbol "INIT." INVESTING IN THE COMMON STOCK INVOLVES MATERIAL RISKS WHICH ARE DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS. ------------------------
PER SHARE TOTAL --------- ----- Public Offering Price...................................... $ $ Underwriting Discount...................................... $ $ Proceeds, before expenses, to Interliant, Inc.............. $ $
The international managers may also purchase up to an additional 130,000 shares from Interliant at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The U.S. underwriters may similarly purchase up to an additional 920,000 shares from Interliant. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. The shares of common stock will be ready for delivery in New York, New York on or about , 1999. ------------------------ MERRILL LYNCH INTERNATIONAL DONALDSON, LUFKIN & JENRETTE CIBC WORLD MARKETS ------------------------ The date of this prospectus is , 1999. [Alternative Page for International Prospectus] 184 UNDERWRITING GENERAL We intend to offer our common stock outside the United States and Canada through a number of international managers and in the United States and Canada through a number of U.S. underwriters. Merrill Lynch International, Donaldson, Lufkin & Jenrette International and CIBC World Markets International Limited are acting as lead managers for each of the international managers named below. Subject to the terms and conditions set forth in an international purchase agreement among us and the international managers, and concurrently with the sale of 6,125,000 shares of common stock to the U.S. underwriters, we have agreed to sell to the international managers, and each of the international managers severally and not jointly has agreed to purchase from us, the number of shares of common stock set forth opposite its name below.
NUMBER INTERNATIONAL MANAGER OF SHARES - ------------------------------------------------------------ --------- Merrill Lynch International................................. Donaldson, Lufkin & Jenrette International.................. CIBC World Markets International Limited.................... Total..........................................
We have also entered into a U.S. purchase agreement with certain underwriters in the United States and Canada for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette and CIBC World Markets Corp. are acting as U.S. representatives. Subject to the terms and conditions set forth in the U.S. purchase agreement, and concurrently with the sale of 875,000 shares of common stock to the international managers pursuant to the international purchase agreement, we have agreed to sell to the U.S. underwriters and the U.S. underwriters severally have agreed to purchase from us an aggregate of 6,125,000 shares of common stock. The initial public offering price per share and the total underwriting discount per share of common stock are identical under the U.S. purchase agreement and the international purchase agreement. In the international purchase agreement and the U.S. purchase agreement, the several international managers and the several U.S. underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all of the shares of common stock being sold pursuant to each such agreement if any of the shares of common stock being sold pursuant to such agreement are purchased. In the event of a default by an underwriter, the U.S. Purchase Agreement and the international purchase agreement provide that, in certain circumstances, the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreements may be terminated. The closings with respect to the sale of shares of common stock to be purchased by the U.S. underwriters and the international managers are conditioned upon one another. We have agreed to indemnify the U.S. underwriters and the international managers against some liabilities, including some liabilities under the Securities Act, or to contribute to payments the U.S. underwriters and the international managers may be required to make in respect of those liabilities. The shares of common stock are being offered by the several underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the A- 2 [Alternative Page for International Prospectus] 185 underwriters and certain other conditions. The underwriters reserve the right to withdraw, cancel or modify such offer and reject orders in whole or in part. COMMISSIONS AND DISCOUNTS The lead managers have advised us that the lead managers propose initially to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus, and to certain dealers at such price less a concession not in excess of $ per share of common stock. The international managers may allow, and such dealers may reallow, a discount not in excess of $ per share of common stock to certain other dealers. After the initial public offering, the public offering price, concession and discount may change. The following table shows the per share and total public offering price, underwriting discount to be paid by us to the U.S. underwriters and the international managers and the proceeds before expenses to us. This information is presented assuming either no exercise or full exercise by the U.S. underwriters and the international managers of their over-allotment options.
PER SHARE WITHOUT OPTION WITH OPTION --------- -------------- ----------- Public Offering Price.......................... $ $ $ Underwriting Discount.......................... $ $ $ Proceeds, before expenses, to Interliant....... $ $ $
The expenses of the offerings (exclusive of the underwriting discount and commissions) are estimated at $1.4 million and are payable by us. INTERSYNDICATE AGREEMENT The international managers and the U.S. underwriters have entered into an intersyndicate agreement that provides for the coordination of their activities. Under the terms of the intersyndicate agreement, the international managers and the U.S. underwriters are permitted to sell shares of our common stock to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the terms of the intersyndicate agreement, the U.S. underwriters and any dealer to whom they sell shares of our common stock will not offer to sell or sell shares of our common stock to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, and the international managers and any dealer to whom they sell shares of common stock will not offer to sell or sell shares of common stock to U.S. persons or to Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions under the terms of the intersyndicate agreement. OVER-ALLOTMENT OPTION We have granted options to the international managers, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of 130,000 additional shares of common stock at the public offering price set forth on the cover page of this prospectus, less the underwriting discount. The international managers may exercise this option solely to cover over-allotments, if any, made on the sale of the common stock offered hereby. To the extent that the international managers exercise this option, each international managers will be obligated, subject to certain conditions, to purchase a number of additional shares of common stock proportionate to such international managers's initial amount reflected in the foregoing table. We also have granted an option to the U.S. underwriters, exercisable for 30 days after the date of this prospectus, to purchase up to an aggregate of 920,000 additional shares of common stock to cover over-allotments, if any, on terms similar to those granted to the international managers. A- 3 [Alternative Page for International Prospectus] 186 RESERVED SHARES At our request, the underwriters have reserved for sale, at the initial public offering price, up to 350,000, or 5%, of the shares offered hereby to be sold to some of our directors, officers, employees, distributors, dealers, business associates and related persons. The number of shares of common stock available for sale to the general public will be reduced to the extent those persons purchase such reserved shares. Any reserved shares which are not orally confirmed for purchase within one day of the pricing of this offering will be offered by the underwriters to the general public on the same terms as the other shares offered in this prospectus. NO SALES OF SIMILAR SECURITIES For a period of 180 days after the date of this prospectus, we, our executive officers, directors and stockholders, have agreed not to directly or indirectly, without approval by Merrill Lynch on behalf of the underwriters: - Offer, pledge, sell, dispose of or transfer any shares of common stock or securities convertible into common stock; - Enter into any agreement that transfers any part of the economic consequence of ownership of the common stock; or - Seek or exercise any right to register any share of common stock or security convertible into common stock. Our stockholders do, however, have the right to: - Transfer the securities as a gift, if the recipient agrees to be bound by the provisions of the lock-up agreement; or - Pledge their securities to us in consideration for a loan from us. In addition, we have the right to transfer common stock in connection with an acquisition, if any recipient of such shares agrees to be bound by the provisions of the lock-up agreement. QUOTATION ON THE NASDAQ NATIONAL MARKET Our common stock has been approved for quotation on the Nasdaq National Market, subject to official notice of issuance, under the symbol "INIT." Before this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations between us and the U.S. representatives and the lead managers. The factors to be considered in determining the initial public offering price, in addition to prevailing market conditions, are expected to be the valuation multiples of publicly traded companies that the U.S. representatives and the lead managers believe to be comparable to us, certain of our financial information, the history of, and the prospects for, our company and the industry in which we compete, and an assessment of our management, its past and present operations, the prospects for, and timing of, our future revenues, the present state of our development, and the above factors in relation to market values and various value measures of other companies engaged in activities similar to ours. There can be no assurance that an active trading market will develop for our common stock or that our common stock will trade in the public market subsequent to this offering at or above the initial public offering price. The underwriters do not expect sales of the common stock to be made to any accounts over which they exercise discretionary authority to exceed 5% of the number of shares being offered in this offering. A- 4 [Alternative Page for International Prospectus] 187 PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS Until the distribution of the common stock is completed, rules of the Securities and Exchange Commission may limit the ability of the underwriters and certain selling group members to bid for and purchase our common stock. As an exception to these rules, the U.S. representatives are permitted to engage in certain transactions that stabilize the price of our common stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of our common stock. If the underwriters create a short position in our common stock in connection with the offering contemplated hereby, i.e., if they sell more shares of our common stock than are set forth on the cover page of this prospectus, the U.S. representatives may reduce that short position by purchasing our common stock in the open market. The U.S. representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above. The U.S. representatives may also impose a penalty bid on our underwriters and selling group members. This means that if the U.S. representatives purchase shares of our common stock in the open market to reduce the underwriters' short position or to stabilize the price of the our common stock, they may reclaim the amount of the selling concession from the underwriters and selling group members who sold those shares. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of our common stock to the extent that it discourages resales of our common stock. Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of our common stock. In addition, neither we nor any of the underwriters makes any representation that the U.S. representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued. UK SELLING RESTRICTIONS Each international manager has agreed that (1) it has not offered or sold and, prior to the expiration of the period of six months from the closing date, will not offer or sell any shares of common stock to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which do not constitute an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995; (2) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the common stock in, from or otherwise involving the United Kingdom; and (3) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of common stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 as amended by the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1997 or is a person to whom such document may otherwise lawfully be issued or passed on. NO PUBLIC OFFERING OUTSIDE THE UNITED STATES No action has been or will be taken in any jurisdiction, except in the United States, that would permit a public offering of the shares of common stock, or the possession, circulation or distribution of this prospectus or any other material relating to us or shares of our common stock in any jurisdiction where action for that purpose is required. Accordingly, the shares of our common stock may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering material or advertisements in A- 5 [Alternative Page for International Prospectus] 188 connection with the shares of common stock may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of any such country or jurisdiction. Purchasers of the shares offered by this prospectus may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price set forth on the cover page hereof. LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Dewey Ballantine LLP, New York, New York. Certain legal matters in connection with the offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The consolidated financial statements of Interliant, Inc. (formerly known as Sage Networks, Inc.) at December 31, 1997 and 1998, and for the period December 8, 1997 (inception) to December 31, 1997 and the year ended December 31, 1998, and the financial statements of Rancher 1 Corp. (formerly known as Interliant, Inc. and referred to in this prospectus as Interliant Texas) at December 31, 1997 and 1998, and for each of the three years in the period ended December 31, 1998, appearing in this prospectus and registration statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon the authority of such firm as experts in accounting and auditing. The balance sheets of B.N. Technology, Inc. dba Internet Communications, as of December 31, 1996 and 1997, and the related statements of operations and accumulated deficit, and cash flows for the period April 15, 1996 (inception) through December 31, 1996 and for the year ended December 31, 1997 included in this prospectus have been so included in reliance on the report of Frankel, Lodgen, Lacher, Golditch, Sardi & Howard, independent accountants given on the authority of said firm as experts in auditing and accounting. The balance sheet of Clever Computers, Inc., as of December 31, 1996 and 1997 and the related statements of income, retained earnings, and cash flows for the years then ended included in this prospectus have been so included in reliance on the report of BSC&E, independent accountants given on the authority of said firm as experts in auditing and accounting. The statements of assets and liabilities as of December 31, 1996 and 1997, and the statements of revenue and expenses and of cash flows for each of the three years in the period ended December 31, 1997, of HostAmerica, a division of HomeCom Communications, Inc., included in this prospectus, have been included herein in reliance on the report, which includes an explanatory paragraph regarding basis of presentation, of PricewaterhouseCoopers LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. The financial statements of Net Daemons Associates, Inc., for the years ended December 31, 1997 and 1998 included in this prospectus and in the registration statement have been audited by Deloitte & Touche LLP, independent accountants as stated in their report appearing herein and elsewhere in the registration statement and is included in reliance upon the report of such firm given upon the authority of said firm as experts in auditing and accounting. The financial statements of Telephonetics International, Inc. and Affiliate included in this prospectus and registration statement have been audited by BDO Seidman, LLP, independent certified accountants to A- 6 [Alternative Page for International Prospectus] 189 the extent and for the periods set forth in their report appearing elsewhere herein and in this registration statement and are included in reliance on such reports given upon the authority of said firm as experts in auditing and accounting. The balance sheets of Tri Star Web as of December 31, 1996 and 1997 and the related statements of operations, and changes in retained earnings, and cash flows for the years then ended, and the consolidated balance sheets of GEN International Inc. and subsidiaries as of December 31, 1995, 1996 and 1997, and the related consolidated statements of operations, changes in stockholders' deficiency, and cash flows for the period April 4, 1995 (inception) through December 31, 1995 and the years ended December 31, 1996 and 1997 and the balance sheets of Digiweb, Inc. as of December 31, 1997 and 1998 and the related statements of income, cash flows and changes in stockholders' equity for the years then ended included in this prospectus have been so included in reliance on the reports of Urbach Kahn & Werlin PC, independent accountants given on the authority of said firm as experts in auditing and accounting. AVAILABLE INFORMATION We have filed with the Commission, Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to us and the common stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed therewith. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. A copy of the Registration Statement may be inspected without charge at the offices of the Commission in Washington, D.C. 20549, and copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549 upon the payment of the fees prescribed by the Commission. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as Interliant, that file electronically with the Commission. We provide Web hosting services to a customer whose primary residence is located in Cuba, Mr. Osvaldo Martinez. This information is correct as of the date of this prospectus. Current information concerning business between any person located in Cuba or the government of Cuba and Interliant may be obtained from the Florida Department of Banking and Finance, Plaza Level, The Capitol, Tallahassee, Florida 32399-0350, telephone number (904) 488-6311. A- 7 [Alternative Page for International Prospectus] 190 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 7,000,000 SHARES [INTERLIANT LOGO] COMMON STOCK ----------------------- PROSPECTUS ----------------------- MERRILL LYNCH INTERNATIONAL DONALDSON, LUFKIN & JENRETTE CIBC WORLD MARKETS , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 191 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following is an itemized statement of the estimated amounts of all expenses payable by the Registrant in connection with the registration of the common stock offered hereby, other than underwriting discounts and commissions: Registration Fee -- Securities and Exchange Commission...... $ 21,375 NASD Filing Fee............................................. 9,125 Blue Sky fees and expenses.................................. 1,000 Accountants' fees and expenses.............................. 300,000 Legal fees and expenses..................................... 550,000 Printing and engraving expenses............................. 500,000 Transfer agent and registrar fees........................... 5,000 Miscellaneous............................................... 13,500 ---------- Total............................................. $1,400,000 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145(a) of the General Corporation Law of the State of Delaware (the "DGCL") provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no cause to believe his conduct was unlawful. Section 145(b) of the DGCL provides that a Delaware corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in any of the capacities set forth above, against expenses actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under similar standards, except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the court in which such action or suit was brought shall determine that despite the adjudication of liability, such person is fairly and reasonably entitled to be indemnified for such expenses which the court shall deem proper. Section 145 of the DGCL further provides that to the extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to in subsections (a) and (b) or in the defense of any claim, issue, or matter therein, he shall be indemnified against any expenses actually and reasonably incurred by him in connection therewith; that indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled; and that the corporation may purchase and maintain insurance on behalf of a director, officer, employee or agent of the corporation against any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against such liabilities under Section 145. II-1 192 Section 102(b)(7) of the DGCL provides that a corporation in its original certificate of incorporation or an amendment thereto validly approved by stockholders may eliminate or limit personal liability of members of its board of directors or governing body for breach of a director's fiduciary duty. However, no such provision may eliminate or limit the liability of a director for breaching his duty of loyalty, failing to act on good faith, engaging in intentional misconduct or knowingly violating a law, paying a dividend or approving a stock repurchase which was illegal or obtaining an improper personal benefit. A provision of this type has no effect on the availability of equitable remedies, such as injunction or rescission, for breach of fiduciary duty. Interliant's Restated Certificate of Incorporation contains such a provision. Interliant's Certificate of Incorporation and By-Laws provide that Interliant shall indemnify officers and directors and, to the extent permitted by the Board of Directors, employees and agents of Interliant, to the full extent permitted by and in the manner permissible under the laws of the State of Delaware. In addition, the By-Laws permit the Board of Directors to authorize Interliant to purchase and maintain insurance against any liability asserted against any director, officer, employee or agent of Interliant arising out of his capacity as such. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES In the three years preceding the filing of this Registration Statement, Interliant has issued securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act") to a limited number of persons, as described below. Interliant believes that the transactions described below were exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, as transactions by an issuer not involving public offering, or pursuant to Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each such transaction represented that they were acquiring the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates issued in such transactions. All recipients had adequate access, through their relationships with Interliant, to information about Interliant, or were given an adequate opportunity to review information about Interliant. The following figures give effect to a three-for-one stock split of the Common Stock of Interliant in July 1998. (A) ISSUANCE OF CAPITAL STOCK. Pursuant to a Stock Subscription Agreement dated December 8, 1997 between Interliant and Web Hosting Organization LLC ("WEB"), Interliant issued to WEB, for a purchase price of $5,000,000, 3,000,000 shares of common stock of Interliant, $.01 par value and also granted WEB an option to purchase up to an additional 6,600,000 shares of common stock at an exercise price of $1.67 per share (the "Option"). On April 7, 1998, in connection with the acquisition of substantially all of the assets of Clever Computers, Inc., ("Clever"), and as consideration for entering into an employment agreement with Interliant, Interliant issued 150,000 shares of common stock to the former president and founder of Clever, Steven C. Dabbs. On July 10, 1998, Interliant issued 9,000 shares of common stock to Jab Web, Inc. (formerly Tri-Star Web Creations, Inc.), as part of the purchase price for substantially all of the assets of Tri-Star Web Creations, Inc. On July 10, 1998, Interliant issued to WEB, for a purchase price of $11,000,000, 6,600,000 shares of common stock. On July 10, 1998, Interliant issued 115,707 shares of common stock to All Information Systems, Inc., as part of the purchase price for substantially all of the assets of All Information Systems, Inc. II-2 193 On July 10, 1998, Interliant issued 12,000 shares of common stock to Software Business Technologies, Inc., as part of the purchase price for substantially all of the Web hosting assets of Software Business Technologies, Inc. On July 30, 1998, Interliant issued 5,490 shares of common stock to BestWare, Inc. (dba "Maikon"), as part of the purchase price for substantially all of the assets of BestWare, Inc. (dba "Maikon"). On August 31, 1998, in connection with the acquisition of B.N. Technology, Inc., and as consideration for entering into employment agreements with Interliant, Interliant issued 240,000 shares of common stock to Mr. Bernd Neumann and Andrea Neumann, his wife, and 60,000 shares of common stock to Mr. Thomas Gorny. On September 16, 1998, in connection with the acquisition of GEN International Inc., and as consideration for entering into a consulting agreement with Interliant, Interliant issued 25,000 shares of common stock to Mr. Thomas Heimann and Patricia Karasy, his wife. On September 18, 1998, Interliant issued to WEB, for a purchase price of $7,500,000, 4,500,000 shares of common stock. On December 4, 1998, Interliant issued to WEB, for a purchase price of $7,500,000, 4,500,000 shares of common stock. On January 28, 1999, Interliant issued 2,647,658 shares of Series A Redeemable Convertible Preferred Stock, convertible into an equal amount of shares of common stock, and warrants to purchase 749,625 shares of common stock to SOFTBANK Technology Ventures IV L.P. and one of its affiliates, SOFTBANK Technology Advisors Fund for a purchase price of $13,000,000. On February 4, 1999, Interliant issued 450,000 shares of common stock to Digiweb, Inc. as part of the purchase price for substantially all of the assets of Digiweb, Inc. On February 4, 1999, in connection with the acquisition of substantially all of the assets of Telephonetics International, Inc., Interliant issued 140,000 shares of common stock to Telephonetics, International, Inc.. On February 4, 1999, Interliant issued to WEB, for a purchase price of $11,000,000, 6,600,000 shares of common stock. On February 17, 1999, in connection with the acquisition of Net Daemons Associates, Inc., Interliant issued 425,000 shares of common stock to certain stockholders of Net Daemons Associates, Inc. On March 10, 1999, in connection with the acquisition of substantially all of the assets of Interliant Texas Interliant issued 2,748,555 shares of common stock to Mathew Wolf, 398,845 shares of common stock to the Ann Weltchek Wolf 1995 Marital Trust, 797,690 shares of common stock to the Mathew D. Wolf Children's Trust, 31,908 shares of common stock to Michael August and 114,644 shares of common stock to Broadview Holdings LLP. On April 19, 1999, SOFTBANK exercised its warrants to purchase 749,625 shares of the common stock of Interliant for an aggregate exercise price of $5,000,000. On May 4, 1999, in connection with the acquisition of Advanced Web Creations, Inc. Interliant issued 52,500 to Advanced Web Creations, Inc., 2,250 shares of common stock to Santa Fe Capital Group of New Mexico, Inc., 53,417 shares of common stock to Gary Rudd, 53,416 shares of common stock to Stephen Rudd, 53,417 shares of common stock to Mark Lichtenstein and 10,000 shares of common stock to Kevin Paul. (B) GRANTS OF STOCK OPTIONS. The Interliant, Inc. 1998 Stock Option Plan was adopted by Interliant's Board of Directors on February 1, 1998. As of the date hereof, options to purchase up to an aggregate 3,697,194 shares of common stock at prices ranging from $0.13 to $8.00 per share, had been granted to employees of II-3 194 Interliant, of which options to purchase up to an aggregate of 3,649,234 shares of common stock, at a weighted average exercise price of $2.40 per share, were outstanding as of such date. As of the date of the filing of this Registration Statement, options to purchase 41,960 shares of common stock have been exercised at a weighted average exercise price of $1.53 per share. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 -- Purchase Agreement.** 2.1 -- Asset Purchase Agreement among Sage Networks Acquisition Corp., Sage Networks, Inc., Interliant, Inc. and the shareholders of Interliant, Inc., dated March 8, 1999.* 2.2 -- Agreement to Deliver Shares between Interliant, Inc., Sage Networks Acquisition Corp. and Sage Networks, Inc., dated as of March 10, 1999.* 2.3 -- Agreement and Plan of Merger by and among Net Daemons, Inc., the Shareholders Party hereto and Sage Networks, Inc. and Sage NDA Acquisition Corp., dated as of February 17, 1999.* 2.4 -- Asset Purchase Agreement between Digiweb, Inc., a Delaware corporation, Yi Wen Chung, Diane X. Chen and Digiweb, Inc., a Maryland corporation, dated February 4, 1999.* 2.5 -- Asset Purchase Agreement between Telephonetics International, Inc., Alan Kvares and Telephonetics, Inc., dated February 4, 1999.* 2.6 -- Asset Purchase Agreement between Sage Networks Acquisition Corp., Thomas Heimann and GEN International Inc., dated September 16, 1998.* 2.7 -- Asset Purchase Agreement between Global Entrepreneurs Network, Inc. and Sage Networks Acquisition Corp., dated as of September 16, 1998.* 2.8 -- Stock Purchase Agreement among B.N. Technology, Inc., Bernd Neumann, Annedore Sommer, and Sage Networks, Inc., dated August 31, 1998.* 2.9 -- Asset Purchase Agreement between Sage Networks, Inc. and HomeCom Communications, Inc. dated June 10, 1998.* 2.10 -- Asset Purchase Agreement between Sage Networks Acquisition Corp., Bonnie Shimel, William Nicholson and James Kucharski, Alan Shimel and Tri-Star Web Creations, Inc., dated May 1, 1998.* 2.11 -- Asset Purchase Agreement between Sage Networks Acquisition Corp., Steven C. Dabbs and Clever Computers, Inc., dated April 7, 1998.* 3.1 -- Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.2 -- Form of Amended and Restated By-Laws of the Registrant.* 4.1 -- Specimen Certificate for common stock of the Registrant.* 4.2 -- Investors Agreement, dated as of January 28, 1999, by and among Sage Networks, Inc., SOFTBANK Technology Ventures IV, L.P. and SOFTBANK Technology Advisors Funds, L.P.* 4.3 -- Securities Purchase Agreement between Sage Networks, Inc. and SOFTBANK Technology Ventures IV, L.P. and SOFTBANK Technology Advisors Funds, L.P. dated January 28, 1999.* 4.4 -- Registration Rights Agreement, dated as of December 8, 1997, by and between Interliant Networks, Inc. and Web Hosting Organization LLC.* 4.5 -- Shareholders Agreement by and among Sage Networks, Inc. and each of the Stockholders of Sage Networks, Inc., dated as of March 10, 1999.* 4.6 -- Letter Agreement, dated November 26, 1997, between Leonard J. Fassler, Bradley A. Feld, Chef Nominees Limited and Charterhouse Equity Partners III L.P.* (Agreement has now been terminated.) 5.1 -- Opinion of Dewey Ballantine LLP.** 10.1 -- Professional Services Agreement by and between Sage Networks, Inc. and Portal Software, Inc., dated as of July 31, 1998.*
II-4 195
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.2 -- Software License and Support Agreement by and between Sage Networks, Inc. and Portal Software, Inc., dated as of July 31, 1998.+ 10.3 -- The Vantive Corporation Software License and Support Agreement by and between Interliant Networks, Inc. and The Vantive Corporation, dated as of September 29, 1998.* 10.4 -- Addendum to The Vantive Corporation Software License and Support Agreement by and between Sage Networks, Inc. and The Vantive Corporation, dated as of September 29, 1998.* 10.5 -- Master Discounted Internet Services Agreement by and between UUNET Technologies, Inc. and Sage Networks, Inc., dated February 17, 1999.+ 10.6 -- Joint Development Agreement between Lotus Development Corporation and Interliant, Inc., dated as of April 27, 1998.+ 10.7 -- Sage Networks, Inc. 1998 Stock Option Plan.* 10.8 -- Form of ISO Award Agreement.* 10.9 -- Form of Incentive Stock Option Award Agreement between Sage Networks, Inc. and the individual Optionee.* 10.10 -- Form of Nonqualified Stock Option Award Agreement between Sage Networks, Inc. and the individual Optionee.* 10.11 -- Employment Agreement by and between Sage Networks, Inc., and Leonard J. Fassler, dated January 1, 1999.* 10.12 -- Consulting Agreement by and between Sage Networks, Inc., and Intensity Ventures, Inc., dated January 1, 1999.* 10.13 -- Employment Agreement by and between Sage Networks, Inc., and Stephen W. Maggs, dated January 1, 1999.* 10.14 -- Employment Agreement by and between Sage Networks, Inc., and Rajat Bhargava, dated January 1, 1999.* 10.15 -- Employment Agreement between Sage Networks, Inc. and James M. Lidestri, dated March 3, 1999.* 10.16 -- Deed of Lease by and between Westwood Center, LLC and Sage Networks, Inc., dated February 11, 1999.* 10.17 -- Sublease Agreement by and between Southern Company Services, Inc. and Sage Networks, Inc., dated May 29, 1998.* 10.18 -- First Amendment to Sublease Agreement by and between Southern Company Services, Inc. and Sage Networks, Inc., dated December 15, 1998.* 10.19 -- Sublease Agreement by and between Leuko Site, Inc. and Sage Networks, Inc., dated November 17, 1998.* 10.20 -- Agreement for Terminal Facilities Collocation Space by and between Comstor Corporation and Sage Networks, Inc., dated as of July 2, 1998.+* 10.21 -- Standard Lease Agreement, dated June 11, 1995, between LaSalle Partners Management Limited (as agent for Fannin Street Limited Partnership) and Wolf Communications Company.* 10.22 -- First Amendment to Standard Lease, dated January 18, 1996, between LaSalle Partners Management Limited (as agent for Fannin Street Limited Partnership) and Wolf Communications Company.* 10.23 -- Second Amendment to Standard Lease, dated August 8, 1996, between LaSalle Partners Management Limited (as agent for Fannin Street Limited Partnership) and Wolf Communications Company.* 21.1 -- List of Subsidiaries. 23.1 -- Consent of Ernst & Young LLP with respect to the financial statements of Interliant, Inc. (formerly known as Sage Networks, Inc.) 23.2 -- Consent of Ernst & Young LLP with respect to the financial statements of Rancher 1 Corp. (formerly known as Interliant, Inc.) 23.3 -- Consent of Urbach Kahn & Werlin PC. 23.4 -- Consent of BSC&E.
II-5 196
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23.5 -- Consent of PricewaterhouseCoopers LLP. 23.6 -- Consent of Frankel, Lodgen, Locher, Golditch, Sardi & Howard. 23.7 -- Consent of BDO Seidman, LLP. 23.8 -- Consent of Deloitte & Touche LLP. 23.9 -- Consent of Dewey Ballantine LLP (contained in Exhibit 5.1).** 24.1 -- Power of Attorney (included on page II-5).* 27.1 -- Financial Data Schedule.*
- --------------- * Previously filed. ** To be filed by amendment. + Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission simultaneously herewith. (b) Consolidated Financial Statement Schedules All schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the underwriters, at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and this offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. II-6 197 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on May 13, 1999. INTERLIANT, INC. By: /s/ BRUCE S. KLEIN ------------------------------------ Bruce S. Klein Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons on May 13, 1999 in the capacities indicated:
SIGNATURE TITLE DATE --------- ----- ---- /s/ LEONARD J. FASSLER* Co-Chairman of the Board May 13, 1999 - ---------------------------------- Leonard J. Fassler /s/ BRADLEY A. FELD* Co-Chairman of the Board May 13, 1999 - ---------------------------------- Bradley A. Feld /s/ STEPHEN W. MAGGS* Chief Executive Officer, May 13, 1999 - ---------------------------------- President, Treasurer and Stephen W. Maggs Director (Chief Executive Officer) /s/ WILLIAM A. WILSON* Chief Financial Officer (Chief May 13, 1999 - ---------------------------------- Financial and Accounting William A. Wilson Officer) /s/ MERRIL M. HALPERN* Director May 13, 1999 - ---------------------------------- Merril M. Halpern /s/ THOMAS C. DIRCKS* Director May 13, 1999 - ---------------------------------- Thomas C. Dircks /s/ PATRICIA A. M. RILEY* Director May 13, 1999 - ---------------------------------- Patricia A. M. Riley /s/ JAY M. GATES* Director May 13, 1999 - ---------------------------------- Jay M. Gates /s/ CHARLES R. LAX* Director May 13, 1999 - ---------------------------------- Charles R. Lax
*By: /s/ BRUCE S. KLEIN -------------------------------- Bruce S. Klein (Attorney in fact) II-7 198 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION PAGE - ------- ----------- ---- 1.1 -- Purchase Agreement.** 2.1 -- Asset Purchase Agreement among Sage Networks Acquisition Corp., Sage Networks, Inc., Interliant, Inc. and the shareholders of Interliant, Inc., dated March 8, 1999.* 2.2 -- Agreement to Deliver Shares between Interliant, Inc., Sage Networks Acquisition Corp. and Sage Networks, Inc., dated as of March 10, 1999.* 2.3 -- Agreement and Plan of Merger by and among Net Daemons, Inc., the Shareholders Party hereto and Sage Networks, Inc. and Sage NDA Acquisition Corp., dated as of February 17, 1999.* 2.4 -- Asset Purchase Agreement between Digiweb, Inc., a Delaware corporation, Yi Wen Chung, Diane X. Chen and Digiweb, Inc., a Maryland corporation, dated February 4, 1999.* 2.5 -- Asset Purchase Agreement between Telephonetics International, Inc., Alan Kvares and Telephonetics, Inc., dated February 4, 1999.* 2.6 -- Asset Purchase Agreement between Sage Networks Acquisition Corp., Thomas Heimann and GEN International Inc., dated September 16, 1998.* 2.7 -- Asset Purchase Agreement between Global Entrepreneurs Network, Inc. and Sage Networks Acquisition Corp., dated as of September 16, 1998.* 2.8 -- Stock Purchase Agreement among B.N. Technology, Inc., Bernd Neumann, Annedore Sommer, and Sage Networks, Inc., dated August 31, 1998.* 2.9 -- Asset Purchase Agreement between Sage Networks, Inc. and HomeCom Communications, Inc. dated June 10, 1998.* 2.10 -- Asset Purchase Agreement between Sage Networks Acquisition Corp., Bonnie Shimel, William Nicholson and James Kucharski, Alan Shimel and Tri-Star Web Creations, Inc., dated May 1, 1998.* 2.11 -- Asset Purchase Agreement between Sage Networks Acquisition Corp., Steven C. Dabbs and Clever Computers, Inc., dated April 7, 1998.* 3.1 -- Form of Amended and Restated Certificate of Incorporation of the Registrant. 3.2 -- Form of Amended and Restated By-Laws of the Registrant.* 4.1 -- Specimen Certificate for common stock of the Registrant.* 4.2 -- Investors Agreement, dated as of January 28, 1999, by and among Sage Networks, Inc., SOFTBANK Technology Ventures IV, L.P. and SOFTBANK Technology Advisors Funds, L.P.* 4.3 -- Securities Purchase Agreement between Sage Networks, Inc. and SOFTBANK Technology Ventures IV, L.P. and SOFTBANK Technology Advisors Funds, L.P. dated January 28, 1999.* 4.4 -- Registration Rights Agreement, dated as of December 8, 1997, by and between Interliant Networks, Inc. and Web Hosting Organization LLC.* 4.5 -- Shareholders Agreement by and among Sage Networks, Inc. and each of the Stockholders of Sage Networks, Inc., dated as of March 10, 1999.* 4.6 -- Letter Agreement, dated November 26, 1997, between Leonard J. Fassler, Bradley A. Feld, Chef Nominees Limited and Charterhouse Equity Partners III L.P.* (Agreement has now been terminated.) 5.1 -- Opinion of Dewey Ballantine LLP.** 10.1 -- Professional Services Agreement by and between Sage Networks, Inc. and Portal Software, Inc., dated as of July 31, 1998. 10.2 -- Software License and Support Agreement by and between Sage Networks, Inc. and Portal Software, Inc., dated as of July 31, 1998.+ 10.3 -- The Vantive Corporation Software License and Support Agreement by and between Interliant Networks, Inc. and The Vantive Corporation, dated as of September 29, 1998.*
199
EXHIBIT NUMBER DESCRIPTION PAGE - ------- ----------- ---- 10.4 -- Addendum to The Vantive Corporation Software License and Support Agreement by and between Sage Networks, Inc. and The Vantive Corporation, dated as of September 29, 1998.* 10.5 -- Master Discounted Internet Services Agreement by and between UUNET Technologies, Inc. and Sage Networks, Inc., dated February 17, 1999.+ 10.6 -- Joint Development Agreement between Lotus Development Corporation and Interliant, Inc., dated as of April 27, 1998.+ 10.7 -- Sage Networks, Inc. 1998 Stock Option Plan.* 10.8 -- Form of ISO Award Agreement. 10.9 -- Form of Incentive Stock Option Award Agreement between Sage Networks, Inc. and the individual Optionee.* 10.10 -- Form of Nonqualified Stock Option Award Agreement between Sage Networks, Inc. and the individual Optionee.* 10.11 -- Employment Agreement by and between Sage Networks, Inc., and Leonard J. Fassler, dated January 1, 1999.* 10.12 -- Consulting Agreement by and between Sage Networks, Inc., and Intensity Ventures, Inc., dated January 1, 1999.* 10.13 -- Employment Agreement by and between Sage Networks, Inc., and Stephen W. Maggs, dated January 1, 1999.* 10.14 -- Employment Agreement by and between Sage Networks, Inc., and Rajat Bhargava, dated January 1, 1999.* 10.15 -- Employment Agreement between Sage Networks, Inc. and James M. Lidestri, dated March 3, 1999.* 10.16 -- Deed of Lease by and between Westwood Center, LLC and Sage Networks, Inc., dated February 11, 1999.* 10.17 -- Sublease Agreement by and between Southern Company Services, Inc. and Sage Networks, Inc., dated May 29, 1998.* 10.18 -- First Amendment to Sublease Agreement by and between Southern Company Services, Inc. and Sage Networks, Inc., dated December 15, 1998.* 10.19 -- Sublease Agreement by and between Leuko Site, Inc. and Sage Networks, Inc., dated November 17, 1998.* 10.20 -- Agreement for Terminal Facilities Collocation Space by and between Comstor Corporation and Sage Networks, Inc., dated as of July 2, 1998.+* 10.21 -- Standard Lease Agreement, dated June 11, 1995, between LaSalle Partners Management Limited (as agent for Fannin Street Limited Partnership) and Wolf Communications Company.* 10.22 -- First Amendment to Standard Lease, dated January 18, 1996, between LaSalle Partners Management Limited (as agent for Fannin Street Limited Partnership) and Wolf Communications Company.* 10.23 -- Second Amendment to Standard Lease, dated August 8, 1996, between LaSalle Partners Management Limited (as agent for Fannin Street Limited Partnership) and Wolf Communications Company.* 21.1 -- List of Subsidiaries. 23.1 -- Consent of Ernst & Young LLP with respect to the financial statements of Interliant, Inc. (formerly known as Sage Networks, Inc.) 23.2 -- Consent of Ernst & Young LLP with respect to the financial statements of Rancher 1 Corp. (formerly known as Interliant, Inc.) 23.3 -- Consent of Urbach Kahn & Werlin PC. 23.4 -- Consent of BSC&E. 23.5 -- Consent of PricewaterhouseCoopers LLP. 23.6 -- Consent of Frankel, Lodgen, Locher, Golditch, Sardi & Howard. 23.7 -- Consent of BDO Seidman, LLP. 23.8 -- Consent of Deloitte & Touche LLP.
200
EXHIBIT NUMBER DESCRIPTION PAGE - ------- ----------- ---- 23.9 -- Consent of Dewey Ballantine LLP (contained in Exhibit 5.1).** 24.1 -- Power of Attorney (included on page II-5).* 27.1 -- Financial Data Schedule.*
- --------------- * Previously filed. ** To be filed by amendment. + Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission simultaneously herewith. (b) Consolidated Financial Statement Schedules All schedules have been omitted because they are not required or because the required information is given in the Consolidated Financial Statements or Notes thereto. EX-3.1 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION 1 Exhibit 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF INTERLIANT, INC. Interliant, Inc. (hereinafter called the "Corporation"), a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: The Corporation was originally incorporated under the name of Sage Networks, Inc., and the original Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on December 8, 1997. An Amended and Restated Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on March 2, 1998. Such certificate was amended pursuant to a Certificate of Amendment of Certificate of Incorporation of the Corporation filed with the Secretary of State of the State of Delaware on July 28, 1998, a Certificate of Amendment of Certificate of Incorporation of the Corporation filed with the Secretary of State of the State of Delaware on January 26, 1999, a Certificate of Amendment of Certificate of Incorporation of the Corporation filed with the Secretary of State of the State of Delaware on March 2, 1999 and a Certificate of Amendment of Certificate of Incorporation of the Corporation filed with the Secretary of State of the State of Delaware on March 11, 1999. The latter Certificate of Amendment changed the name of the Corporation to Interliant, Inc. 1. Pursuant to Sections 242 and 245 of the Delaware General Corporation Law, this Amended and Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of the Corporation. 2. The text of the Certificate of Incorporation of the Corporation is hereby restated, integrated and amended to read in its entirety as follows: 2 FIRST: The name of the Corporation is Interliant, Inc. SECOND: The address of the registered office and registered agent in this state is Corporation Service Company, 1013 Centre Road in the City of Wilmington, County of New Castle, and the name of the registered agent at said address is Corporation Service Company. THIRD: The nature of the business of the Corporation and its purpose is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law (the "DGCL"). FOURTH: The authorized capital stock of the Corporation shall consist of (i) 2,647,658 shares of Series A Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred"), (ii) [200,000,000] shares of Common Stock, par value $.01 per share (the "Common Stock"), and (iii) [1,000,000] shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The Corporation shall reserve at all times so long as any shares of Series A Preferred remain outstanding, free from preemptive rights, out of its treasury stock or its authorized but unissued shares of Common Stock, or both, solely for the purposes of effecting the conversion of the shares of Series A Preferred, sufficient shares of Common Stock to provide for the conversion of all outstanding shares of Series A Preferred. The Corporation shall from time to time in accordance with the laws of the State of Delaware increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall not be sufficient to permit conversion of the Series A Preferred. All shares of Common Stock which may be issued upon conversion of the shares of Series A Preferred will upon issuance by the Corporation be duly and validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof and the Corporation shall take no action which will cause a contrary result. The rights, preferences, privileges and restrictions granted to or imposed upon the Series A Preferred and the Common Stock or the holders thereof are as follows: A. SERIES A CONVERTIBLE PREFERRED STOCK Section 1. Dividends. No dividends shall accrue on the Series A Preferred. The holders of the Series A Preferred shall be entitled to receive, out of funds legally available therefor, dividends at the same rate as dividends are paid with respect to the Common Stock (treating each share of Series A Preferred as being equal to the number of shares of Common Stock (including fractions of a share) into which each share of Series A Preferred is then convertible). All numbers relating to the calculation of dividends shall be subject to equitable adjustment in the event of any stock dividend, stock split, combination, reorganization, recapitalization, reclassification or other similar event involving a change in the capital structure of the Series A Preferred. 2 3 Section 2. Liquidation Preference. Subject to Section 2(d) hereof, in the event of a Liquidity Event (as hereinafter defined), before any distribution or payment may be made with respect to the Common Stock or any other series or class of capital stock ranking on liquidation junior to the Series A Preferred, holders of each share of Series A Preferred at each holders sole option shall be entitled to be paid first out of the assets of the Corporation available for distribution to holders of the Corporation's capital stock of all classes, whether such assets are capital, surplus, or capital earnings, as follows: (a) The holders of the Series A Preferred shall be entitled to receive at each holders sole option, prior and in preference to any distribution of any of the assets or surplus funds of the Corporation to the holders of the Common Stock, by reason of their ownership of such stock, the amount equal to the sum of $4.91 per share for each share of Series A Preferred (as adjusted for any stock splits, stock dividends, combinations, recapitalizations, reclassifications or other similar events involving a change in the capital structure of the Series A Preferred) plus any dividends declared but unpaid on such share (the "Liquidation Amount"), plus an additional amount equal to 8% per annum on the Liquidation Amount accrued from the date of issuance of each such share of Series A Preferred to the date of payment of the Liquidation Amount (together with the Liquidation Amount, the "Liquidation Preference. If the assets of the Corporation legally available for distribution to the holders of the Series A Preferred are insufficient to permit payment of the Liquidation Preference Amount in full to all holders of Series A Preferred, the holders of the Series A Preferred shall share ratably in any distribution of available assets to the holders of Series A Preferred pro rata in proportion to the respective Liquidation Preference Amounts each such holder would otherwise be entitled to receive if all Liquidation Preference Amounts with respect to such shares were paid in full. (b) After payment has been made to the holders of the Series A Preferred of the full amounts to which they shall be entitled as set forth in Section 2(a), then the entire remaining assets and funds of the Corporation legally available for distribution, if any, shall be distributed on a pro rata basis on the outstanding Common Stock. (c) For purposes of this Section 2, the term "Liquidity Event" shall mean any one or more of the following: (i) a liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary; (ii) a sale of all or substantially all of the assets of the Corporation, or a merger or consolidation of the Corporation with or into any other entity in which the aggregate Transaction Value (as hereinafter defined) is less than or equal to $143,000,000 (other than a merger or consolidation in which shares of the Corporation's voting capital interests outstanding immediately before such merger or consolidation are exchanged or converted into or constitute shares which represent more than fifty percent (50%) of the surviving entity's voting capital interests after such consolidation or merger) or (iii) a transaction or series of related transactions in which a person or group of persons (as defined in Rule 13d-5(b)(1) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) acquires beneficial ownership (as determined in accordance with Rule 13d-3 of the Exchange Act) of more than 50% of the 3 4 voting power of the Corporation (the Liquidity Events described in (ii) and (iii) of this clause are collectively, the "Sale Transaction Liquidity Events"); provided, however, that any reorganization, merger or consolidation involving (1) only a change in the state of incorporation of the Corporation, (2) a merger of the Corporation with or into a wholly-owned subsidiary of the Corporation that is incorporated in the United States of America, or (3) an acquisition by merger, reorganization or consolidation, of which the Corporation is substantively the surviving corporation and operates as a going concern, of another entity or corporation incorporated in the United States of America that is engaged in a business similar or related to the business of the Corporation and which does not involve a recapitalization or conversion of the Series A Preferred shall not constitute a "Sale Transaction Liquidity Event". (d) Notwithstanding the foregoing, in the event of a Sale Transaction Liquidity Event in which the aggregate Transaction Value is greater than $143,000,000 (subject to the provisos set forth in Section 2(c) herein), the holders of Series A Preferred shall be entitled to receive their pro rata share of the assets or proceeds, as the case may be, as if they had converted their shares of Series A Preferred into Common Stock immediately prior to such transaction at the then applicable Conversion Price pursuant to the provisions of Section 4 hereof. (e) For purposes of this Section 2, the term "Transaction Value" with respect to any transaction, shall mean the amount of consideration actually received (x) by the shareholders of the Corporation and (y) by the Corporation, in each case, with respect to such transaction; provided, however, that such aggregate consideration shall not be deemed to include (i) amounts received by the holders of options, warrants and convertible securities which are not exercisable at the time of or upon consummation of such transaction (ii) the amount of any indebtedness for borrowed money set forth on the consolidated balance sheet of the Corporation and its subsidiaries as of the last fiscal quarter prior to the consummation of such transaction) or balance sheet, if any, prepared in connection with such transaction, or (iii) contingent payments to the Corporation or its shareholders (including but not limited to "earnouts") and which, in the case of (i), (ii) and (iii), are assumed by the purchaser or an affiliate in such transaction. Section 3. Redemption. (a) Within thirty days following the written request (the "Redemption Request") of a majority in interest of the holders of the Series A Preferred, which Redemption Request may be given at any time on or after the seventh anniversary of the date of initial issuance of Series A Preferred (the "Redemption Date"), the Corporation shall redeem the Series A Preferred by paying in cash therefor, $4.91 per share of Series A Preferred (as adjusted for any stock splits, stock dividends, combinations, recapitalizations, reclassifications or other similar events involving a change in the capital structure of the Series A Preferred) plus all declared but unpaid dividends on such shares (the "Redemption Price"). (b) At least ten (10) but no more than twenty (20) days prior to the Redemption Date written notice shall be mailed, first class postage prepaid, to each 4 5 holder of the Series A Preferred at the address set forth in the records of the Corporation, notifying such holder of the place at which payment may be obtained on the Redemption Date for the shares of Series A Preferred and calling upon such holder to surrender to the Corporation, in the manner and at the place designated, such holder's certificate or certificates representing the shares to be redeemed (the "Redemption Notice"). On or after the Redemption Date, each holder of Series A Preferred shall surrender to the Corporation the certificate or certificates representing such shares, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. (c) From and after the Redemption Date, unless there shall have been a default in payment of the Redemption Price, all rights of the holders of shares of Series A Preferred as holders of Series A Preferred (except the right to receive the Redemption Price without interest upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the Corporation or be deemed to be outstanding for any purpose whatsoever. If the funds of the Corporation legally available for redemption of shares of Series A Preferred on the Redemption Date are insufficient to redeem the total number of shares of Series A Preferred, those funds which are legally available will be used to redeem the maximum possible number of such shares ratably among the holders of such shares to be redeemed based upon their holdings of Series A Preferred. The shares of Series A Preferred not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Corporation are legally available for the redemption of shares of Series A Preferred such funds will immediately be used to redeem the balance of the shares which the Corporation has become obliged to redeem on any Redemption Date but which it has not redeemed. Section 4. Conversion. The holders of the Series A Preferred shall have conversion rights as follows (the "Conversion Rights"): (a) Right to Convert Series A Preferred. Each share of Series A Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, at the office of the Corporation or any transfer agent for the Series A Preferred, into such number of fully paid and nonassessable shares of Common Stock as is determined by multiplying each share of Series A Preferred by the quotient obtained by dividing $4.91 by the then applicable Series A Conversion Price. The price at which shares of Common Stock shall be deliverable upon conversion of the Series A Preferred (the "Series A Conversion Price") shall initially be $4.91 per share of Common Stock. Such initial Series A Conversion Price shall be subject to adjustment as hereinafter provided. (b) Automatic Conversion of Series A Preferred. Each share of the Series A Preferred shall automatically be converted into shares of Common Stock at the then effective Series A Conversion Price, immediately prior to the effectiveness of a Qualifying Public Offering (as hereinafter defined) at the then applicable Series A 5 6 Conversion Price. For purposes of this Section 4, the term "Qualifying Public Offering" shall mean a firm commitment underwritten public offering of Common Stock by the Corporation with a nationally recognized investment banking firm, which results in gross proceeds to the Corporation equal to or greater than $30,000,000 and in which the pre-money valuation of the Corporation immediately prior to such offering is equal to or greater than $ 150,000,000. The automatic conversion of the Series A Preferred into shares of Common Stock shall be subject in all circumstances to the closing and consummation of the offer and sale of shares of Common Stock in a Qualified Public Offering. (c) Mechanics of Conversion. No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred. In lieu of any fractional share to which the holder would otherwise be entitled, the Corporation shall (after aggregating all shares into which shares of Series A Preferred held by each holder could be converted) pay cash equal to such fraction multiplied by the market price per share of Common Stock (as determined in a reasonable manner presented by the Board of Directors) at the close of business on the date of conversion. Before any holder of Series A Preferred shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, the holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent, and shall give written notice to the Corporation at such office that the holder elects to convert all or any number of shares of the Series A Preferred represented by such certificate or certificates, provided, however, that in the event of an automatic conversion pursuant to clause (b) of this Section 4, the outstanding shares of Series A Preferred shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent, and provided further, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Series A Preferred are either delivered to the Corporation or its transfer agent as provided above, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. The Corporation shall, as soon as practicable after such delivery, or such agreement and indemnification in the case of a lost certificate, issue and deliver at the office of the Corporation or of any transfer agent, as the case may be, to such holder of Series A Preferred, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into a fractional share of Common Stock. Such conversion shall not terminate the rights of the holders of the Series A Preferred or Common Stock issuable upon conversion of the Series A Preferred to receive dividends which have been declared but are unpaid with respect to the Series A Preferred prior to the date of conversion. Except as provided above, such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Series A Preferred to be converted, or in the case of automatic conversion immediately prior to the close of business on the date of closing of a Qualifying Public Offering, and the person or persons entitled to receive the shares of 6 7 Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock at the close of business on such date. (d) Series A Preferred Conversion Price Adjustments. The Series A Conversion Price shall be subject to adjustment upon the issuance of Additional Shares of Common Stock from time to time as follows: (i) Special Definitions. For purposes of this Section 4(d), the following definitions shall apply: (1) "Options" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities. (2) "Original Issue Date" shall mean the date on which the first share of Series A Preferred was first issued. (3) "Convertible Securities" shall mean any evidences of indebtedness, shares (other than Common Stock and Series A Preferred) or other securities convertible into or exchangeable for Common Stock. (4) "Conversion Price" shall be the Series A Conversion Price. (5) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued (or, pursuant to Section 4(d)(iii) below, deemed to be issued) by the Corporation after the Original Issue Date other than shares of Common Stock issued or issuable: (A) in an amount not exceeding 1,500,000 shares of Common Stock to officers, directors and employees of, and consultants and vendors to the Corporation or any subsidiary thereof, pursuant to a stock option plan, stock purchase plan or other employee stock incentive plan approved by the Board of Directors or other stock arrangements which have been approved by the Board of Directors at prices or exercise prices determined by the Board of Directors to be not less than the fair market value of such shares, options or other stock arrangements on the date of grant thereof; (B) upon conversion of shares of the Series A Preferred or the exercise or conversion of any Options outstanding on the Original Issue Date; (C) pursuant to any event for which adjustment has already been made pursuant to this Section 4(d); (D) as a dividend or distribution on the Series A Preferred; 7 8 (E) as a dividend or distribution on the Common Stock; (F) upon any subdivision or split up of Common Stock; (G) upon any capital reorganization of the Corporation; or (H) up to an aggregate of 9,214,344 shares as all or a portion of the consideration for acquisitions by the Corporation pursuant to the Corporation's acquisition strategy in effect on the Original Issue Date. (ii) No Adjustment of Conversion Price. No adjustment in the Conversion Price shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the Corporation is less than the Conversion Price, in effect on the date of and immediately prior to such issue. (iii) Deemed Issue of Additional Shares of Common Stock. Except as provided in Section 4(d)(i)(5) above, in the event the Corporation at any time or from time to time after the Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 4(g)(v) below) of such Additional Shares of Common Stock would be less than the Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued: (1) no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities; (2) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or increase or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the initial Conversion Price thereof set forth in Section 8 9 4(a) above (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities; (3) on the expiration or cancellation of any Options or the termination of the right to convert or exchange any Convertible Securities which shall have not been exercised, if the Conversion Price shall have been adjusted upon the original issuance thereof or shall have been subsequently adjusted pursuant to clause (2) above, the Conversion Price shall be recomputed as if the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefore was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged plus the consideration actually received by the Corporation upon such conversion or exchange, if any; and (4) no readjustment pursuant to clause (2) or clause (3) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the initial Conversion Price on the original adjustment date (unless the Conversion Price is increased above the initial Conversion Price pursuant to Section 4(e)(2) or (e)(4)), or (ii) the Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock (other than those the subject of such adjustments) between the original adjustment date and such readjustment date; and (iv) Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock. In the event this Corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(d)(iii), but excluding stock dividends, subdivisions or split-ups that are the subject of adjustment pursuant to Section 4(e)) without consideration or for a consideration per share less than the Conversion Price applicable on and immediately prior to such issue, then and in such event, the Conversion Price shall be reduced concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying the Conversion Price in effect on the date of and immediately prior to such issue by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue (on a fully diluted as converted basis), including without limitation the number of shares of Common Stock issuable upon conversion of the Series A Preferred outstanding immediately prior to such issue and (ii) the number of shares of Common Stock which the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Conversion Price in effect on the date of and immediately prior to such issue; and the denominator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue (on a fully diluted as converted basis), including without limitation the 9 10 number of shares of Common Stock issuable upon conversion of the Series A Preferred outstanding immediately prior to such issue and (ii) the number of such Additional Shares of Common Stock so issued. (v) Determination of Consideration. For purposes of this Section 4(g), the consideration received by the Corporation for the issue of any Additional Shares of Common Stock shall be computed as follows: (1) Cash and Property. Such consideration shall: (A) insofar as it consists of cash, be computed at the aggregate amount of cash received by the Corporation; (B) insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (C) in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors. (2) Options and Convertible Securities. The consideration per share received by the Corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(d)(ii) and 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing: (A) the total amount, if any, received or receivable by the Corporation as consideration for the issue of such Options or Convertible Securities, plus the (ii) aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the Corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such options for Convertible Securities and the conversion or exchange of such Convertible Securities by (B) the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities. (e) Adjustment of Conversion Price of Series A Preferred. The Series A Conversion Price shall be subject to adjustment from time to time as follows: (1) Adjustments for Subdivisions of Common Stock. If the number of shares of Common Stock outstanding at any time after filing this Certificate of Amendment to Certificate of Incorporation with the Secretary of State of the State of 10 11 Delaware is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split up of stock, then the Series A Conversion Price then in effect shall, concurrently with the effectiveness of such dividend, subdivision or split up, be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of Series A Preferred shall be increased in proportion to such increase of outstanding shares of Common Stock. (2) Adjustments for Combinations of Common Stock. If the number of shares of Common Stock outstanding at any time after filing this Certificate of Amendment to Certificate of Incorporation with the Secretary of State of the State of Delaware is decreased by a combination of the outstanding shares of Common Stock, then the Series A Conversion Price then in effect shall, concurrently with the effectiveness of such combination, be proportionately increased so that the number of shares of Common Stock issuable upon conversion of each share of Series A Preferred shall be decreased in proportion to such decrease in outstanding shares of Common Stock. (3) Adjustments for Stock Dividends and Other Distributions. In the event the Corporation at any time or from time to time makes or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution (excluding any repurchases of securities by the Corporation not made on a pro rata basis from all holders of any class of the Corporation's securities) payable in property or in securities of the Corporation other than shares of Common Stock, then and in each such event the holders of Series A Preferred shall receive at the time of such distribution, the amount of property or the number of securities of the Corporation that they would have received had their Series A Preferred been converted into Common Stock on the date of such event. (4) Adjustments for Reclassification, Exchange and Substitution. Except as provided in Section 2 upon a Liquidity Event, if the Common Stock issuable upon conversion of the Series A Preferred shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), each share of Series A Preferred shall thereafter be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series A Preferred immediately before that change. In addition, to the extent applicable in any reorganization or recapitalization, provision shall be made so that the holders of the Series A Preferred shall thereafter be entitled to receive upon conversion of the Series A Preferred the number of shares of stock or other securities or property of the Corporation or otherwise, to which a holder of Common Stock deliverable upon conversion would have been entitled on such reorganization or recapitalization. (f) Amendments to Certificate of Incorporation. The Corporation shall not amend its Certificate of Incorporation without the approval, by vote or written 11 12 consent, by the holders of at least 66 2/3% of the then outstanding shares of Series A Preferred, voting together as a separate class, if such amendment would (x) amend, alter or change any of the rights, preferences, privileges of or limitations provided for herein for the benefit of any shares of Series A Preferred, (y) increase or decrease (other than by redemption or conversion) the authorized number of shares of Series A Preferred or (iii) create any new class of equity securities having rights and preferences senior to or on a parity with the Series A Preferred with respect to voting, dividends or liquidation preference. (g) Certificate as to Adjustments. Upon the occurrence of each adjustment or readjustment of the Series A Conversion Price pursuant to Section 4(d), the Corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Series A Preferred a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Corporation shall, upon the written request at any time of any holder of Series A Preferred, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the Series A Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Series A Preferred. Notwithstanding the foregoing, no adjustment of the Series A Conversion Price shall be made if the amount of any such adjustment would be an amount less than $1.00, but any such amount shall be carried forward and an adjustment with respect thereof shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other amount(s) so carried forward, shall aggregate an increase or decrease of $1.00 or more. (h) Notices of Record Date. In the event that the Corporation shall propose at any time: (i) to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus; (ii) to offer for subscription pro rata to the holders of any class or series of its stock any additional shares of stock of any class or series or other rights; (iii) to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or (iv) to merge or consolidate with or into any other corporation, or sell, lease or convey all or substantially ail its property or business, or to liquidate, dissolve or wind up; then, in connection with each such event, the Corporation shall send to the holders of the Series A Preferred: 12 13 (1) at least twenty (20) days' prior written notice of the date on which a record shall be taken for such dividend, distribution or subscription rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (iii) and (iv) above; and (2) in the case of the matters referred to in (iii) and (iv) above, at least twenty (20) days' prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event). Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to the holders of Series A Preferred at the address for each such holder as shown on the books of the Corporation. Section 5. Voting. Except as may be otherwise provided in these terms of the Series A Preferred or by law, the Series A Preferred shall vote together with all other classes and series of voting stock of the Corporation as a single class on all actions to be taken by the stockholders of the Corporation. Each share of Series A Preferred shall entitle the holder thereof to such number of votes per share on each such action as shall equal the number of shares of Common Stock (including fractions of a share) into which each share of Series A Preferred is then convertible pursuant to Section 4 hereof. B. COMMON STOCK All shares of Common Stock will be identical and will entitle the holders thereof to the same rights and privileges. Section 1. Dividends. When, as and if dividends are declared thereon, whether payable in cash, property or securities of the Corporation, the holders of Common Stock will be entitled to share equally in and receive, in accordance with the number of shares of Common Stock held by each such holder, such dividends. Dividends payable under this Section 1 shall be paid to the holders of record of the outstanding Common Stock as their names shall appear on the stock register of the Corporation on the record date fixed by the Board of Directors in advance of declaration and payment of each dividend. Any Common Stock issued as a dividend pursuant to this Section 1 shall, when so issued, be duly authorized, validly issued, fully paid and non-assessable, and free of all liens and charges. Notwithstanding anything contained herein to the contrary, no dividends on Common Stock shall be declared by the Corporation's Board of Directors or paid or set apart for payment by the Corporation at any time that such declaration, payment, or setting apart is prohibited by applicable law. Section 2. Voting Rights. Each holder of the Common Stock shall be entitled to one vote for each share of Common Stock held on all matters submitted to a vote of the stockholders. 13 14 Section 3. Other Rights. Except for and subject to those rights expressly granted to the holders of Series A Preferred, or as otherwise provided herein, and except as may be provided by the laws of the State of Delaware, the holders of Common Stock shall have exclusively all other rights of stockholders, including, without limitation, (a) the right to receive dividends, when, as and if declared by the Board of Directors, out of assets lawfully available therefor, and (b) in the event of any distribution of assets upon a liquidation, dissolution or winding up or otherwise, the right to receive ratably and equally with all other holders of Common Stock all of the assets and funds of the Corporation remaining after the payment to the holders of the Series A Preferred, of the specific amounts which they are entitled to receive upon such liquidation, dissolution or winding up. For the purposes of this Section 3, neither the consolidation, combination or merger of the Corporation with or into any other corporation or corporations in which the stockholders of the Corporation receive cash or capital stock and/or other securities (including debt securities) of the acquiring corporation (or of the direct or indirect parent corporation of the acquiring corporation), nor the sale, lease, or transfer by the Corporation of all or any part of its assets, nor the reduction of the capital stock of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation. C. PREFERRED STOCK Subject to Section A.4(f) of this Paragraph Fourth, the Board of Directors (or a duly authorized committee thereof) is hereby expressly authorized to provide for, designate and issue, out of the authorized but unissued shares of Preferred Stock, one or more series of Preferred Stock which shall have the powers, terms, conditions, designations, preferences and privileges, the relative, participating, optional and other special rights, and the qualifications, limitations and restrictions, if any, as provided herein. Before any shares of any such series are issued, the Board of Directors (or a duly authorized committee thereof) shall fix, and is hereby expressly empowered to fix, as to the shares of any such series: (a) the designation of such series, the number of shares to constitute such series and the stated value thereof, if different from the par value thereof; (b) whether the shares of such series shall have voting rights or powers, in addition to any voting rights required by law and, if so, the terms of such voting rights or powers, which may be full or limited; (c) the dividends, if any, payable on such series, whether any such dividends shall be cumulative and, if so, from what dates, the conditions and dates upon which such dividends shall be payable, the preferences or relation which such dividends shall bear to the dividends payable on any shares of stock of any other class or any other series of this class; (d) whether the shares of such series shall be subject to redemption by the Corporation and, if so, the times, prices and other conditions of such redemption; 14 15 (e) the amount or amounts payable upon shares of such series upon, and the rights of the holders of such series in, the liquidation, dissolution or winding up, or upon any distribution of the assets, of the Corporation; (f) whether the shares of such series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to which and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof; (g) whether the shares of such series shall be convertible into or exchangeable for shares of stock of any other class or any other series of this class or any other securities and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchange; (h) the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Corporation of, the Common Stock or shares of stock of any other class or any other series of this class; (i) the conditions or restrictions, if any, to be effective while any shares of such series are outstanding upon the creation of indebtedness of the Corporation or upon the issue of any additional stock, including additional shares of such series or of any other series of this class or of any other class; and (j) any other powers, designations, preferences and relative, participating, optional or other special rights, and any qualifications, limitations, or restrictions thereof. The powers, designations, preferences and relative, participating, optional or other special rights of each series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. The Board of Directors is hereby expressly authorized from time to time to increase (but not above the total number of shares thereof then outstanding) the number of shares of Preferred Stock designated to any one or more series of Preferred Stock pursuant to this Section C of this Paragraph Fourth. Fifth: A. Board of Directors. The number of directors of the Corporation shall consist of not less than five (5) nor more than fifteen (15) directors. The exact number of directors shall be determined from time to time by a resolution or resolutions adopted by the affirmative vote of a majority of the total number of directors which the Corporation would have if there were no vacancies or by resolution adopted by the stockholders. Directors (whether elected at an annual meeting or to fill a vacancy or otherwise) shall hold office for a term expiring at the next annual meeting of stockholders 15 16 of the Corporation, at which meeting their successors will be elected. Directors shall hold office until their successors are duly elected and qualified, subject, however, to a director's prior death, resignation, disqualification or removal from office. Any additional director elected to fill a vacancy resulting from an increase in the number of directors shall hold office for a term that shall coincide with the remaining term of the existing directors, but in no case shall a decrease in the number of directors shorten the term of any incumbent directors. B. Removal of Directors. A director may be removed from office, either with or without cause, by the affirmative vote of the holders of a majority of the combined voting power of all outstanding shares of stock then entitled to vote generally in the election of directors, voting as a single class. Sixth: The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation, and in furtherance and, except as specifically set forth in this Paragraph, not in limitation of the powers of the Corporation and of its directors and stockholders conferred by statute: (1) Subject to the provisions of Paragraph Eleventh hereof, the Board of Directors shall have power without (except as provided by applicable law) the assent or vote of the stockholders to make, alter, amend, change, add to or repeal the By-laws of the Corporation; to authorize and cause to be executed mortgages and liens upon all or any part of the property of the Corporation; to determine the use and disposition of any surplus or net profits; to fix the times for the declaration and payment of dividends; and to set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve. (2) In addition to the powers and authorities hereinbefore or by statute expressly conferred upon them, the Board of Directors is hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation; subject, nevertheless, to the provisions of the laws of the state of Delaware, this Amended and Restated Certificate of Incorporation and the Corporation's By-laws, as in effect from time to time. SEVENTH: The books and records of the Corporation may be kept (subject to any mandatory requirement of law) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or by the By-laws of the Corporation. EIGHTH: No director shall be liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, provided that the foregoing does not eliminate or limit any liability that may exist with respect to (1) a breach of the director's duty of loyalty to the Corporation or its stockholders, (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) liability under Section 174 of the DGCL or (4) a transaction from which the director derived an improper personal benefit, it being the intention of the foregoing provision to eliminate the liability of the Corporation's directors to the 16 17 Corporation or its stockholders to the fullest extent permitted by Section 102(b)(7) of the DGCL, as in effect on the date hereof and as such Section may be amended after the date hereof to the extent such amendment permits such liability to be further eliminated or limited. No amendment, modification or repeal of this Paragraph Eighth shall adversely affect any right or protection of a director that exists at the time of such amendment, modification or repeal. NINTH: Subject to the provisions of Section A.4(f) of Paragraph Fourth, the Corporation reserves the right to amend or repeal any provision contained in this Amended and Restated Certificate of Incorporation in the manner now or hereafter prescribed by the laws of the State of Delaware, and all rights herein conferred upon stockholders or directors are granted subject to this reservation. TENTH: Following the consummation of an initial public offering of Common Stock or any transaction or event as a result of which any Common Stock is listed on a national securities exchange or registered under Section 12 of the Securities Exchange Act of 1934, as amended, any action required or permitted to be taken by the stockholders of the Corporation must be affected at a duly called annual or special meeting of stockholders of the Corporation, or by a consent in writing to the taking of such action if provision for such consent is made in the Corporation's By-laws. ELEVENTH: In furtherance and not in limitation of the power conferred upon the Board of Directors by law, the Board of Directors shall have the power to make, adopt, alter, amend and repeal from time to time the By-laws of the Corporation, subject to the right of the stockholders entitled to vote with respect thereto to alter, amend and repeal By-laws adopted by the Board of Directors. 3. This Amended and Restated Certificate of Incorporation was duly adopted in accordance with the provisions of Sections 242 and 245 of the DGCL. The Board of Directors adopted resolutions setting forth this Amended and Restated Certificate of Incorporation, declaring its advisability and directing its consideration by the stockholders of the Corporation. A majority of the stockholders of the Corporation duly approved this Amended and Restated Certificate of Incorporation in accordance with Section 242 of the DGCL by executing a Waiver of Meeting of Stockholders and Majority Written Consent to Adoption of Resolutions pursuant to Section 228 of the DGCL, and written notice of such consent has been given to all stockholders who have not consented in writing to said amendments. 17 18 IN WITNESS WHEREOF, Interliant, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by its - ---------------------- and attested to by its Secretary and caused the corporate seal of the Corporation to be hereunto affixed this ---- day of May, 1999. -------------------------------- Name: Title: Attest: - --------------------------- Secretary 18 EX-10.1 3 PROFESSIONAL SERVICES AGREEMENT 1 Exhibit 10.1 PROFESSIONAL SERVICES AGREEMENT This PROFESSIONAL SERVICES AGREEMENT (this "Agreement") is entered into by and between Sage Networks, Inc., a Georgia corporation with principle offices at 215 First St., 3rd Floor, Cambridge, MA 02142 ("Customer") and Portal Software, Inc., a California corporation with principle offices located at 20863 Stevens Creek Boulevard, Suite 200, Cupertino, California 95014 ("Portal") is effective as of July 31, 1998 ("Effective Date") and describes the terms and conditions pursuant to which Portal will provide professional services with respect to the software licensed by Portal to Customer ("Portal Software") pursuant to a certain Software License and Support Agreement (the "License Agreement"). Any capitalized terms not expressly defined in this Agreement have the meanings given to such terms in the License Agreement. In consideration of the mutual promises and upon the terms and conditions set forth below, the parties agree as follows: 1 SCOPE OF SERVICES 1.1 SERVICES. Portal will provide the professional services (the "Services") described in Schedule A attached hereto, as amended from time to time by agreement of the parties. 1.2 MANNER OF PERFORMANCE. Portal will retain sole and exclusive right to control or direct the manner or means by which the Services are performed and may subcontract or assign any or all of its obligations and rights under this Agreement. Any such subcontract or assignment is subject to Customer's consent, which consent shall not be unreasonably withheld or delayed. 1.3 SOFTWARE. The Services will be provided for the current release of the Portal Software, unless otherwise specifically noted. Portal will not be responsible for the migration or implementation of the Services for Updates, releases or versions of the Portal Software, unless Customer separately contracts for such migration or implementation. 2 CUSTOMER'S DUTIES AND RESPONSIBILITIES 2.1 DATA AND INFORMATION. Customer shall make available at Customer's offices in a timely manner, upon reasonable advance notice, at no charge to Portal all technical data, computer facilities, programs, files, documentation, test data, sample output, or other information and resources required by Portal for the performance of the Services. Customer will be responsible for, and assumes the risk of any problems resulting from, the content, accuracy, completeness and consistency of all such data, materials and information supplied by Customer. 2.2 EQUIPMENT. Customer shall provide, at no charge to Portal, office space, services and equipment (such as copiers, fax machines, and modems) as Portal reasonably requires to provide the Services. 3 RELATIONSHIP OF PARTIES 3.1 INDEPENDENT CONTRACTORS. Each party will be and act as an independent contractor and not as an agent or partner of, joint venturer with, the other party for any purpose related to this Agreement or the transactions contemplated by this Agreement, and neither party will by virtue of this Agreement will have any right, power or authority to act or create any obligation, expressed or implied, on behalf of the other party. 3.2 CONTACT PERSON. Each party will appoint in writing an employee or agent of such party to act as the "Contact Person" for all communication between the parties related to the Services. The contact person will be responsible for monitoring the status of the Services and will schedule regular meetings with both technical and management personnel of each party to review the status of the Services. Either party may change its Contact Person upon written notice to the other. 4 CONFIDENTIALITY Each party agrees that all code, inventions, algorithms, know-how, ideas and all other business, technical and financial information each party obtains from the other are the confidential property of the disclosing party ("Proprietary Information" of the disclosing party). Without limiting the generality of the foregoing, any code, inventions, algorithms, know-how, ideas and all other business, technical and financial information resulting from Portal's performance of the Services shall be deemed Proprietary Information of Portal. Except as expressly and unambiguously allowed herein, the receiving party will hold in confidence and not use or disclose any Proprietary Information of the disclosing party and shall similarly bind its employees in writing. The receiving party shall not be obligated under this Section 4 with respect to information the receiving party can document: (a) is or has become publicly available without restriction through no fault of the receiving party or its employees or agents; (b) is received without restriction from a third party lawfully in possession of such information and lawfully empowered to disclose such information; (c) was rightfully in the possession of the receiving party without restriction prior to its disclosure by the other party; or (d) was independently developed by employees or consultants of the receiving party without use or reference or access to such Proprietary Information. 5 PORTAL'S RIGHT TO DEVELOP COMPETITIVE PRODUCTS Nothing in this Agreement shall be construed as to preclude Portal from developing, using, or marketing programs or other materials that may be competitive with that prepared for Customer hereunder, irrespective of whether such programs are similar or related to the programs developed under this Agreement. 6 FEES AND PAYMENTS 6.1 FEES. Customer shall pay Portal for the Services in accordance with the fees and rates set forth in Schedule A attached hereto. Portal hereby reserves the right to modify the fees by providing Customer with written notice within ninety (90) days of such notification provided, however, Customer shall have the right to cancel this Agreement within said ninety (90) day period in the event Customer desires not to be bound by such modification. Portal will invoice Customer on a biweekly basis as Services are performed. All payments for fees and expenses must be made within thirty (30) days of the date of invoice. In the event that within one hundred and eighty days from the Effective Date hereof Portal reduces its fees and rates offered to other customers generally for the same services to be rendered to 2 PROFESSIONAL SERVICES AGREEMENT Customer hereunder, below the fees and rates set forth herein, then the fees and rates herein shall be reduced to such prevailing fees and rates. 6.2 EXPENSES. Customer shall reimburse Portal for all reasonable travel and other related expenses incurred by Portal in connection with performance of the Services subject to the following: (i) Portal agrees to substantially comply with Customer's current Corporate Travel and Entertainment Policy, a copy of which is attached hereto as Schedule B; (ii) Customer will not pay for travel expenses in connection with Portal personnel who live within fifty miles of the Customer site. 6.3 TAXES. Customer agrees to pay or reimburse Portal for all federal, state, dominion, provincial or local sales taxes, fees or duties arising out of this Agreement or the transaction contemplated by this Agreement (other than taxes on the net income of Portal). 6.4 INTEREST AND FURTHER COSTS. Customer shall pay Portal one and one-half percent (1 1/2% ) interest per month on the outstanding balance of any fees or expenses not paid within thirty (30) days of the date of invoice. Customer shall be responsible for all costs incurred by Portal in order to recover payment of Customer's account, including without limitation, all reasonable professional fees and legal costs. Without waving or prejudicing any other rights or remedies, Portal shall have the right to suspend or delay the provision of Services on a day-for-day basis equal to the number of days a payment due hereunder is past due beginning five (5) days after notice to Customer if Customer has not cured such payment default within such five (5) day period. 6.5 INVOICES. Services will commence as soon as practical following Portal's receipt and acceptance of a signed copy of this Agreement and a purchase order or other written authorization of the Services. Fees for the Services shall be payable when invoiced and shall be deemed overdue if they remain unpaid 31 days after they become payable. If Customer's procedures require that an invoice be submitted against a purchase order before payment can be made, Customer will be responsible for issuing such purchase order at least thirty (30) days before the payment date. 7 LIMITED WARRANTY AND LIMITATION OF LIABILITY 7.1 PORTAL WARRANTS THAT THE SERVICES PROVIDED UNDER THIS AGREEMENT WILL BE PERFORMED IN A PROFESSIONAL AND WORKMAN-LIKE MANNER CONFORMING TO GENERALLY ACCEPTED INDUSTRY STANDARDS AND PRACTICES. EXCEPT FOR THE FOREGOING, PORTAL MAKES NO WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, REGARDING OR RELATING TO ANY MATERIALS OR SERVICES FURNISHED OR PROVIDED TO ANY CUSTOMER UNDER THIS AGREEMENT OR THE RESULTS THEREOF. PORTAL SPECIFICALLY DISCLAIMS ALL IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO SAID MATERIAL AND SERVICES, AND WITH RESPECT TO THE USE OF ANY OF THE FOREGOING. 7.2 IN NO EVENT WILL PORTAL BE LIABLE FOR ANY LOSS OF PROFITS, LOSS OF USE, BUSINESS INTERRUPTION, LOSS OF DATA, COST OF COVER, OR INDIRECT, SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF ANY KIND IN CONNECTION WITH OR ARISING OUT OF THE FURNISHING, PERFORMANCE OR USE OF SERVICES, WHETHER ALLEGED AS A BREACH OF CONTRACT OR TORTIOUS CONDUCT, INCLUDING NEGLIGENCE, EVEN IF PORTAL HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN ADDITION, PORTAL WILL NOT BE LIABLE FOR ANY DAMAGES CAUSED BY DELAY IN DELIVERY OR FURNISHING THE SERVICES. PORTAL'S LIABILITY UNDER THIS AGREEMENT FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL AND/OR CONSEQUENTIAL DAMAGES OF ANY KIND, INCLUDING, WITHOUT LIMITATION, RESTITUTION, WILL NOT, IN ANY EVENT, EXCEED THE FEES PAID BY CUSTOMER TO PORTAL UNDER SECTION 5.1 OF THIS AGREEMENT. 7.3 Customer shall indemnify Portal against all claims by third parties related to this Agreement. 7.4 The provisions of this Section 7 allocate risks under this Agreement between Customer and Portal. Portal's pricing reflects this allocation of risk and limitation of liabilities. 7.5 No action arising our of any breach or claimed breach of this Agreement or the transactions contemplated by this Agreement may be brought by either party more than one (1) year after the cause of action has accrued. For purposes of this Agreement, a cause of action will be deemed to have accrued when a party knew or reasonably should have known of the breach or claimed breach. 7.6 No employee, agent, representative, or affiliate of Portal has authority to bind Portal to any oral representations or warranty concerning the Software or the Services. Any written representation or warranty not expressly contained in this Agreement will not be enforceable. 8 TERM AND TERMINATION 8.1 TERM. This Agreement will take effect on the Effective Date and will remain in effect, unless earlier terminated in accordance with Section 8.2, until all of the Services have been completed. 8.2 TERMINATION. (a) This Agreement may be terminated, with or without cause, by Customer upon thirty (30) days' prior written notice to Portal, provided that no such termination will entitle Customer to a refund of any portion of the Services fee. (b) This Agreement may be terminated by Portal if Customer (i) fails to pay any amount due to Portal under this Agreement within thirty (30) days after Portal gives written notice of such non-payment, or (ii) commits a material non-monetary breach of this Agreement, which breach if capable of being cured, is not cured within thirty (30) days of written notice of such breach by Portal. (c) This Agreement may be terminated by Portal if Customer (i) terminates or suspends its business activities, (ii) becomes insolvent, admits in writing its inability to generally pay its debts as they mature, makes an assignment for the benefit of creditors, or becomes subject to direct control of a trustee, receiver or similar authority, or (iii) becomes subject to any bankruptcy or insolvency proceeding under federal or state statutes that is not dismissed within ninety (90) days. (d) In the event of any termination, each party shall pay to the other all amounts accrued hereunder, whether billed or unbilled, as of the date of the termination. There shall be no right of set-off. 8.3 EFFECT OF TERMINATION. Notwithstanding the foregoing, Sections 3,4,5,6,7,9,10,11, and 12 of this Agreement and any accrued rights to payment shall survive termination, regardless of the reason for termination. 3 PROFESSIONAL SERVICES AGREEMENT 9 ASSIGNMENT Neither party shall have any right or ability to assign or transfer any obligations or benefits under this Agreement except to a successor entity by way of a sale of assets, merger or consolidation without the prior written consent of the other party, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, either party may assign or transfer any rights to receive payments hereunder. 10 NOTICE All notices under this Agreement shall be in writing, and shall be deemed given when personally delivered, or five (5) days after being sent by prepaid, certified or registered U.S. mail ,or upon receipt after being sent by commercial overnight courier service with tracking capabilities, to the appropriate address set forth below. FOR PORTAL: ATTN: LEGAL DEPARTMENT PORTAL SOFTWARE, INC. 20863 STEVENS CREEK BOULEVARD, SUITE 200 CUPERTINO, CA 95014 FOR LICENSEE: SAGE NETWORKS, INC. 215 FIRST STREET CAMBRIDGE, MA 02142 AND ATTN: GENERAL COUNSEL SAGE NETWORKS, INC. 11 MARTINE AVENUE WHITE PLAINS, NY 10606 11 FORCE MAJEURE Either party to this Agreement shall be excused from any delay or failure in performance hereunder, except the payment of fees by Customer to Portal, caused by reason of occurrence or contingency beyond its reasonable control, including without limitation acts of God, earthquake, labor disputes and strikes, riots, war or governmental requirements. 12 MISCELLANEOUS 12.1 WAIVERS AND MODIFICATIONS The failure of either party to enforce its rights under this Agreement at any time for any period shall not be construed as a waiver of such rights. No changes or modifications to or waivers of any provisions of this Agreement shall be effective unless evidenced in writing and signed by both parties. 12.2 SEVERABILITY In the event that any provision of this Agreement shall be determined to be illegal or unenforceable, such provision will be limited or eliminated to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect and enforceable. 12.3 GOVERNING LAW AND JURISDICTION This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to conflicts of law provisions thereof. In any action or proceeding to enforce rights under this Agreement, the prevailing party will be entitled to recover costs and reasonable attorney's fees. 12.4 HEADINGS Headings herein are for convenience of reference only and shall in no way affect the interpretation of the Agreement. 12.5 ENTIRE AGREEMENT This Agreement, including all Schedules hereto, supersedes all proposals, oral or written, all negotiations, conversations, discussions or agreements between or among the parties relating to the subject matter of this Agreement and all past dealing or industry custom. IN WITNESS WHEREOF, the parties have executed this Agreement. PORTAL SOFTWARE, INC. ("PORTAL") By: /s/ D. Karen Ha --------------------------------------------------------------------------- (Typed or Printed Name): D. Karen Ha ------------------------------------------------------ Title: Vice President ------------------------------------------------------------------------ Date: August 6, 1998 ------------------------------------------------------------------------- SAGE NETWORKS, INC. ("CUSTOMER") By: /s/ Leonard J. Fassler ---------------------------------------------------------------------------- (Typed or Printed Name): Leonard J. Fassler ------------------------------------------------------ Title: Co-Chairman ------------------------------------------------------------------------ Date: July 31, 1998 ------------------------------------------------------------------------- 4 [PORTAL LOGO] SCHEDULE A
__________________________________________________________________________________________________________________________ c CLIENT: Sage Networks, Inc. PURCHASE ORDER NO: ___________________________________ ADDRESS: 215 First Street PURCHASE ORDER DATE: ___________________________________ Cambridge, MA 02142 PORTAL'S CONTRACT NO: ___________________________________ ___________________________________________________ PORTAL LICENSE NO: ___________________________________ ___________________________________________________ PROJECT ID NO: ___________________________________ __________________________________________________________________________________________________________________________ CONTRACT ADMINISTRATOR PORTAL PROJECT MANAGER Name: _____________________________________________ Name: ______________________________________________________ Address: __________________________________________ Address: ____________________________________________________ Telephone: ________________________________________ Telephone: __________________________________________________ BILLING/ACCOUNTS PAYABLE CONTACT PORTAL PROGRAM LICENSEE IF OTHER THAN CLIENT Name: ___________________________________________ Name: _______________________________________________________ Address: _________________________________________ Address: ____________________________________________________ ___________________________________________________ _____________________________________________________________ Telephone: _______________________________________ Telephone: __________________________________________________ __________________________________________________________________________________________________________________________ SPECIAL NOTES: __________________________________________________________________________________________________________________________
5 PROFESSIONAL SERVICES AND TRAINING RATES PORTAL PROFESSIONAL SERVICES GROUP ("PPSG") RATES
- ----------------------------------------------------------------------------------------------------------------------------- JOB TITLE HOURLY RATE - ----------------------------------------------------------------------------------------------------------------------------- PPSG CONSULTANT $209.00/hour (plus expense) - ----------------------------------------------------------------------------------------------------------------------------- PPSG PROJECT MANAGER $266.00/hour (plus expense) - -----------------------------------------------------------------------------------------------------------------------------
TRAINING RATES
- ----------------------------------------------------------------------------------------------------------------------------- TITLE RATE - ----------------------------------------------------------------------------------------------------------------------------- BASIC INFRANET DEVELOPER TRAINING $2,500.00/student per week - ----------------------------------------------------------------------------------------------------------------------------- ADVANCED INFRANET DEVELOPER TRAINING $2,500.00/student per week - -----------------------------------------------------------------------------------------------------------------------------
The rates set forth above are for training services offered at Portal's training facility at its Corporate headquarters in Cupertino, California. IMPLEMENTATION SERVICES - ----------------------------------------------------------------------------------------------------------------------------- DESCRIPTION AMOUNT - ----------------------------------------------------------------------------------------------------------------------------- IMPLEMENTATION SERVICES (SEE FOLLOWING PAGES - ATTACHED SOW) - -----------------------------------------------------------------------------------------------------------------------------
In the event Portal increases its rates beyond those set forth above within the next three (3) years following the Effective Date of this Agreement, Portal agrees that it will honor the rates set forth above for that time period. If Portal's professional services rates drop below those set forth above, Customer shall be permitted to acquire professional services at Portal's then current rates. 6 SCHEDULE B SAGE NETWORKS, INC. CORPORATE TRAVEL AND ENTERTAINMENT POLICY Policy Dated: February 16, 1999 General Policy It is Sage's policy to reimburse employees for actual, reasonable and proper business expenditures that are incurred while conducting authorized business for Sage and that meet IRS regulations as a business expense. Managers are responsible for ensuring that employees who incur travel or entertainment expenses comply with the guidelines in this policy. Employees traveling on corporate business are expected to exercise good judgement, ensure that expenditures incurred are reasonable, necessary and in the best interest of the Company and are within the guidelines of this policy. Scope All Sage employees. Procedures It is the responsibility of each manager reviewing and approving expense reports to ensure that reported expenses are in accordance with these policies, and properly documented. Reimbursement of reported expenses are subject to audit by Sage and the IRS to ensure compliance with this policy and Internal Revenue Service regulations. Fraudulent entries on expense reports are considered cause for immediate dismissal. A. Expense Reporting/Processing - - All employees should use the standard Sage expense report form for reporting expenses. An electronic version is available as an excel spreadsheet. - - Receipts are required for all expenses. - - Purpose of the trip (if applicable), should be noted on the expense report. - - Expenses must be itemized in the appropriate columns. Include the business purpose, name of restaurant and name of attendees and affiliation for all business meals with two or more people, in the description column of the expense report. - - Employees submitting more than one expense report should be sure that the receipts related to each report are attached to the appropriate report. - - Completed expense reports should be submitted to the employee's direct supervisor for approval. It is the responsibility of the manager to REVIEW the expense report before approving. The report should then be submitted to the Finance Department for 7 processing. All properly approved expense reports received by 12 noon on Friday will be processed by Finance by the following Friday, if not sooner. - - Expense reports are to be submitted to the employee's direct supervisor for approval within one week of completion of travel. Expense reports received more than 60 days after the expense is incurred will not be reimbursed. - - Unusual items not specifically approved by the Controller or COO will be questioned via e-mail requesting an explanation of the item from the employee. The employee's expense report will not be processed until the unusual items are satisfactorily explained. B. Lost Receipts - - If an employee loses a receipt for airline tickets, hotel charges or rental cars, the vendor can usually provide detailed copies of receipts. For expenses paid in cash or lost receipts, a letter from the employee's supervisor authorizing payment without receipt must be attached to the expense report. C. Travel Authorization - - All travel must be approved IN ADVANCE by the employee's direct supervisor. This should be done using the Company's Travel Authorization Form and should indicate all options researched (i.e., flights, Saturday stay, etc.). All approved Travel Authorization Forms should be forwarded to the Finance Department. Expenses incurred without proper approval will not be reimbursed. - - Employees must make all of their own travel arrangements through Vista Travel Agency, the Company's travel agency. Vista has negotiated corporate air, hotel and car rental rates for the Company, which may not be available if these providers are contacted directly. Expenses related to travel arrangements not made through Vista may not reimbursable unless documentation can be provided indicating that lower prices can be obtained elsewhere. - - Vista can be reached at (617) 621-0100 in MA or (800) 875-0100 out of MA, ask for Sharon McHugh (x230), who is the agent handling Sage's account. Vista's office manager is Jan Daubenspeck (x223) if Sharon is not available. After hours or in emergencies, employees can call (800) 676-0371. D. Air Travel - - Whenever possible, reservations for travel should be made at least 7 days in advance of a trip in order to take advantage of the lowest possible airfares. Employees should evaluate the likelihood of changing plans before booking a penalty fare. - - Vista has been instructed to find Sage employees the lowest airfare possible, including fares that require connections or plane changes. The travel agency has been instructed to call the COO or Controller to approve the selection of a more expensive flight by an employee. The employee must provide the COO or Controller with a valid business need for the approval of the more expensive flight. 8 - - From time to time, the Company may require that employees travel with a particular airline with which it has negotiated special rates. - - All air travel should be coach class, except for international flights of more than six hours, in which case business class is allowed. - - Employees can use their own frequent flyer mileage to upgrade their seating, however they cannot select a higher priced flight in order to be able to upgrade their seat. - - Employees may retain any frequent flyer miles earned while traveling on company business. However, participation in these programs may not result in any incremental costs to the Company when selecting a flight. - - No more than five employees may travel on the same flight. E. Ground Transportation - - Each employee should assess the cost of ground transportation (i.e., car rental vs. taxi) and choose the least expensive option. - - No private limousines are allowed. Public airport or hotel limousine services that are shared are acceptable. Reservations for these services should be made through the Company's travel agency. Again, Vista Travel Agency has negotiated corporate rates that may not be available if an employee calls the limousine service directly. - - When an employee's personal car is used for business travel, other than normal commuting, the Company will reimburse the employee at a rate of $.31 cents/mile. - - Travel to and from the airport is reimbursable. F. Rental Cars - - Midsize cars are to be used in all cases unless more than four people are traveling together. - - Employees are expected to refuel rental cars before returning them to avoid excessive fuel charges by the rental agency. - - As most credit card companies provide collision coverage, this coverage should be waived to avoid unnecessary charges. G. Hotels - - All hotel reservations should be made through Vista Travel Agency to ensure the lowest available rates. Employees are expected to stay in moderately priced business class hotels or motels. From time to time, the Company may require that employees stay in a particular hotel with which it has negotiated special rates. - - If a reservation must be canceled, employees should call the travel agency as soon as possible at the phone number above or call the hotel directly to avoid unnecessary charges. - - In-room entertainment (movies, drinks, etc.) is not reimbursable. H. Meals 9 - - Reimbursable meals are limited to $45 per day in the following cities: New York, Chicago, Los Angeles, San Francisco and Boston. Reimbursable meals are limited to $35 per day in all other cities. These are maximum reimbursable costs. Actual costs should be submitted on expense reports and RECEIPTS ARE REQUIRED for reimbursement. Tear off tabs are not acceptable. - - Room service meals are reimbursable as long as they are within the above limits including any gratuities or service charges. - - Employee lunches are not reimbursable unless they are approved by the CEO or COO. I. Entertainment - - Entertainment expenses for clients or other business associates are reimbursable if the entertainment is the setting for the business meeting. An explanation of the business purpose, the location of the restaurant or establishment and the name of the attendees and their company affiliation should be indicated on the expense report. J. Recruiting - - Travel related to potential recruits must be approved in advance by the CEO or COO. The Company will reimburse the recruit's expenses in accordance with the above employee policy. All recruits must submit expense reports with receipts. The expense report must be approved by the department manager. Travel arrangements should be made through Vista Travel. K. Telephone - - Reasonable costs for phone call for business purposes are reimbursable. These include business calls made from hotel rooms or from home office sites. - - Cellular phone calls will not be reimbursed. - - Phone calls on airplanes are not reimbursable unless it is an emergency. L. Laundry - - Reasonable costs for laundry are reimbursable for trips that require the employee to be away from home for five consecutive days or more. M. Travelers Check Fees - - The Company will reimburse fees for travelers checks. A receipt should be submitted with the expense report. N. Unusual Items 10 - - Unusual expenses must have written approval by the department manager attached to the expense report. Unusual items include: - An amount spent for a reimbursable item that exceeds the normal guidelines. - An expenditure that is not normally considered a business expense. O. Non-Reimbursable Expenses - - Personal items and services purchased while traveling are not reimbursable. These items include, but are not limited to: - Personal air travel and personal trip insurance, including insurance on personal cars - Airline club memberships - Entertainment of or travel expense for spouse - Theater tickets/movie tickets - In-room movies/airplane movies - Purchase of luggage or brief case - Exercise room fees - Bar bills - Golf or other sporting activities - Traffic Fines - Loss of cash advance - Toiletries - Newspapers or magazines - Medicine P. Overseas Conversion Rates - - All expenses should be reported in US dollars. All currency exchange receipts should be saved and used for conversion for actual foreign expenses. If an expense is charged on a credit card, the actual conversion rate should appear on the statement. This rate should be used for expense reimbursement. If a conversion rate cannot be established by these means, then the current rate as published in the Wall Street Journal may be used. Q. Questions Regarding Travel Policy - - Please refer questions regarding the Company's travel policy to your immediate supervisor or to the Finance Department. EX-10.2 4 SOTFWARE LICENSE AND SUPPORT AGREEMENT 1 Exhibit 10.2 ** Indicates that information has been omitted herein pursuant to a request for confidential treatment filed with the Securities and Exchange Commission simultaneously herewith. Portal Proprietary & Confidential [PORTAL LOGO] AGREEMENT NUMBER: SOFTWARE LICENSE AND SUPPORT AGREEMENT This Software License and Support Agreement shall be effective as of July 31, 1998, ("Effective Date") is entered into by and between Portal Software, Inc, a California corporation with principle offices at 20863 Stevens Creek Boulevard, Suite 200, Cupertino, California 95014 ("Portal") and Sage Networks, Inc., a Delaware corporation with principle offices at 215 First Street, Cambridge, MA 02142 ("Licensee") and describes the terms and conditions pursuant to which Portal shall license to Licensee and support certain Portal Software (as defined below). 1 DEFINITIONS 1.1 "Agreement" means this Software License and Support Agreement, including any and all attached Schedules. 1.2 "Application" means the specific Application set forth in Schedule A hereto of the Portal Software running on one or more related computers at a single location, that share the same Portal Software Database. 1.3 "Confidential Information" means this Agreement and all its Schedules, any addenda hereto signed by both parties, all software listings, Documentation, information, data, drawings, benchmark tests, specifications, trade secrets, object code and machine-readable copies of the Portal Software, and any other proprietary information supplied to Licensee by Portal or by Licensee to Portal which is clearly marked as "confidential" if in tangible form, or identified as "confidential" if orally disclosed. 1.4 "Designated Equipment" means the hardware make and model of the server computer(s) on which the Portal Software will be installed. Licensee will use reasonable efforts to provide Portal with at least thirty (30) days prior written notice describing the type and location of the server hardware initially and if moved during the term of this Agreement. 1.5 "Portal Software" means (i) the software products designated on Schedule A hereto provided to Licensee by Portal in executable form (but not the Source Code), (ii) the associated program documentation ("Documentation"), (iii) any source code or object code which Portal in its sole discretion may provide to Licensee from time to time and (iv) any Updates, modifications, maintenance releases, bug fixes or work-arounds which Portal may provide to Licensee from time to time. 1.6 "Portal Software Database" means the customer database associated with the Portal Software which contains the Customer Records. 1.7 "Production Site(s)" means the addresses and locations of the server computer(s) on which the Portal Software will be installed. Licensee agrees to use reasonable efforts to provide Portal with the addresses and locations of such Production Sites at least thirty (30) days prior to any such installation(s). 1.8 "Sage-based Services Distributors" means any entity under contract with Licensee for the distribution of Licensee's products and services. Licensee shall be responsible for ensuring the compliance of its Sage-based Services Distributor with the terms and provisions of this Agreement. Any use of the Portal Software in connection with such Sage-based Services Distributors and their Subscribers is solely limited to the products and services of Sage Networks, Inc., and the Application. If the Portal Software is used in connection with customers of any Sage-based Services Distributors, those customers shall be counted toward Licensee's Subscriber total. 1.9 "Subscriber" means an individual customer record account object ("Customer Record") in the Portal Software Database. The total number of Subscribers is exactly equal to the number of Customer Records in the Portal Software Database, except that Subscribers shall not include fictitious customer records created by Licensee solely for the purposes of testing the Portal Software in a non-production environment. 1.10 "Updates" means any updates to the Portal Software licensed hereunder which Portal, in its discretion, makes generally available to its Portal Software licensees. 2 GRANT OF LICENSE 2.1 For so long as this Agreement remains in force Portal grants to Licensee a perpetual, non-exclusive and non-transferable (subject to Section 11) right to use the Portal Software on the Designated Equipment and on a single Portal Software Database located at the designated Production Site only for the specified Application. Licensee may possess only the number of copies of any Portal Software necessary for the type of use specified above and may use such copies only in accordance with this Agreement and the Documentation. Portal shall at all times retain ownership of all Portal Software including any Documentation and any copies thereof. 2.2 Portal will deliver to Licensee, as soon as is practicable, the necessary password to enable Licensee to download from Portal's website one machine-readable copy of the Software, along with one machine-readable copy of the Documentation. Licensee may not reproduce the Documentation except as needed by Licensee's employees in order to support the Application. 2.3 Licensee may copy the Portal Software for backup or archival purposes provided that all titles, trademark symbols, copyright symbols and legends, and other proprietary markings are reproduced. 2.4 Licensee shall be permitted to create applications using the Policy Facilities Modules source code and Application Programming Interfaces ("Portal Software Customization Tools") which Portal may, in its sole discretion, provide to Licensee from time to time. 2.5 Portal grants and Licensee receives no other rights or licenses to the Portal Software, derivative works (as defined in the United States copyright Act of 1976, Title 17 USC Section 101 et. Seq.) or any intellectual property rights related thereto, whether by implication, estoppel or otherwise, except those rights expressly granted in this Section 2. 3 LICENSE RESTRICTIONS 3.1 Licensee agrees that it will not itself, or through any parent, subsidiary, affiliate, agent or other third party: 3.1.1 sell, lease, license, sublicense, encumber or otherwise transfer any portion of the Portal Software or Documentation; 3.1.2 except to the minimum extent necessary to comply with EC Directive, if applicable, or other applicable legislation, decompile, disassemble, or reverse engineer any portion of the Portal Software or attempt to discover any source code or underlying ideas or algorithms of any Portal Software; Portal SLSA Page 1 of 5 2 Portal Proprietary & Confidential 3.1.3 other than to the extent permitted by Section 2.4 above, create any Derivative Work based on the Portal Software or any Portal Confidential Information; 3.1.4 use the Portal Software to provide processing services to third parties (except Sage-based Services Distributors or their customers), commercial timesharing, rental or sharing arrangements, or on a "service bureau" basis or otherwise use or allow others to use the Portal Software for the benefit of any third party; 3.1.5 provide, disclose, divulge or make available to, or permit use of the Portal Software by persons other than Licensee's employees who shall be bound by the confidentiality terms and provisions contained in Section 12 below, without Portal's prior written consent; 3.1.6 use any Portal Software, or allow the transfer, transmission, export, or re-export of any Portal Software or portion thereof in violation of any export control laws or regulations administered by the U.S. Commerce Department, OFAC, or any other government agency. All the limitations and restrictions on the Portal Software in this Agreement also apply to the Documentation. 4 MANNER OF PAYMENT All payments due hereunder shall be made inside the U.S., in U.S. dollars and are exclusive of any sales, use or other taxes, fees or duties arising out of this Agreement. In addition to any remedies Portal may have hereunder or at law, any payments more than thirty (30) days overdue will bear a late payment fee of 1.5% per month, or, if lower, the maximum rate allowed by law. Delays in payment will result in a day-for-day delay of the Portal Software implementation timetable. 5 LICENSE FEE 5.1 In consideration of the rights granted herein, Licensee shall pay Portal the license fee specified in Schedule A on the Effective Date. 6 MAINTENANCE AND TECHNICAL SUPPORT 6.1 Provided Licensee remains current on its Gold Level Maintenance Support payment obligations, Licensee shall be entitled to receive Updates and technical support in accordance with Portal's Gold Level Support Policy, a current copy of which is provided at Schedule B. The first annual Gold Level Maintenance Support payment shall be due upon the earlier of: (i) completion of implementation services, or (ii) 180 days from the Effective Date hereof, whichever shall be first. 6.2 Support Services shall consist of (i) error correction and telephone support provided during Portal's normal business hours to Licensee's technical support contact concerning the installation and use of the then current release of the Portal Software and (ii) product Updates that Portal in its discretion makes generally available and are not designated by Portal as products for which it charges a separate fee. Portal shall have no obligation to support (a) altered, damaged or modified Portal Software (except as authorized by Portal or if such modifications or customizations are performed by Portal Professional Services Group during implementation) or any portion of the Portal Software incorporated into other software, (b) Portal Software that is not the then current or immediately previous sequential release, (c) problems caused by Licensee's negligence, abuse, or misapplication, or use of the Portal Software other than as specified in Portal's user documentation or other causes beyond the control of Portal, or (d) Portal Software installed on a system that is not supported by Portal. Portal shall have no liability for any changes in Licensee's hardware which may be necessary to use the Portal Software. 6.3 Portal may elect on sixty (60) days notice (i) effective on any Annual Maintenance Fee payment date thereafter with respect to any particular Portal Software, to change the Annual Maintenance Fee and support services terms for that Portal Software to its then standard fees and terms and/or (ii) effective on the third or any later Annual Maintenance Fee payment date with respect to any particular Portal Software, not to provide Support Services to Licensee for that Portal Software, in which cases Licensee may elect to forego further Support Services and Annual Maintenance Fees for such Portal Software, whereupon Portal shall refund Licensee any Support Services fees pro-rated for the balance of the annual term. 6.4 Upon completion of the implementation of the Portal Software by Portal, Portal will provide Licensee with a letter confirming that such installation of the Portal Software was authorized and that Portal's maintenance, technical support and warranty obligations hereunder shall not have been waived. 7 TERMINATION 7.1 This Agreement commences on the Effective Date and will remain in force until it is terminated. 7.2 Licensee may, upon thirty (30) days prior written notice to Portal, terminate this Agreement. However, no such termination will entitle Licensee to a refund of any portion of any monies which have been paid to Portal. 7.3 Portal may, by written notice to Licensee, terminate this Agreement if any of the following events ("Termination Events") occur, provided that no such termination will entitle Licensee to a refund of any portion of any monies which have been paid to Portal; 7.3.1 Licensee is in breach of this Agreement in any material respect, which breach, if capable of being cured, is not cured within thirty (30) days after Portal gives Licensee written notice of such breach; or Portal may terminate this Agreement immediately upon notice if Licensee breaches any of its obligations under Section 3 above in any material respect; 7.3.2 Licensee terminates its business activities or becomes insolvent, admits in writing to its inability to generally pay its debts as they mature, makes an assignment for the benefit of creditors, or becomes subject to direct control of a trustee, receiver or similar authority, unless Licensee remains current on all payment obligations hereunder and any such payments are not reasonably susceptible to being reclaimed or refunded. 7.4 Termination will become effective immediately under Section 7.3.2 or on the date set forth in the written notice of termination under Section 7.3.1 provided such date is not less than thirty (30) days from delivery of said notice. Termination of this Agreement will not affect the provisions regarding Licensee's or Portal's treatment of Confidential Information, provisions relating to the payments of amounts due, provisions limiting or disclaiming Portal's liability, and/or provisions regarding applicable law, which provisions will survive termination of this Agreement. 7.5 Upon termination, all licenses granted hereunder shall cease to be effective and Licensee shall immediately cease all use of any affected Portal Software, Documentation and Portal Confidential Information. 7.6 Within fourteen (14) days of the date of termination or discontinuance of this Agreement for any reason whatsoever, Licensee shall return the Portal Software, derivative works and all copies thereof, in whole or in part, all related Documentation and all copies thereof, and any other Confidential Information in its possession. Licensee shall furnish Portal with a certificate signed by an executive officer of Licensee verifying that the same has been done. 7.7 Termination is not an exclusive remedy and all other remedies will be available whether or not termination occurs. Portal SLSA Page 2 of 5 3 Portal Proprietary & Confidential 8 INDEMNIFICATION FOR INFRINGEMENT 8.1 Portal shall, at its expense defend or settle any claim, action or allegation brought against Licensee that the Portal Software infringes any patent, copyright, trade secret or other proprietary right of any third party, and Portal will similarly indemnify and hold harmless Licensee from damages and costs incurred by Licensee (including reasonable attorneys' fees and costs) as a result of any such claims of infringement and shall pay any final judgment awarded or settlements entered into; provided that Licensee gives prompt written notice to Portal of any such claim, action or allegation of infringement and gives Portal the authority to proceed as contemplated herein. Portal will have the exclusive right to defend any such claim, action, or allegation and make settlements thereof at its own discretion, and Licensee may not settle or compromise such claim, action or allegation, except with prior written consent of Portal. Licensee shall give such assistance and information as Portal may reasonably require to settle or oppose such claims. 8.2 In the event any such infringement, claim, action, or allegation is brought or threatened, Portal may, at its sole option and expense: 8.2.1 Procure for Licensee the right to continue use of the Portal Software or the infringing portion thereof; 8.2.2 Modify, amend or replace the Portal Software or infringing part thereof with other software which has substantially the same or better capabilities; 8.2.3 If neither of the foregoing is commercially practicable, Portal shall refund the portion of the licensee fee specified on Schedule A related to the infringing part thereof less one-forty-eighth (1/48) thereof for each month or portion thereof that this Agreement has been in effect. In the event that such refund is made, Licensee shall immediately cease using the infringing portion of the Portal Software and will remove the same from its system and so certify to Portal. By paying a refund in the manner herein contemplated Portal will be released from any further obligation whatsoever to Licensee in connection with the infringing part of the Portal Software. If, as a result of having terminated its licenses with respect to any infringing Portal Software, Licensee is unable to use any or all of the other components of the Portal Software licensed hereunder, Licensee shall be permitted to terminate its licenses for those other Portal Software components upon the same terms and conditions as applicable to the infringing Portal Software Components set forth above. 8.3 THE FOREGOING OBLIGATIONS SHALL NOT APPLY TO THE EXTENT THE INFRINGEMENT ARISES AS A RESULT OF MODIFICATIONS TO THE PORTAL SOFTWARE MADE BY ANY PARTY OTHER THAN PORTAL OR PORTAL'S AUTHORIZED REPRESENTATIVE. THIS SECTION 8 STATES THE ENTIRE LIABILITY OF PORTAL WITH RESPECT TO INFRINGEMENT OF ANY PATENT, COPYRIGHT, TRADE SECRET OR OTHER PROPRIETARY RIGHT. 9 WARRANTY AND LIMITATION OF LIABILITY 9.1 Portal warrants to Licensee that the Portal Software will perform in substantial accordance with the Documentation for a period of one hundred eighty (180) days from the Effective Date. Portal represents and warrants that the Portal Software is designated to be used prior to, during and after the calendar year 2000 and that the Portal Software will operate during each such time period without error relating to, or the product of, date data which references different centuries or more than one century. If the Portal Software does not perform as warranted, Portal shall undertake to correct the non-conforming part of the Portal Software, or if correction is reasonably not possible, replace such non-conforming part of the Portal Software free of charge. If neither of the foregoing is commercially practicable, Portal shall refund the monies paid by Licensee for that non-conforming part of the Portal Software. In the event that such refund is made, Portal may amend Schedule A with respect to the non-conforming part of the software program. The foregoing Year 2000 Warranty shall not apply to the extent that the Portal Software is used or interfaced with other software, data or operating systems which are not Year 2000 compliant and it is reasonably established that such non-compliant software, data or operating system is the source of the Year 2000 problem or if the Portal Software has been modified in a manner not authorized by Portal. THE FOREGOING ARE LICENSEE'S SOLE AND EXCLUSIVE REMEDIES FOR BREACH OF WARRANTY. The warranty set forth above is made to and for the benefit of Licensee only and will be enforceable against Portal only if: 9.1.1 The Portal Software has been properly installed and has been used at all times in accordance with the Documentation and this Agreement; 9.1.2 All modifications, alterations or additions to the Portal Software, if any, have been made using Portal Software Customization Tools provided by Portal to Licensee; and 9.1.3 Licensee has not made or caused to be made modifications, alterations or additions to the Portal Software that cause it to deviate from the Documentation. 9.2 Except as set forth above, Portal makes no warranties, whether express or implied, or statutory regarding or relating to the Portal Software or the Documentation, or any materials or services furnished or provided to Licensee under this Agreement. Specifically, Portal does not warrant that the Portal Software will be error free or will perform in an uninterrupted manner. To the maximum extent allowed by law, Portal specifically disclaims all implied warranties of merchantability and fitness for a particular purpose (even if Portal had been informed of such purpose) with respect to the Portal Software, Documentation and support and with respect to the use of any of the foregoing. 9.3 IN NO EVENT WILL PORTAL OR ITS SUBCONTRACTORS BE LIABLE FOR ANY LOSS OF PROFITS, LOSS OF USE, BUSINESS INTERRUPTION, LOSS OF DATA, COST OF COVER OR INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OF ANY KIND IN CONNECTION WITH OR ARISING OUT OF THE FURNISHING, PERFORMANCE OR USE OF THE PORTAL SOFTWARE OR SERVICES PERFORMED HEREUNDER OR ANY DELAY IN DELIVERY OR FURNISHING THE PORTAL SOFTWARE OR SAID SERVICES WHETHER ALLEGED AS A BREACH OF CONTRACT OR TORTIOUS CONDUCT, INCLUDING NEGLIGENCE, EVEN IF PORTAL HAD BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. 9.4 PORTAL'S MAXIMUM AGGREGATE LIABILITY (WHETHER IN CONTRACT, TORT OR ANY OTHER FORM OF LIABILITY) FOR DAMAGES OR LOSS, HOWSOEVER ARISING OR CAUSED, WHETHER OR NOT ARISING FROM PORTAL'S NEGLIGENCE, SHALL IN NO EVENT BE GREATER THAN (a) IN THE EVENT SUCH DAMAGE IS NOT RELATED TO SUPPORT, THE LICENSE FEE SPECIFIED IN SCHEDULE A RELATED TO THE PARTICULAR PORTAL SOFTWARE PROGRAM WHICH CAUSED THE DAMAGE OR LOSS, OR (b) IN THE EVENT SUCH DAMAGE OR LOSS IS RELATED TO SUPPORT, THE SUPPORT FEES PAID BY LICENSEE FOR THE THEN CURRENT SUPPORT TERM. 9.5 No employee, agent, representative or affiliate of Portal has authority to bind Portal to any oral representations or warranty concerning the Portal Software. Any written representation or warranty not expressly contained in this Agreement is unenforceable. 10 EMBEDDED REPORTING /COMPLIANCE ROUTINE; AUDIT RIGHTS Licensee shall keep and maintain full, accurate and detailed records regarding the License and the number of End Users of the Portal Software. Portal or its representatives shall be entitled to review and audit such books and records and/or Licensee's compliance with the provisions of this Agreement from time to Portal SLSA Page 3 of 5 4 Portal Proprietary & Confidential time during normal business hours upon thirty (30) days prior written notice reasonable notice to Licensee. 11 ASSIGNMENT/BINDING AGREEMENT Neither this Agreement nor any rights under this Agreement may be assigned or otherwise transferred by Licensee, in whole or in part, whether voluntary or by operation of law, except by way of sale of assets, merger or consolidation, without the prior written consent of Portal, which consent shall not be unreasonably withheld or delayed, provided that in the case of any such sale of assets, merger or consolidation, the number of Subscribers shall not be increased beyond the maximum number of Subscribers in the block of Subscribers then applicable immediately prior to such sale of assets, merger or consolidation. Subject to the foregoing, this Agreement will be binding upon and will inure to the benefit of the parties and their respective successors and assigns. Notwithstanding the foregoing, no transfer or assignment of Licensee's rights hereunder shall be effective unless and until (1) Licensee has paid and remains current on all amounts due hereunder, and (2) the purported assignee agrees in writing to be bound by all of the obligations of Licensee hereunder. Further, neither this Agreement nor the licenses granted hereunder shall be transferable to any direct competitor of Portal. 12 CONFIDENTIALITY 12.1 Each Party acknowledges that the Confidential Information constitutes valuable trade secrets and each party agrees that it shall use the Confidential Information of the other party solely in accordance with the provisions of this Agreement and it will not disclose, or permit to be disclosed, the same directly or indirectly, to any third party without the other party's prior written consent. Each party agrees to exercise due care in protecting the Confidential Information from unauthorized use and disclosure. However, neither party bears any responsibility for safeguarding any information that it can document in writing (i) is in the public domain through no fault of its own, (ii) was properly known to it, without restriction, prior to disclosure by Disclosing Party, (iii) was properly disclosed to it, without restriction, by another person with the legal authority to do so, (iv) is independently developed by Receiving Party without use or reference to Disclosing Party's Proprietary Information or (v) is required to be disclosed pursuant to a judicial or legislative order or proceeding; provided that, to the extent permitted by and practical under the circumstances, Receiving Party provides to Disclosing Party prior notice of the intended disclosure and an opportunity to respond or object to the disclosure or if prior notice is not permitted or practical under the circumstances, prompt notice of such disclosure. 12.2 In the event of actual or threatened breach of the provisions of Section 3 or Section 12.1, the non-breaching party will be entitled to immediate injunctive and other equitable relief, without bond and without the necessity of showing actual damage. 13 NOTICE Any notice required or permitted under the terms of this Agreement or required by law must be in writing and must be (a) delivered in person, (b) sent by registered mail, return receipt requested, (c) sent by overnight air courier, or (d) by facsimile, in each case forwarded to the appropriate address set forth below. FOR PORTAL: ATTN: LEGAL DEPARTMENT PORTAL SOFTWARE, INC. 20863 STEVENS CREEK BOULEVARD, SUITE 200 CUPERTINO, CA 95014 FOR LICENSEE: SAGE NETWORKS, INC. 215 FIRST STREET CAMBRIDGE, MA 02142 AND ATTN: GENERAL COUNSEL SAGE NETWORKS, INC. 11 MARTINE AVENUE WHITE PLAINS, NY 10606 Either party may change its address for notice by written notice to the other party. Notices will be considered to have been given at the time of actual delivery in person, three (3) business days after posting, or one days after (vi) delivery to an overnight air courier service or (vii) the moment of transmission by facsimile. 14 MISCELLANEOUS 14.1 Force Majeure. Neither party will incur any liability to the other on account of any loss or damage resulting from any delay or failure to perform all or any part of this Agreement if such delay or failure is caused, in whole or in part, by event, occurrences, or causes beyond its control and without negligence of the parties. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, riots, acts of war, earthquakes, fire and explosions, but the ability to meet financial obligations is expressly excluded. 14.2 Waiver. Any waiver of the provisions of this Agreement or of a party's rights or remedies under this Agreement must be in writing to be effective. Failure, neglect or delay by a party to enforce the provisions of this Agreement or its rights or remedies at any time will not be construed to be deemed a waiver of such party's rights under this Agreement and will not in any way affect the validity of the whole or any part of this Agreement or prejudice such party's right to take subsequent action. 14.3 Severability. If any term, condition or provision in this Agreement is found to be invalid, unlawful or unenforceable to any extent, the parties shall endeavor in good faith to agree to such amendments that will preserve, as far as possible, the intentions expressed in this Agreement. If the parties fail to agree on such an amendment, such invalid term, condition or provision will be severed from the remaining terms, conditions and provisions, which will continue to be valid and enforceable to the fullest extent permitted by law. 14.4 Entire Agreement. This Agreement (including the Schedules and any addenda hereto signed by both parties) contains the entire agreement of the parties with respect to the subject matter of this Agreement and supercedes all previous communications, representations, understandings and agreements, either oral or written, between the parties with respect to said subject matter. 14.5 Standard Terms of Licensee. No terms, provisions or conditions of any purchase order, acknowledgement or other business form that Licensee may use in connection with the acquisition or licensing of the Portal Software will have any effect on the rights, duties or obligations of the parties under, or other otherwise modify, this Agreement, regardless of any failure of Portal to object to such terms, provisions, or conditions. 14.6 Public Announcements/Publicity. Licensee and Portal agree to cooperate regarding public relations activities, including public announcements, joint press releases, and other activities to be mutually agreed. Neither party will perform such activities without the prior written consent of the other party, which consent shall not be unreasonably withheld. 14.7 Counterparts. This Agreement may be executed in counterparts, each of which so executed will be deemed to be an original and such counterparts together will constitute one and the same Agreement. 14.8 Applicable Law. This Agreement will be interpreted and construed pursuant to the laws of the State of California and the United States without regard to conflicts of laws provisions thereof, and without regard to the United Nations Convention on the International Sale of Goods. Any waivers or amendments shall be effective only if made in writing. This Agreement is the complete and exclusive statement of the mutual understanding of the parties and supersedes and cancels all previous written and oral agreements and communications relating to the subject matter of this Agreement. The prevailing party in any action to enforce this Agreement will be entitled to recover its reasonable attorney's fees and costs in connection with such action. Licensee represents that it is not a government agency and it is not acquiring the license pursuant to a government contract or with government funds. In the event of a conflict between the terms and provisions of this Agreement and any other document or agreement, this Agreement shall be controlling. Portal SLSA Page 4 of 5 5 Portal Proprietary & Confidential IN WITNESS WHEREOF, the authorized representatives of the parties hereby bind the parties by signing below: SAGE NETWORKS, INC. BY: /s/ Leonard J. Fassler ------------------------------------------------------------------- PRINT NAME: Leonard J. Fassler ------------------------------------------------------------------- TITLE: Co-Chairman ------------------------------------------------------------------- DATE: July 31, 1998 ------------------------------------------------------------------- PORTAL SOFTWARE, INC. BY: /s/ John Little ------------------------------------------------------------------- PRINT NAME: John Little ------------------------------------------------------------------- TITLE: President and Chief Executive Officer ------------------------------------------------------------------- DATE: August 6, 1998 ------------------------------------------------------------------- Portal SLSA Page 5 of 5 6 Schedule A to Portal Proprietary & Confidential SCHEDULE A SECTION 1.0 PORTAL SOFTWARE The following Portal Software products and their associated online documentation will be provided: - - Infranet, including Infranet Server, Infranet Developer, Infranet Administrator, Infranet Payment Tool, Infranet Pricing Tool, Policy Configuration Tool, Invoice Designer Tool, Infranet Insite; SECTION 2.0 APPLICATION DESCRIPTION/EQUIPMENT/INITIAL SUBSCRIBER LIMIT 2.1 APPLICATION: BILLING AND CUSTOMER MANAGEMENT OF SUBSCRIBERS TO LICENSEE'S ONLINE WEB HOSTING SERVICE. 2.2 PLATFORM (O/S): SUN/SOLARIS UNIX 2.3 INITIAL SUBSCRIBER LIMIT: 25,000 SECTION 3.0 INSTALLATION SITES 3.1 PRODUCTION SITE: 64 PERIMETER CENTER EAST, G1, ATLANTA, GA 30346 3.2 DEVELOPMENT SITE: 64 PERIMETER CENTER EAST, G1, ATLANTA, GA 30346 3.3 BACKUP SITE: 64 PERIMETER CENTER EAST, G1, ATLANTA, GA 30346 SECTION 4.0 LICENSE AND MAINTENANCE SUPPORT SERVICE FEES 4.1 PORTAL SOFTWARE LICENSE FEES The following Price List describes the price for licensing the Portal Software for the above-stated Application for the up to 25,000 total Subscribers.
- -------------------------------------------------------------------------------------------------------------------- PORTAL SOFTWARE COMPONENT LIST PRICE DISCOUNT FINAL PRICE - -------------------------------------------------------------------------------------------------------------------- INFRANET $100,000.00 ** ** - --------------------------------------------------------------------------------------------------------------------
4.2 ANNUAL GOLD LEVEL SUPPORT SERVICE FEES Portal will provide Gold Level Maintenance Support Services for a term of one year pursuant to Attachment B at the following price:
- -------------------------------------------------------------------------------------------------------------------- PORTAL SUPPORT SERVICE ANNUAL FEE ANNUAL PAYMENT DATE - -------------------------------------------------------------------------------------------------------------------- GOLD LEVEL MAINTENANCE SUPPORT ** 180 days from the Effective Date or upon (25,000 SUBSCRIBERS) completion of implementation, whichever shall be first. - --------------------------------------------------------------------------------------------------------------------
SLSA Schedule A Page A-1 7 Portal Proprietary & Confidential 4.3 ADDITIONAL SUBSCRIBER LICENSE AND MAINTENANCE SUPPORT FEES For up to three (3) years from the Effective Date ("Option Period") Licensee shall be entitled to license Additional Subscribers at the rates set forth in the following table. After expiration of the Option Period, Licensee will license Additional Subscribers at Portal's then current rates. Such Additional Subscribers may only be licensed in the incremental blocks specified and not one at a time. Applicable Annual Maintenance Support Fees must be licensed and paid before such Additional Subscribers are called into use. Annual Maintenance Support fees will be prorated over the remainder of the annual support term during which they are added. In the event Portal reduces its list pricing below those prices offered to Licensee for Additional Subscribers hereunder during the Option Period, Licensee shall be permitted to apply the discount schedule below to Portal's then current rates.
- -------------------------------------------------------------------------------------------------------------------- SUBSCRIBER NUMBERS SUBSCRIBERS DISCOUNT PRICE PER PRICE PER BLOCK ANNUAL GOLD SUPPORT IN BLOCK SUBSCRIBER FEE PER BLOCK - -------------------------------------------------------------------------------------------------------------------- 25,001- 50,000 25,000 **(1) ** ** ** - -------------------------------------------------------------------------------------------------------------------- 50,001-100,000 50,000 ** ** ** ** - -------------------------------------------------------------------------------------------------------------------- 100,001-200,000 100,000 ** ** ** ** - -------------------------------------------------------------------------------------------------------------------- 200,001-450,000 250,000 ** ** ** ** - -------------------------------------------------------------------------------------------------------------------- 450,001-950,000 500,000 ** ** ** ** - --------------------------------------------------------------------------------------------------------------------
SECTION 5.0 PAYMENT SCHEDULE Licensee agrees to make payment in accordance with the following table:
- -------------------------------------------------------------------------------------------------------------------- DESCRIPTION AMOUNT PAYMENT DUE DATE - -------------------------------------------------------------------------------------------------------------------- LICENSE FEE ** Within 30 Days of Effective Date - -------------------------------------------------------------------------------------------------------------------- ANNUAL GOLD SUPPORT PAYMENT ** 180 days from the Effective Date or upon completion of implementation, whichever shall be first. - --------------------------------------------------------------------------------------------------------------------
- -------- 1 Licensee shall be entitled to receive a ** discount on the first block of 25,000 Additional Subscribers if Licensee purchases such Additional Subscribers within (60) days of the Effective Date hereof. SLSA Schedule A Page A-2 8 [PORTAL LOGO] SCHEDULE B [INFRANET(TM)] PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS PORTAL SOFTWARE, INC. 20863 Stevens Creek Boulevard Suite 200 Cupertino, CA 95014 U.S.A. 9 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS PRODUCT SUPPORT .............................................. 1 GUIDELINES, POLICIES AND DEFINITIONS ......................... 1 SUPPORT OVERVIEW ............................................. 3 PORTAL ERROR TRACKING SYSTEM (PETS) ........................ 3 WEB-BASED SUPPORT .......................................... 3 PORTAL ERROR TRACKING SYSTEM (PETS) .......................... 4 PETS TICKET SEVERITY DEFINITIONS: .......................... 4 PETS TICKETS RESPONSE TIME ................................. 6 PHASE DEFINITIONS: ......................................... 6 CHANGING SEVERITY LEVEL OF A PETS TICKET: .................. 7 STATUS DEFINITIONS IN PETS: ................................ 7 TYPICAL PROGRESSION THROUGH STATUS ......................... 8 CHANGING THE STATUS OF A PETS TICKET ....................... 8 ACTIVITY LOG IN PETS TICKETS ............................... 9 PETS REVIEW CYCLES ......................................... 9 PETS SEVERITY 1 TICKETS .................................... 9 PETS SEVERITY 2 TICKETS .................................... 9 PETS SEVERITY 3, 4, 5 AND 10 TICKETS ....................... 10 PORTAL WEB-BASED SUPPORT ..................................... 10 CASE SUBMISSION ............................................ 10 TECHNICAL SUPPORT CONTACTS ................................. 11 SUPPORT AND ESCALATION PROCESS ............................... 11 FOR SEVERITY 1 & 2 ......................................... 11 FOR GENERAL SUPPORT ISSUES AND ERRORS OF ANY SEVERITY ...... 12 SOFTWARE ERRORS .............................................. 12 FIRST CUSTOMER SHIP RELEASES AND UPDATE RELEASES ........... 12 PRODUCT SUPPORT PERIOD ..................................... 13 DIRECTIONS FOR PETS .......................................... 14
Page B 2 10 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS SUPPORT OVERVIEW As Portal grows we are committed to continuing to develop our world-class technical support service organization to provide the best support services to our customer. The following are procedures that we would like to implement to ensure that you, as a customer, receive the proper and prompt assistance when needed. There are currently two methods of addressing issues raised for support. They are: PORTAL ERROR TRACKING SYSTEM (PETS) Production related errors are defects/bugs of Infranet that occurred during the execution of a production system and should be reported as such in Portal's Error Tracking System (PETS). Please submit an error report for the problem using PETS -- www.pin.com (there are separate instructions for how to logon to PETS and use it). Our response time for the defect will be based on the severity levels and individual customer's support contract. If the defect is not resolved in a satisfactory manner, please escalate the situation per the escalation process. WEB-BASED SUPPORT For all those technical, development, non-production related questions, please start by submitting the question/issue via our Web-Based Support: www.portal.com/WebSupport/login.htm Each customer contact is provided with a login ID and unique password. To obtain your login and password, register by completing our online registration form: www.portal.com/professional_services/plreg.htm Page B 3 11 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS PORTAL ERROR TRACKING SYSTEM (PETS) PETS Ticket Severity Definitions: SEVERITY 1- PRODUCTION ISSUE - Major product defect causing complete loss of service. Resolution: work until complete (Portal found bugs - major product defect that would likely cause full loss of service to a customer's production system) Examples: - System failure prevents end-users from accessing network service. - Failover not successful in routing around problems. - Repeated data loss or data corruption occurs to object data. - Repeated software failures that result in total interruption of service. SEVERITY 2 - PRODUCTION ISSUE/EMERGENCY DEVELOPMENT ISSUE - Serious product defect causing major but intermittent loss of production service or preventing imminent deployment of system under development. No workaround is available, but operation can continue in a restricted fashion. Resolution: Work until complete. (Portal found bugs - serious product defect that would likely cause major but intermittent loss of service at a customer site.) Examples: - System failure prevents end-users from signing up for service, but allows end users to access network services. - System failure prevents billing collections from occurring, but allows end-users to access network service. SEVERITY 3 - Significant product defect causing loss of service of one or more functions. Workaround is not available, or functionality loss is critical to system operation. Resolution: Patch or next release, if imminent Examples: - System failure prevents admin users from performing specific account updates, but all other functions are working. However, the missing function is critical to determining customer's sales commissions. - System failure prevents end-users from accessing web pages for account information, but allows end-users to access network service. However, for many users, the web is the only access available to them. Page B 4 12 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS SEVERITY 4 - Product defect causing loss of service of one or more functions. Workaround is available, or functionality loss is not critical to system operation. Resolution: Next or future release Examples: - System failure prevents admin users from performing specific account updates, but all other system functions are working. - System failure prevents end-users from accessing web pages for account information, but allows end-users to access network service. SEVERITY 5 - Minor product defect causing little or no end-user visible loss of service. This category includes cosmetic errors or defects where the impact to a customer's operation is minor. Resolution: Candidate for future release Examples: - Documentation errors requiring correction or clarification. - Most error message problems. - System failure that occurs rarely and where failover successfully routes around the failure. SEVERITY 10 -Enhancement request to Infranet for new feature or modification to existing feature rendering the feature more effective, complete or easier to use. Resolution: Candidate for future release Examples: - Additional summary reports by cycle, accounts, etc. - Additional screens in the web interface. Page B 5 13 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS PETS Tickets Response Time
- ------------------------------------------------------------------------------------------------------ SEVERITY LEVEL CALL TARGET RESOLUTION BACK FOR TIME INITIAL ANALYS IS - ------------------------------------------------------------------------------------------------------ 1 Complete loss in production 30 minutes 4 hours work until complete 2 Serious defect causing major but 4 hours 8 hours work until complete intermittent loss in production or preventing deployment. 3 Significant defect causing minor loss 2 business 5 business Patch or next release in production with no workaround days days 4 Minor defect causing minor loss with Via PETS Via PETS Next or future release workaround updates updates 5 Minor defect causing no loss Via PETS Via PETS Candidate for future updates updates release 10 Request for Enhancement Via PETS Via PETS Candidate for future updates updates release - ------------------------------------------------------------------------------------------------------
Phase Definitions: - CALL BACK TIME - Initial callback from Portal by a qualified technical support representative. - TARGET FOR INITIAL ANALYSIS - Targeted response time for first detailed analysis of problem, including any possible workaround and plan for complete resolution. - RESOLUTION - Estimate of when fix or workaround is available to customer to eliminate symptoms of problem. Page B 6 14 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS Changing Severity Level of a PETS Ticket: When a PETS ticket is initially submitted, the submitter makes their best estimate of the appropriate severity level of the ticket and files it as such. As Portal and the submitter work on the reported issue, it may become clear that the severity level should be changed. If the submitter wishes to change the severity level, they should send an email to techsup@corp.portal.com listing the PETS id number, what severity level to change from and to, and why the change is being requested. If in reviewing the PETS ticket, Portal's analysis is that a change in severity levels is consistent with the definitions above, Portal will change the severity level and notify the submitter. Status Definitions in PETS: SUBMITTED - Ticket has been logged into PETS for tracking PENDING - Not enough information has been logged in the ticket; more information is needed from the submitter for Portal to further analyze the problem. Information to include when submitting a PETS ticket includes: how to reproduce the error, any non-reproducible symptoms and any error messages. Customers should update the PETS ticket with the additional information and inform support by sending an email to techsup@corp.portal.com. Technical support will change the status of the ticket so that it is continued to be worked on. QUALIFIED - Infranet Technical Support has reviewed the ticket and qualified it as warranting Engineering evaluation. If the issue can be resolved without Engineering evaluation, the Technical Support personnel will drive resolution rather than qualifying it to pass to Engineering for evaluation. ASSIGNED - Engineering resources have been assigned to resolve the error. EVALUATED - Engineering has evaluated the ticket and considers the ticket to contain enough information to proceed. INTEGRATED - The error is fixed and tested. The fix is incorporated into a release of Infranet. DELIVERED - The fix is delivered to the customer as either a patch or a future release. Delivered is the final status for any PETS ticket that requires code changes. Page B 7 15 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS CLOSED - No action needed because the reported issue is a duplicate of an existing ticket, it turns out not to be an error or it cannot be reproduced. Closed is the final status for any PETS ticket that does not require code changes. Typical Progression Through Status The order in which the status indicators are listed in the prior pages is close to the typical progression through to resolution of a PETS ticket. All tickets are automatically tagged with a status of Submitted when they are filed. Infranet Technical Support personnel are the first ones at Portal to review a PETS ticket. They will do one of three things. 1) They may see that more information is needed, note what information is needed in the activity log of the PETS ticket and change the status to Pending until more information is submitted to techsup@corp.portal.com. 2) They may determine that this PETS ticket warrants review by Portal Engineering and mark the status as Qualified. Or 3) they answer the question themselves if the answer does not require any code changes, and then mark the status as Closed. Once a PETS ticket is marked as qualified, then Portal Engineering reviews it, assigns it to an appropriate engineer and marks the status as Assigned. When an engineer reviews the PETS ticket, they may do one of three things: 1) Evaluate it, determine they have enough information to reach a resolution and mark the status as Evaluated. 2) Evaluate it, determine that more information is necessary, list what information is necessary in the activity log of the PETS ticket and mark the status as Pending. 3) Evaluate the ticket, determine that it should be closed for some reason, indicate the reason (such as duplicate of another PETS ticket, not reproducible or not an error) and change the status to Closed. After a Portal engineer has evaluated a PETS ticket and determined that enough information is available, the engineer will work on a fix for the error. Once a fix has been implemented, tested and integrated into an Infranet build, then the engineer will change the status to Integrated. After the build in which the fix has been integrated is delivered (posted to the Portal web site) as a Release or an Update, then the PETS ticket status is changed to Delivered and the activity log is updated with the name of the Release or Update. Delivered is the final status for any PETS ticket that requires code change. Closed is the final status for PETS tickets that do not require code changes. Changing the Status of a PETS Ticket Page B 8 16 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS As the ticket progresses through to resolution, Portal will update the status of the PETS ticket. If the submitter wishes to update the status of a ticket, for example when they've provided requested additional information in response to a status of Pending, the submitter should send an email to techsup@corp.portal.com requesting the status change. Activity Log in PETS Tickets Portal will add to the activity log of a PETS ticket as it progresses through to resolution. Any information that is pertinent will be added to the log. In particular when a ticket's status is changed to Pending, details of what information is needed is described in the activity log. PETS Review Cycles Portal does a full review of outstanding PETS tickets at least once during the course of each Infranet release. Since Infranet releases are scheduled 3 times a year, all the outstanding PETS ticket will be reviewed at least three times a year. COMMUNICATION PETS Severity 1 Tickets For Severity 1 tickets Portal provides updates to submitter as pertinent information is available. These updates are provided via phone, fax or email as the situation warrants. The definition of Severity 1 as complete loss of service in production will be strictly adhered to and any tickets that do not fall within this definition either initially or after a work around has been provided will be reassigned to a lower severity level. PETS Severity 2 Tickets For Severity 2 tickets Portal provides updates to submitter as pertinent information is available. These updates are provided via phone, fax or email as the situation warrants. The definition of Severity 2 as major loss of service in production or preventing deployment will be strictly adhered to and any tickets that do not fall within this definition either initially or after a work around has been provided will be reassigned to a lower severity level. Page B 9 17 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS PETS Severity 3, 4, 5 and 10 Tickets Portal communicates updates on these tickets via PETS as pertinent information is available. The PETS system permits users to search for recently updated tickets and it will also send out an automatic email when a ticket is changed. WEB-BASED SUPPORT Technical support is available to all Portal customers with a current customer support contract. Portal's Web-Based support provides fast and easy access to all your technical support cases. It allows you to add a new case, or update and monitor the status of an existing case. Each case is associated with a case number for reference and tracking purposes. Case Submission: When you submit a question or issue to us, please make sure you do the following so we can best serve you: 1. Give us a DETAILED DESCRIPTION OF YOUR PROBLEM. 2. Give us a DETAILED DESCRIPTION OF WHAT YOU HAVE DONE to try to solve the problem on your own. Have you read the documentation? Have your looked in the error log? 3. Email any configuration or log files to techsup@portal.com. Please include your case number and company name in the subject header of the email. For example, "Portal case# 1234: dm_oracle pinlog files" NOTE: Be aware that when you CC people in your email to us with aliases, we may not get the full email address of the CC'ed person. If that is the case, we will be unable to send a reply to them. You will need to forward our reply to them yourself. All questions submitted are researched and answered in a timely manner. Portal will log all questions/issues in the order they are received and will work on them IN THAT ORDER. Once the question has been understood and analyzed, an estimate of how long it would take to resolve it will be provided back to the customer IF an answer or a solution is not available in a reasonable amount of time. Technical Support Contacts To ensure that we provide uniform support to each of our customers, each customer account is required to designate two senior level contacts to function as the technical Page B 10 18 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS support liaison to Portal. Please send an email to techsup@portal.com stating the name, phone number and email address of your contacts. Your designated contacts will be added to our call tracking database and will be the only individuals allowed to submit issues into technical support. To change your contact information, please send an email request to techsup@portal.com. Additional contacts can be negotiated into the Support Maintenance Contract at additional cost. SUPPORT AND ESCALATION PROCESS To ensure our customers are getting the appropriate level of attention and service, the following are procedures to use when dealing with any Infranet product defects. For Severity 1 or 2 Errors: For PRODUCTION defects entered into PETS as SEVERITY 1 or 2, please call our 24-Hour answering service AFTER you have entered the error into PETS so we can respond to your submittal in a timely manner. SEVERITY 1 & 2: (408) 752 - 7430 Customers on 7 by 24 hours support, should call at any time, others should call during our normal business hours between 8:00am - 5pm PST. An agent with the answering service will receive your call and collect the following information from you: your name, phone number, company which you represent, severity, and a brief message. The answering service will escalate your call to the appropriate Portal individual. Our internal escalation guidelines are as follows: FOR SEVERITY 1: 1. Page primary on-call support engineer. 2. If primary on-call person does not respond in 10 minutes, page secondary on-call support engineer. 3. If the secondary on-call person does not respond in 10 minutes page and call the Technical Support Manager 4. If the manager does not respond in 10 minutes, page and call the regional Director and the VP of Portal's Professional Services Group. FOR SEVERITY 2: 1. Page the primary on-call support engineer. 2. If the primary on-call person does not respond in 1 hour, page the secondary on-call support engineer. Page B 11 19 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS 3. If the secondary on-call person does not respond in 1 hour, page and call the Technical Support Manager. 4. If the Manager does not respond in 1 hour, page the regional Director. 5. If the Director does not respond in 1 hour, page the VP of Portal's Professional Services Group. For General Support Issues and Errors of Any Severity: If you feel that an error or defect of any severity submitted via PETS is not being resolved appropriately, please call the Technical Support phone number at: Technical Support: (408) 343-4410 (voicemail) and leave a voicemail with your name, phone number, company which you represent and brief problem description. A Technical Support engineer will be paged automatically to assist you. If the Technical Support engineer is unable to address your needs, please feel free to contact the Technical Support Manager at: Technical Support Manager (West): (408) 697-5037 (pager) Technical Support Manager (East): (888) 550-0405 (pager) If the problem is not progressing at a speed with which you are satisfied, you may ask the Technical Support Manager to escalate the issue. S/He will work with you to set up a conference call with the VP of Portal's Professional Services Group. SOFTWARE ERRORS First Customer Ship Releases and Update Releases Portal will work on tickets of severity 1, 2, and 3 until they are resolved. Fixes for these tickets are targeted to be included in an Update Release of the currently shipping Infranet release as well as in the following release. Portal schedules one Update Release four weeks after the First Customer Ship (FCS) of an Infranet Release. An Update Release is a full Infranet release with additional fixes integrated. After the scheduled Update Release that Portal posts to the web 4 weeks after FCS, any other Update Releases are posted on an as-needed basis. For example, Portal posted Infranet 5.1 Update 5. Update Releases contain the cumulative set of fixes available for a given release. Update Releases should be downloaded and installed in full to ensure that you have the most recent, supported version of Infranet. Page B 12 20 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS Tickets of severity 4 are targeted for fixing in the next release, severity 5 for fixing in a future release and tickets of severity 10 are candidates for a future release. Product Support Period Infranet releases are supported for a period of 6 months after the subsequent release of Infranet ships. For example, Infranet 5.1 will be supported for 6 months after the release of Infranet 5.2 or for a total of 10 months after shipping 5.1 (since 5.2 ships 4 months after 5.1, 5.1 is supported for that 4 months plus an additional 6 months for a total of 10 months.). Portal highly encourages customers to upgrade to the latest release of Infranet in order to benefit from the latest features and fixes. Yet, we understand that it does take time to migrate to the latest release, so we have allocated a period of a total of ten months to support a release: four months until the next release ships (Infranet releases ship three times a year, every four months) plus six months after the next release ships. Page B 13 21 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS DIRECTIONS TO USING PETS2 GETTING STARTED You can get to PETS2, login via the www.pin.com web site. Log into this site using your current user name and password. Once on, click on PETS2. The system will ask you for another login and password. This is not the same user login/password that was used in PETS. Support will let you know your new login. The password is the same as before. When you type in your login and password, make sure you use capitals when specified. PETS2 is now case sensitive. - -------------------------------------------------------------------------------- Select one of the schemas in the list below. Click on Query OR Submit (or use the buttons which follow the list) to open the selected schema for Query OR Submit. PETS2 PETS:User Comments Click on QUERY OR SUBMIT to start working with the selected schema. - -------------------------------------------------------------------------------- You will see the above when you first login. The PETS2 schema is used for tickets. The PETS:User Comments schema is used for User Comments. SEARCHING AND MODIFYING A TICKET To search or modify a ticket, choose the PETS2 schema and click on QUERY. You may search on any one of the fields you see. You may select from the pulldown menu for any or all of these fields. If a field is left blank, that field is considered a wildcard. If you leave all the fields blank, all wildcards, you'll get all your tickets in PETS2. After you've made your search criteria selection, hit RUN QUERY and a list of all tickets matching your set of criteria will appear. You can either view or modify those tickets. SUBMITTING A TICKET To submit a ticket, choose the PETS2 schema and click on the SUBMIT button at the top of the page to get a blank ticket. Currently, the only way to get back to the PETS2 page is to use a bookmark or to hit "back" in your browser. We are looking into changing that. There are several fields that are required in submitting a ticket. They are the following: - - Severity - Release - Product - OS - Problem Summary - - Problem Detail - Last Name - Caller ID - Hdwr - DB Page B 14 22 PRODUCT SUPPORT GUIDELINES, POLICIES AND DEFINITIONS If you don't fill in all the fields, you'll get an error message and your ticket won't be submitted. After you've filled everything out, click on SUBMIT at the top or bottom of the screen. The next screen will tell you if the submission was successful. To get back to the any of the previous screens, just hit "back" on your browser. SUBMITTING SUGGESTIONS FOR IMPROVING OR FIXING PETS2 There are two ways to do suggest improvements for PETS2. You can either file a ticket against PETS2 by following the instructions above and choosing PETS as a product or you can submit a comment. To submit a suggestion for improving or changing PETS2 itself, choose the "PETS:User Comments" schema in the first screen after logging in and click on SUBMIT. Fill in the Description field and the optional Comments field and click on SUBMIT. SEARCHING FOR A USER COMMENT You can search for a user's comment by filling in any one of the fields. Most likely, you will only fill in the "Company Name" field. PETS2 is case sensitive so be sure to fill in the "Company Name" exactly as it appears when you submitted it. Hit QUERY when you have entered in the field. PETS2 will give you a list of comments matching your criteria. You can only view the comment even though it says you can modify it. If you try to modify, it will give you an error. We will change that for future releases. THE QUERY BAR The query bar is used for complex queries. We don't suggest you use it. Portal is a registered trademark in the United States, and Portal Software, the Portal logo, the Real Time - No Limits tagline and Infranet are trademarks of Portal Software, Inc. Copyright 1998 Portal Software, Inc. Page B 15 23 [Portal Logo] [Infranet Logo] Portal Professional Services Group Sage Networks Implementation Statement of Work PORTAL SOFTWARE, INC. 20863 Stevens Creek Boulevard Suite 200 Cupertino, CA 95014 USA (408) 343-4400 24 SAGE NETWORKS STATEMENT OF WORK PROJECT OVERVIEW The Portal Professional Services Group (PPSG) is pleased to present this statement of work (SOW) to Sage Networks. PPSG provides client assistance in the areas of implementation, training and technical support. This SOW describes our concept of support for the implementation of Infranet in the Sage Networks environment. Among the many benefits of Infranet is its ability to reduce Sage Networks time to market for new products. Therefore, PPSG's goal is to get Sage Networks operational within the business space as quickly as possible. To accomplish this, we will perform an implementation customized to meet Sage Networks specific requirements. In addition to the Phase 1 implementation effort Portal will, in parallel, assist Sage Networks in the further development of a roll out strategy and project plan for phases beyond the initial implementation. SCOPE The scope of this statement of work includes the following: - The performance of a mini-workshop (3 days) to further define implementation requirements and the final Phase 1 deliverables. - The development of a project workbook and detailed design specification. - The installation of Infranet Foundation, client applications, and any purchased managers, i.e., email manager. - Configuration and customization of Infranet as necessary. - Unit and integration testing - Cutover assistance - Management reporting and meetings 02/16/99 PROJECT SUBJECT Page - A- 4 SAGE NETWORKS STATEMENT OF WORK 25 SAGE NETWORKS STATEMENT OF WORK DELIVERABLES 1. Mini-workshop with project workbook and project plan. 2. Detailed design document. 3. Installation of Infranet Foundation, client applications, and optional managers. 4. Development of an event collection and process capability. 5. Installation and customization, as necessary, of dm_ICVerify module. 6. Installation and integration of MCIS manager, if purchased. 7. Installation and integration of dm_email, if purchased. 8. Development of an interface to the Great Plains general ledger system. 9. Assistance and mentoring in developing a data conversion process 10. Installation of the Insite reporting tool. 11. Assistance in the development of the price plan. 12. Management reports and meetings TIME ESTIMATES
Estimated Staff Days to Task No. Task Complete - -------- ---- ------------- 1 Mini-workshop with project workbook and project plan 6 2 Detailed design document 4 3 Installation of Infranet Foundation 1 4 Installation client applications 0 5 Development of an event collection and process capability 15 6 Installation and customization, as necessary, of dm_ICVerify 3 7 Installation and integration of MCIS manager 5* 8 Installation and integration of dm_email 3* 9 Development of an interface to the general ledger system 3 10 Configuration of default policies 5 11 Conversion assistance 5 12 Installation of Insite Reporting Tool 0 13 Assistance in the development of the price plan 5 14 Production assistance 2 15 Management reports and meetings 5 -- Total person Days 54 Elapsed Time (approximately 54 working days = 5 work weeks)
Notes: * = additional time required if manager purchased 02/16/99 PROJECT SUBJECT Page - A- 5 SAGE NETWORKS STATEMENT OF WORK 26 SAGE NETWORKS STATEMENT OF WORK SCHEDULE The start date for the effort outlined in this document will be August 24, 1998. STAFFING Portal Professional Services Group will staff the Customer project with 2 full time consultants starting on August, 24, 1998. The consultants will work a standard 8-hour working day. Hours billed above the 8 hours per day must be pre-approved by the Customer or Project Manager. The Project Manager from Portal assigned to the Sage Networks account is Steve Stratton. Contact information: Project Manager 703-918-4911 steves@portal.com CONSULTING RATES The following rates will be used for the Portal Staffing effort under this agreement. All tasks are billed on a time and material basis.
TEAM MEMBERS $ HOURLY RATE $ DAILY RATE ------------ ------------- ------------ Title TECHNICAL CONSULTANT $220 $ 1,760 $280 $ 2,240 PROJECT MANAGER ESTIMATED CONSULTING TOTAL $ 95,000 ESTIMATED TRAVEL TOTAL $ 20,000 ESTIMATED PROJECT TOTAL $ 115,000
EXPENSES Expenses will be the responsibility of the customer. All expenses will be billed back to the customer for the actual amount paid by the consultant. The PPSG team will ensure that all expenses are reasonable for the local area. 02/16/99 PROJECT SUBJECT Page - A- 6 SAGE NETWORKS STATEMENT OF WORK 27 SAGE NETWORKS STATEMENT OF WORK ACCEPTANCE AND SIGN-OFF Each deliverable described in this statement of work will require a sign-off from the customer. Upon completion of a document it will be distributed to the appropriate persons at the customer site. The customer will review and submit one of the following back to the Portal project manager: - The accepted document with comments to be incorporated - The accepted document as it was submitted - The document with comments to be incorporated and resubmitted for approval The customer has 5 days to review each document and submit comments and acceptance back to the Portal Project manager. If the document has not been received back from the customer within 5 days, the documents will be deemed accepted by the customer. The undersigned hereby incorporates this Statement of Work into the Professional Services Agreement between Portal Software, Inc., and Sage Networks, Inc. dated July 31, 1998, as provided in Section 1.1 of the agreement. PORTAL SOFTWARE INC. SAGE NETWORKS, INC. /s/ D. Karen Ha /s/ Leonard J. Fassler - ----------------------------- ---------------------------------- NAME Vice President Co-Chairman - ----------------------------- ---------------------------------- TITLE August 6, 1998 July 31, 1998 - ----------------------------- ---------------------------------- DATE 02/16/99 PROJECT SUBJECT Page - A- 7 SAGE NETWORKS STATEMENT OF WORK EX-10.5 5 MASTER DISCOUNTED INTERNET SERVICES AGREEMENT 1 ** Indicates that information has been omitted herein pursuant to a request for confidential treatment filed with the Securities and Exchange Commission simultaneously herewith. Exhibit 10.5 [UUNET Technologies, Inc. Letterhead] MASTER DISCOUNTED INTERNET SERVICES AGREEMENT This Master Internet Services Agreement ("Agreement") is made by and between UUNET Technologies, Inc., with its principal offices at 3060 Williams Drive, Fairfax, VA 22031 ("UUNET") and Sage Networks, Inc. ("Customer") with its principal offices located at 64 Perimeter Center, Atlanta, Georgia 30341 for the purpose of setting forth the terms and conditions relating to the purchase of UUNET's Internet products and services by the Eligible Participants, as defined in Section 1 below. 1. DEFINITIONS. "Eligible Participants" means Customer, its Affiliates and any other entities that UUNET and Customer mutually agree upon, are eligible to participate in the offerings under this Agreement. "Affiliate" means with respect to a party, an entity controlled by, controlling or under common control with such party. "Effective Date" means the effective date of this Agreement which shall be the last date of the signatures of a duly authorized representative of a party affixed below. 2. SERVICES. The services that are currently available hereunder from UUNET and its Affiliates (the "Services") are set forth in the attached Schedule 1. UUNET may amend Schedule 1 or Schedule 2 at any time and from time to time remove Services if they should be discontinued or add new services (which shall be included within the term "Services" upon such addition) by providing a revised copy thereof to Customer. Such amendments shall be prospective only and shall not affect any existing Service being provided by UUNET or any of its Affiliates to Eligible Participants at the time of amendment which Services shall continue to be offered to Customer for the balance of the Term hereof at the prices and with the discounts set forth on Schedule 1 attached hereto. 3. PRICING AND DISCOUNTS. 3.1 The prices and discounts for Services applicable to this Agreement are detailed in Schedule 1, and shall be applicable for the duration of the initial term set forth in Section 6 unless otherwise amended as provided for below in this Section 3.2. The discounts shall not be combined with promotional discounts as may be available from time to time from UUNET. An Eligible Participant may elect, at the time of any order for Services, the applicable discount set forth in Schedule 1 or the terms of any promotion then in effect. In either event, the discount or promotion shall only be available if Eligible Participant agrees to the standard terms and conditions applicable to such Service and commits to purchase that Service for a minimum one year term or such longer term as may be specified in the applicable Service Agreement. 3.2 The parties acknowledge and agree that they have negotiated competitive pricing for the Services. 3.2.1 Not more often than once every six months Customer may request that UUNET review whether the pricing available to Customer hereunder is as competitive as pricing for comparable services purchased from UUNET in similar quantities by similarly situated customers, and if UUNET determines that this pricing is not competitive then UUNET may at its election adjust the fees for the Services to make the fees competitive or terminate this Agreement upon sixty days written notice. 3.2.2 After two years of the Effective date of this Agreement, if industry pricing or comparable services purchased in similar quantities from other national Internet service providers is different than the fees set forth in Schedule 1, at Customer's request, the parties shall renegotiate the fees for the services to make the fees competitive with industry pricing. 3.2.3 For purposes of making price adjustments hereunder, UUNET may consider, among other things, the minimum Mbps commitment, the number and type of telecommunications lines being serviced, and the term of comparable contracts. 2 4. FORECASTS. Two weeks prior to the end of each calendar quarter Customer shall, based on the best available information, provide UUNET a forecast of orders likely to be generated pursuant to this Agreement on a per service and per country basis. Customer and UUNET shall meet at Customer's principal office during the first two weeks of each calendar quarter during the term of this Agreement to discuss Customer's estimate of anticipated Eligible Participants' needs for Services on a per service and per country basis for the ensuing calendar quarter. Additionally, these meetings will be designed to promote discussions of the most appropriate network architecture to service Sage Networks' customers. Each of these meetings shall be followed by an executive meeting at which at least one officer of Customer attends. 5. SERVICE ORDERS AND COORDINATION. Eligible Participants will coordinate all orders for Services through UUNET's designated Account Manager. Only Eligible Participants who identify themselves as Eligible Participants under this Agreement will be offered the discount set forth in Schedule 1. The Eligible Participant ordering Service will enter into a service agreement with UUNET for each Service. Each service agreement shall set forth the terms, conditions, and pricing of the Service. The current terms and conditions applicable to purchases of dedicated Internet connections are set forth in Schedule 2. If any Eligible Participant believes that the level of such Service or support in any case is insufficient, that Eligible Participant may contact UUNET's designated Account Manager for assistance with problem resolution. 6. TERM OF THE AGREEMENT. (a) Unless terminated by Customer in accordance with the provisions of paragraph (b) of this Section 6. The initial term of this Agreement shall be three years from the Effective Date which term shall be automatically renewed for an additional one year term, provided that neither party has delivered to the other a written notice of intent not to renew for the forthcoming term not less than 60 days in advance of the end of the then-current term. The term commitment will commence and continue for three years from the Commitment date (as stated in Schedule 1) upon which Customer will have ordered the minimum Mbps commitment set forth in Schedule 1. (b) UUNET acknowledges that it is Customer's primary Internet service provider. UUNET agrees that that if in any calendar quarter Customer receives credits under the applicable Service Level Agreement referenced in Section 7 of Schedule 2 for more than ** of the circuits ordered from UUNET then Section 12 ("Primary Provider") of this Agreement shall be null and void. 7. CONSULTING. UUNET will (at no additional charge) provide one day of on-site assistance once quarterly and provide remote assistance as reasonably required to assist Customer in routing traffic and configuring equipment. 8. LIMITATION OF LIABILITY. NOTWITHSTANDING ANYTHING ELSE TO THE CONTRARY STATED OR IMPLIED HEREIN OR IN ANY SERVICE AGREEMENT, NEITHER PARTY SHALL HAVE ANY LIABILITY TO THE OTHER PARTY WHATSOEVER FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SPECIAL DAMAGES, INCLUDING WITHOUT LIMITATION, LOSS OF PROFIT, LOSS OF REVENUE, OR LOSS OF BUSINESS SUFFERED BY THE OTHER OR BY ANY ELIGIBLE PARTICIPANT, ASSIGNEE OR OTHER TRANSFEREE OF THE OTHER, EVEN IF INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES. 9. ACCEPTABLE USE. UUNET's services may only be used for lawful purposes. Use of any Service must comply with the then-current version of the UUNET Acceptable Use Policy ("Policy") for the country in which the service is provided, available at the following URL:www.uu.net/usepolicy, and in the event no Policy is available for that country the U.S. policy shall apply. UUNET reserves the right to change the Policy from time to time, effective upon posting of the revised Policy at the URL. UUNET reserves the right to suspend the Service or terminate this Agreement effective upon notice for a violation of the Policy. 10. INVOICING AND PAYMENT. UUNET will invoice each Eligible Participant for the applicable Service in accordance with the terms of the applicable service agreement. The Eligible Participant obtaining Service will make payment for Services in accordance with the terms of each applicable service agreement. 11. MARKETING AND PUBLICITY. UUNET and Customer will design and implement a joint marketing program, and promptly after execution of this Agreement the respective points of contract of each party shall 3 agree upon a plan setting forth the approved joint activities. Such joint marketing program shall include, but not be limited to, (i) allowing Customer to resell UUNET Service through Customer's network of resellers, (ii) cooperating on mutually beneficial hosting and co-location remarketing programs and (iii) cooperation on international co-location facilities agreements. Other than (a) identifying UUNET to Eligible Participants as Customer's preferred internet service provider, and (b) any mutually approved joint marketing programs, neither party shall publicize the existence of this Agreement without the written consent of the other, except as may be required by applicable law, regulation, or government order. Neither party may use the name, logo, trademarks, service marks or other proprietary identifying symbols of the other party in any advertising, signage, marketing materials, brochures or any other materials in any medium without the other party's express advance written consent. Any such permitted use shall be only within guidelines provided by such party. Neither party shall issue any press release, announcement or public statement with respect to this Agreement or the other party without the other party's express advance written consent. Any breach of this Section shall be a material breach of this Agreement constituting cause for termination. 12. PRIMARY PROVIDER. Both parties understand that this is a "non-exclusive" agreement. However, Customer agrees that subject to the terms of this Section, UUNET will become and remain the primary provider of internet services for the Sage Networks. In the event Customer obtains over 600 Mbps of bandwith for internet traffic in years two and three of the term commitment, ** of any bandwith over 600 Mbps shall be purchased from UUNET. If the ** requirement is not met, Customer will pay UUNET Shortfall Revenue in the amount of ** per Mbps for each Mbps by which Customer has fallen short of the ** requirement. Customer shall notify UUNET immediately upon determining that the ** requirement in this Section has not been met. Customer shall provide UUNET relevant records relating to this Section at each quarterly business review held pursuant to Section 4. Notwithstanding anything to the contrary stated herein, this Section 12 shall be inapplicable if Customer has purchased bandwith from UUNET in an amount equal to or greater than ** of the applicable Minimum Mbps Commitment set forth in Schedule 1. 13. AUDIT. In order to verify the statements issued by Customer in connection with Section 12 or the performance of Customer's financial obligations to UUNET hereunder, UUNET may cause, upon ten (10) days' prior notice (i) an audit to be made of the Customer's relevant customer books and records and/or (ii) an inspection to be made of the Customer's relevant facilities and procedures. Any audit and/or inspection shall be conducted during regular business hours at Customer's facilities and in a manner that does not interfere with Customer's normal business activities. Any audit shall be conducted by an independent certified public accountant selected by UUNET (other than on a contingent fee basis) who will be subject to the confidentiality provisions of this Agreement. UUNET will be entitled to receive the final written report from the selected auditor. All records and the final written report shall remain the confidential information of UUNET. Customer agrees to provide the selected auditor access to the relevant records and facilities. UUNET agrees to, or to cause the auditor to, deliver a copy of the final report to Customer promptly upon completion of the audit. Customer shall notify UUNET within thirty (30) days of its receipt of the report of any disagreements with the findings contained therein. Such notice shall state the basis upon which Customer disagrees with the findings and shall be accompanied by data to support its assertions. If within thirty (30) days of delivery of such notice to UUNET, Customer and UUNET cannot agree on the numbers or the amounts reported, a second audit shall be conducted by an independent certified public accountant mutually agreed to by the parties. The cost of such second audit shall be borne equally by both parties and the conclusions shall be binding upon both parties. Customer shall make prompt adjustments to compensate for any errors or omissions disclosed by the audit. Any such audit shall be paid for by UUNET unless material discrepancies are disclosed. "Material" shall mean an error of five percent (5%) or more of the number or amount that was reported. If material discrepancies are disclosed, Customer agrees to reimburse UUNET for the reasonable costs (based on current market prices) associated with the audit in addition to all sums due. In no event shall audits be made more frequently than annually. 14. OPPORTUNITY TO BID. In the event Customer requires additional telecommunications services (including Internet-protocol-based services and traditional voice services), Customer shall provide UUNET and its affiliates an opportunity to propose terms under which they could provide such services to Customer. 15. CONFIDENTIALITY The prices and terms of this Agreement shall be held confidential by each party, as shall each party's confidential or proprietary information, including, without limitation, any information obtained by UUNET, its agents or representatives in the course of performing an audit pursuant to Section 13 of this Agreement ("Confidential Information"). UUNET's performance under this Agreement, the quality of UUNET network performance, the discounts and prices set forth in 4 Schedule 1 and any data provided by UUNET to Customer regarding performance of the UUNET network shall be deemed UUNET Confidential Information. Neither party shall disclose the other party's Confidential Information to third parties without the other party's written consent, except as permitted pursuant to this Section. Each party shall disseminate the other party's Confidential Information among its employees only on a need-to-know basis and shall use such Confidential Information only for the purpose of performing its obligations hereunder. To the extent a party is required by applicable law, regulation, or a government agency or court order, subpoena, or investigative demand, to disclose the existence or terms of this Agreement, or the other party's Confidential Information, such party shall use its reasonable efforts to minimize such disclosure and obtain an assurance that the recipient shall accord confidential treatment to such Confidential Information, and shall notify the other party contemporaneously of such disclosure. Either party, in its discretion, may terminate this Agreement for cause upon ten days' notice and without penalty in the event of any breach of this Section. The obligations in this Section shall survive any termination of this Agreement for a period of two years. 16. GENERAL. This Agreement may not be assigned by either party without the prior written consent of the other, which consent shall not be unreasonably withheld, conditioned or delayed, provided, however, that this Agreement shall be binding upon and inure to the benefit of any successor in interest to Customer resulting from, among other things, a merger, consolidation, sale of stock or sale of substantially all of the assets of Customer. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by law. This Agreement supersedes all prior or contemporaneous representations, agreements or understandings concerning the subject matter hereof. If any term of this Agreement, or the application of such term to any person or circumstance, shall be held invalid, the remainder of this Agreement, or the application of such term to persons or circumstances other than those to which it is held invalid, shall not be affected thereby. The effective date of this Agreement is the last date of the signatures of a duly authorized representative of a party affixed below. /s/ Stephen Maggs /s/ Mary Alexander - ---------------------------------- ---------------------------------- Customer Authorized Signature UUNET Authorized Signature Stephen Maggs Mary Alexander - ---------------------------------- ---------------------------------- Printed Name Printed Name 2/17/99 2/17/99 - ---------------------------------- ---------------------------------- Date Date 5 SCHEDULE 1 1. PRICES The pricing set forth in Section 3 below shall be applied to the then-current list price set forth in the applicable service agreement. 2. EXCLUSIONS Pricing does not apply to Equipment charges (including routers, CSUs/DSUs and firewall hardware), Telco line charges, or any charges for Services not specified in this Schedule 1 unless such charges are included in the Monthly Fee for a Service specified in this Schedule 1. 3. ELIGIBLE PARTICIPANT DISCOUNT The Eligible Participant pricing will apply only to services specified in this Schedule 1, which may be changed from time to time. U.S. DISCOUNTS (CONTINENTAL US ONLY) Unless adjusted as set forth in Section 3 of this Agreement, Customer shall pay ** per megabit of sustained use (using UUNET's standard 95th percentile calculation as set forth in the applicable Service Agreement): provided that Customer agrees to pay a minimum charge based upon the Minimum Mbps Commitment even if billing based on sustained use would be less than that below. Pricing does not include telco start-up or monthly line charges. COMMITMENTS AND PRICING: MINIMUM Mbps COMMITMENT START-UP CHARGE PRICE/Mbps COMMITMENT DATE -100 Mbps $0 ** 1/30/99 -300 Mbps $0 ** 12/31/99 -600 Mbps $0 ** 12/31/00 ORDER TYPE MINIMUM BANDWIDTH PER ORDER T1 1.5 Mbps T3 3.0 Mbps OC3 30 Mbps OC12 60 Mbps DISCOUNTS OUTSIDE CONTINENTAL U.S. Same as above, provided that if more than ** of the total bandwidth purchased from UUNET is outside the continental U.S., then Customer shall pay an additional charge of ** per Mbps for any bandwidth above that ** level. 6 SCHEDULE 2 TERMS AND CONDITIONS 1. UUNET Technologies, Inc. ("UUNET") exercises no control over, and accepts no responsibility for, the content of the information passing through UUNET's host computers, network hubs and points of presence (the "UUNET Network"). EXCEPT AS EXPRESSLY SET FORTH IN SECTION 7 BELOW, UUNET (a) MAKES NO WARRANTIES OF ANY KIND, WHETHER EXPRESS OR IMPLIED, FOR THE SERVICES AND EQUIPMENT IT IS PROVIDING, AND (b) DISCLAIMS ANY WARRANTY OF TITLE, MERCHANTABILITY, NON-INFRINGEMENT OR FITNESS FOR A PARTICULAR PURPOSE. Use of any information obtained via the UUNET Network is at Customer's own risk. UUNET specifically denies any responsibility for the accuracy or quality of information obtained through its services. UUNET shall not be liable for any delay or failure in performance due to Force Majeure, which shall include without limitation acts of God, earthquake, labor disputes, changes in law, regulation or government policy, riots, war, fire, epidemics, acts or omissions of vendors or suppliers, equipment failures, transportation difficulties, or other occurrences which are beyond UUNET's reasonable control. 2. All use of the UUNET Network and the service must comply with the then-current version of the UUNET Acceptable Use Policy ("Policy") which is made a part of this Agreement and is available at the following URL: www.uu.net/usepolicy.html. UUNET reserves the right to amend the Policy from time to time, effective upon posting of the revised Policy at the URL or other notice to Customer. UUNET reserves the right to suspend the service or terminate this Agreement effective upon notice for a violation of the Policy. Customer agrees to indemnify and hold harmless UUNET from any losses, damages, costs or expenses resulting from any third party claim or allegation ("Claim") arising out of or relating to use of the service, including any Claim which, if true, would constitute a violation of the Policy. 3. NEITHER PARTY SHALL BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES THAT RESULT FROM CUSTOMER'S OR CUSTOMER'S USERS' USE OF THE UUNET NETWORK AND THE SERVICE INCLUDING, WITHOUT LIMITATION, ANY SUCH DAMAGES FOR LOSS OF DATA RESULTING FROM DELAYS, NON-DELIVERIES, MISDELIVERIES OR SERVICE INTERRUPTIONS. Notwithstanding anything to the contrary stated in this Agreement, Customer's sole remedies for any claims relating to this service or the UUNET Network are set forth in Section 7 below. 4. Networks assigned from a UUNET net-block are non-portable. Network space allocated by UUNET must be returned to UUNET in the event Customer discontinues service. 5. Payment is due 30 days after date of invoice. Accounts are in default if payment is not received within 30 days after date of invoice. If payment is returned to UUNET unpaid Customer is immediately in default and subject to a returned check charge of $25 from UUNET. Accounts unpaid 60 days after date of invoice may have service interrupted or terminated. Such interruption does not relieve Customer of the obligation to pay the Monthly Fee. Only a written request to terminate Customer's service relieves Customer of the obligation to pay the Monthly Fee. Accounts in default are subject to an interest charge on the outstanding balance of the lesser of 1.5% per month or the maximum rate permitted by law. Customer agrees to pay UUNET its reasonable expenses, including attorney and collection agency fees, incurred in enforcing its rights under these Terms and Conditions. Prices are exclusive of any taxes which may be levied or assessed upon the Equipment or services provided hereunder. Any such taxes shall be paid by Customer. If Customer is exempt from otherwise applicable taxes, Customer must submit its tax identification number and exemption certificate at the same time it submits this Agreement. 6. Billing for UUNET service will commence when a UUNET hub and a functioning telephone circuit are prepared to route IP packets to Customer's site. The Start-up Charge is invoiced upon acceptance of this Agreement by UUNET. Charges for Equipment shall be invoiced upon shipment. Service is invoiced monthly in advance, and may be canceled only by 60 days' advance written notice. In the event of early cancellation of a Term Commitment, Customer will be required to 7 pay 75% of UUNET's standard Monthly Fee for each month remaining in the Term Commitment. UUNET reserves the right to change the rates by notifying Customer 60 days in advance of the effective date of the change. 7. The Service Level Agreement ("SLA") for this service, which is made a part of this Agreement, is set forth at www.uu.net/customers/sla/terms.html and applies only to customers agreeing to a Term Commitment of at least one year. UUNET reserves the right to amend the SLA from time to time effective upon posting of the revised SLA to the URL or other notice to Customer; provided, that in the event of any amendment resulting in a material reduction of the SLA's service levels or credits, Customer may terminate this Agreement without penalty by providing UUNET written notice of termination during the 30 days following notice of such amendment. The SLA sets forth Customer's sole remedies for any claim relating to this service or the UUNET Network, including any failure to meet any guarantee set forth in the SLA. UUNET's records and data shall be the basis for all SLA calculations and determinations. Notwithstanding anything to the contrary, the maximum amount of credit in any calendar month under the SLA shall not exceed the Monthly Fee and/or Start-up Charge which, absent the credit, would have been charged to UUNET service that month (collectively the "UUNET Fees"); provided, that the maximum amount of credit for failure to meet the Availability Guarantee shall not exceed the sum of (a) the UUNET Fees, plus (b) the telephone company line charge which, absent the credit, would have been charged for such month. If Customer receives credits under this Section in three consecutive months, Customer may terminate without penalty (including, without limitation, the early termination penalty described above in paragraph 6) by providing UUNET written notice of termination in the fourth month. 8. Neither party may use the other party's name, trademarks, tradenames or other proprietary identifying symbols without the prior written approval of the other party. Neither party may assign or transfer any of its rights or obligations under this Agreement without the express, prior written consent of the other party; provided, that either party may assign or transfer this Agreement to any affiliate of such party upon advance written notice to the other party. No failure on the part of either party to exercise, and no delay in exercising, any right or remedy hereunder shall operate as a waiver thereof nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy granted hereby or by law. 9. These Terms and Conditions are applicable to Services purchased pursuant to the Master Discounted Internet Services Agreement between UUNET Technologies, Inc., and Customer dated February 17, 1999 and shall prevail notwithstanding any variance with terms and conditions of any order submitted. Activation of service shall indicate UUNET's acceptance of this Agreement. Use of the UUNET Network constitutes acceptance of these Terms and Conditions. EX-10.6 6 JOINT DEVELOPMENT AGREEMENT 1 ** Indicates that information has been omitted herein pursuant to a request for confidential treatment filed with the Securities and Exchange Commission simultaneously herewith. Exhibit 10.6 JOINT DEVELOPMENT AGREEMENT This Joint Development Agreement dated as of April 27, 1998 (this "Agreement") is between Lotus Development Corporation, a Delaware corporation with offices at 55 Cambridge Parkway, Cambridge, MA 02142 ("Lotus") and Interliant, Inc., a Texas corporation with a place of business at 1301 Fannin, Suite 700, Houston, Texas 77002 ("Interliant"). Background Lotus has developed certain technology to be included in Louts Domino Instant! Host ("Instant! Host") as a service provider hosting platform for Lotus' Instant! Applications. The initial code implementing such technology is currently included in Lotus Instant!TEAMROOM. Interliant, as a network service provider of Lotus Notes and Lotus Domino services, is interested in developing a set of service offerings based on Instant! Host technology that implements Lotus' "Instant!" products and related strategies. Lotus and Interliant share a common interest in reducing time to market for Lotus Instant! applications, and in producing an Instant! Host platform that benefits from each party's knowledge and expertise in producing quality Notes/Domino-based application hosting platforms. Lotus and Interliant now wish jointly to develop commercial versions of instant! Host on the terms and conditions set forth herein. Therefore, the parties agree as follows: 1. Development. (a) Joint Responsibility. Lotus and Interliant shall have joint architectural design, product management and product development responsibility for Lotus instant! Host, and have agreed on resources to be contributed, timelines, project plans and contingencies. Each party agrees in good faith to use diligent efforts to undertake and complete the development of a version of Lotus Instant! Host as contemplated hereunder and in accordance with functional specifications developed and agreed to by Lotus and Interliant (the "Work"). (b) Lotus Instant! Host Software Developer Kit, version 1.1. As agreed by the parties, the first phase of development is the development of the Lotus Instant! Host Developer Kit, version 1.x. This development kit will be made available by Lotus or Interliant, as the case may be, to Lotus and Interliant business partners at no charge. The parties acknowledge that version 1.0 of such development kit is complete and was made available for shipment on or about July 20, 1997 and that version 1.1 is complete and was made available for shipment on or about December 15, 1997. (c) Functional Specifications and the Development Schedules. During the course of development, Interliant shall implement changes to the functional specifications made by Lotus from time to time. Lotus shall, in consultation with Interliant and based on reasonable work estimates supplied by Interliant, revise any relevant development schedules as reasonably necessary in Lotus' reasonable judgment, to accommodate changes made in the functional specification. Nothing herein shall require Lotus to revise development schedules based on delays attributable to Interliant or on Interliant's failure to meet the development schedules once revised to accommodate the changes to the functional specification. 1 2 (d) Product Development Review. Lotus shall appoint an employee to serve as project manager ("Lotus Project Manager") and Interliant shall appoint an employee to serve as development liaison ("Interliant Liaison") throughout the course of development contemplated by this Agreement. Initially the Lotus Project Manager shall be Corinne Acheson and the Interliant Liaison shall be David Botello. The parties may, at their own option, each appoint other employees to serve in such or other formal capacities during the term of this Agreement. The Lotus Project Manager and the Interliant Liaison shall meet at mutually agreed times and locations in order to discuss the status and progress of the development work on Instant! Host. (e) Lotus Personnel. Lotus will provide non-dedicated architectural and product management assistance for Instant! Host, as well as qualified dedicated development personnel to complete Instant! Host product development, pursuant to the agreed upon development schedules. (f) Interliant Personnel. Interliant will provide non-dedicated architectural and product management assistance to Lotus for Instant! Host. Interliant will provide qualified dedicated development personnel to work with the Instant! Host product development team, pursuant to the agreed upon development schedules. (g) Documentation. The parties shall jointly write and produce any necessary written end-user documentation and shall create the text for the "op-screen" help and documentation for Instant! Host. (h) Testing. The joint Lotus/Interliant development team shall conduct interim evaluation and testing of Instant! Host on agreed upon dates. Upon completion of the development of Instant! Host, such joint development team shall deliver to Lotus and Interliant a final commercial release of Instant! Host, in both source and object code form, as well as all programmer's notes and technical documentation used or developed in performing the Work. (i) Acceptance. Within ten (10) business days after the delivery by the joint Lotus/Interliant development team to both Interliant and Lotus of each development version and of the final release version of Instant! Host, each party shall review and test the Instant! Host product and Lotus shall either accept or reject the delivery. In the event of rejection, Lotus shall specify the manner in which the version fails to meet the requirements of the agreed upon functional specifications. After such notification, the joint development team shall correct the aforesaid problems or deficiencies within ten (10) business days (if practicable). Upon any redelivery, Lotus shall, in its reasonable judgment, determine whether or not to accept such redelivered version of Instant! Host or to require another iteration of the process. 2. Ownership; Licenses. (a) Lotus acknowledges that all code contributed or developed by Interliant hereunder and identified as "Interliant Code" on Schedule 1 attached hereto (the "Interliant Code") remains the sole property of Interliant, and Interliant acknowledges that all code contributed or developed by Lotus hereunder and identified as "Lotus Code" on Schedule 2 attached hereto (the "Lotus Code") remains the sole property of Lotus. For the term of this 2 3 Agreement, Interliant may update Schedule 1 and Lotus may update Schedule 2 at any time in a writing and by mutual agreement of the other Party. With respect to any source code proprietary to the other party (to the extent such other party supplies such source code), each party agrees to maintain such source code in confidence, and to protect such source code using the same degree of care it uses to protect its own proprietary and confidential information of like importance. (b) Subject to acceptance of Instant! Host by Lotus pursuant to Section 1(i) above, Lotus hereby grants Interliant a royalty-free license to use and modify the Lotus Code for the sole purpose of enhancing its Domino-based hosting services, provided that if Interliant ceases jointly developing new versions of Instant! Host. Interliant will receive updates to the source code for new versions developed by Lotus only so long as Interliant is actively hosting the complete Lotus family of Domino Instant! Applications and offering them to the marketplace. (c) Subject to acceptance of Instant! Host by Lotus pursuant to Section 1(i) above, Interliant hereby grants Lotus a perpetual, irrevocable license to use, copy and modify, distribute, and sublicense the Interliant Code (as defined in Section 2(a) hereof) as part of Instant! Host (or any successor product, or product in which the Instant! Host code is incorporated), subject to the nondisclosure requirements with respect the source code contained in said Section 2(a). Additionally, Lotus shall have the irrevocable right to assign the licenses granted hereunder in connection with any sale or transfer of the Instant! Host product or the Louts Code or any exclusive licensing arrangement with respect thereto. (d) Subject to acceptance of Instant! Host by Lotus pursuant to Section 1, Lotus will have the right, without payment of any royalties other than those set forth in Section 3 thereof, independently to develop and market successor versions of Instant! Host (whether or not such versions constitute derivative works) and extensions to Instant! Host which add additional features and functionality, so long as such extension do not constitute derivative works. Interliant agrees that it shall not create either extensions or derivative works (within the meaning of the U.S. Copyright Act of 1976, as amended) of Instant! Host or the Interliant Code which offer similar functionality as Instant! Host as it applies to Domino applications. Except as expressly permitted in Section 2(b), Interliant may not create derivative works of the Lotus Code. (e) As long as Instant! Host contains the Interliant Code, all derivative works of the Interliant Code created by Interliant that apply to Lotus Domino shall be deemed for all purposes to be subject to the licenses and other rights granted to Lotus in Section 2(c) hereof herein with respect to Instant! Host. (f) Interliant may host other service providers using Instant! Host. Interliant shall not otherwise have the right to resell the Instant! Host product, except as expressly provided in this Agreement. Interliant will compensate Lotus for all such service provider hosting and related services or sales of instant! Host at Lotus' published Instant! Host rates. (g) Interliant has the right to make pre-release versions of Instant! Host available to its business partners in connection with their application development efforts with the prior written approval of Lotus, pursuant to the terms and conditions of Lotus' standard beta agreement. 3 4 (h) If, so long as Lotus is obligated to pay royalties to Interliant hereunder, Lotus desires, or is required, to sell or transfer all or substantially all of the Instant! Host product or Lotus Code to an unaffiliated third party or to IBM Global Services, Lotus shall first offer to sell such Lotus Code to Interliant at the same price and upon the same terms (or terms as similar as reasonably possible). Such right of first refusal shall be provided to Interliant by written notice (the "Notice of Offer") given to Interliant of the proposed sale or transfer. The Notice of Offer shall set forth with reasonable specificity the price and other terms and conditions of the proposed sale or transfer. Interliant shall then have the right, exercisable by written notice to Lotus (the "Notice of Acceptance") delivered within fifteen (15) days following the receipt of the Notice of Offer, to elect to purchase the Lotus Code at the price and on the terms set forth in the Notice of Offer. Such purchase by Interliant shall be consummated within ninety (90) days following delivery of the Notice of Acceptance unless otherwise agreed by the parties. If Interliant elects not to purchase the Lotus Code, then Lotus shall be free to sell or transfer such Lotus Code to such third party. (i) Interliant agrees that, during the Term hereof, it will not sell or transfer the Interliant Code to any unaffiliated third party, except in connection with an acquisition by a third party of a majority of the voting securities of Interliant or all or substantially all of Interliant's assets. 3. Royalties. (a) As full consideration for the satisfaction of Interliant's development obligations in Section 1 hereof and for the licenses granted by Interliant to Lotus in Section 2 hereof Lotus agrees to pay Interliant a royalty equal to ** of the net revenue (determined in accordance with generally accepted accounting principles, consistently applied) received in connection with the licensing of Instant! Host (or any successor product) by Lotus. The foregoing percentage may be adjusted by Lotus in good faith based on the value of Interliant's overall contribution to the Instant! Host development effort (including intellectual property and expertise) as reflected in the then-current versions of Instant! Host and the Domino Instant! Host software developers kit, provided that (i) there shall be not more than one (1) such adjustment during the first year of the Term hereof, (ii) such adjustment may only occur ** with respect to each new major release of Instant! Host, (iii) any such adjustment which results in a reduction of the royalty percentage payable to Interliant shall not reduce such royalty percentage by more than ** of the royalty percentage that was payable with respect to the immediately preceding major release of Instant! Host, and (iv) prior to any adjustment, Lotus informs Interliant of its decision and engages in good faith discussions with regarding Lotus' justification for such adjustment. (b) Lotus will establish standard rates under which it will license Instant! Host to third parties. Lotus reserves the right to modify its standard rates and/or licensing model as it sees fit. (c) Interliant will be required to pay Lotus for Instant! Host licenses at Lotus' then applicable standard service provider rates for non-Lotus developed Instant! applications offered for subscription to users via Instant! Host. 4 5 (d) Interliant will host all Domino Instant! Applications that Lotus offers to the market on Lotus' then-standard terms and conditions. (e) The royalties set forth in Section 3(a) hereof shall be due and payable forty-five (45) days after each calendar quarter during the Term hereof. (f) The royalties payable hereunder do not include sales, use, withholding, excise or other taxes, fees, duties or tariffs now or hereafter imposed on the production, storage, transportation, import, export, licensing or use of Instant! Host. (g) Payments shall be sent to: If to Interliant: Interliant Accounts Receivable Department 1301 Fannin, Suite 700 Houston, Texas 77002 If to Lotus: Lotus Development Corporation Accounts Receivable Department 55 Cambridge Parkway Cambridge, MA 02142 (h) During the Term hereof, each party shall keep accurate records which are sufficient for the computation of payments due to the other party under this Agreement and, with reasonable advance notice and not more than once per calendar year, shall make such records reasonably available to such other party and its independent auditors and other representatives at the place or places where such records are customarily kept, for inspection during normal business hours, subject to appropriate nondisclosure obligations. Each party shall reimburse the other for any reasonable, documented, out-of-pocket expenses if such inspection reveals that the payments made by such party during the period reviewed aggregated less than 90% of the payments required to be made by such party during such period. 4. Marketing. (a) Lotus will have sole worldwide sales, promotional and marketing rights and responsibilities for Instant! Host, provided that, at the reasonable request of Lotus, Interliant will reasonably participate in Lotus' promotional and marketing efforts through participation in industry events, trade shows, press releases and like events, as appropriate. 5 6 (b) During the Term hereof, Lotus will provide a commercially reasonable level of promotional and marketing resources for Instant! Host. 5. Support. Reference is made to the Support Services Agreement dated as of November 1, 1997 between Lotus and Interliant (the "Support Agreement"). Support for Interliant with respect to Instant! Host will be provided by Lotus in accordance with the terms and conditions of the Support Agreement. 6. Representations and Warranties. Each party hereby represents and warrants to the other party that (i) such party has full right, power and authority to enter into this Agreement and to Carry out its obligations hereunder, (ii) all source code, object code and other materials developed or written by such party or such party's employees who are members of the joint development team are the original work of such party, validly licensed from third parties for the purposes contemplated by this Agreement or in the public domain; (iii) the Work will be delivered free and clear of all liens, security interests, charges or encumbrances by third parties; and (iv) the Work shall not infringe any U.S., EU or Japanese patent, copyright, trademark, trade secret or other proprietary rights, provided that neither party makes any representations or warranties with respect to code supplied or developed by the other party. THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 7. Indemnities. (a) Lotus shall indemnify and hold Interliant harmless from, and defend any claim, suit or proceeding, and pay any settlement amounts or damages awarded by a court of competent jurisdiction, arising out of claims by third parties that any code contributed or developed by Lotus in Instant! Host infringes any United States, Canadian, EU or Japanese copyright, patent, trade secret or trademark of such third party or parties. (b) Interliant shall indemnify and hold Lotus harmless from and defend any claim, suit or proceeding, and pay any settlement amounts or damages awarded by a court of competent jurisdiction, arising out of claims by third parties that any code contributed or developed by Interliant in Instant! Host (including the Interliant Code) infringes any United States, Canadian, EU or Japanese copyright, parent, trade secret or trademark of such third party or parties. (c) The obligations to defend and to provide indemnification under this Section 7 are subject to the following conditions: (i) The party claiming indemnification shall promptly notify the party having the duty of indemnification in writing of any indemnifiable claim or action for which indemnification is sought (provided that any failure to so notify shall not limit the indemnifying party's indemnification obligation except if and to the extent such failure materially prejudiced the indemnifying party's ability to defend against any claim, suit or other proceeding). (ii) The indemnifying party shall, at its option, have sole control of the defense of any such claim or action and all negotiations for any settlement or compromise, provided that the party seeking indemnification shall have the right to provide for its own, separate defense at its own cost and expense. 6 7 (iii) Following notice of any action against the indemnified party based on a claim that a indemnifying party's code is infringing, the indemnifying party may at its option (A) procure for the indemnified parry the right to continue using such indemnifying party's code, (B) replace such code with non-infringing code of substantially equivalent functionality, (C) modify such code to make it non-infringing, or (D) terminate this Agreement and pay to the indemnified party all amounts received from the indemnified party by the indemnifying party under this Agreement. (d) Neither party shall be liable for any claim of infringement based on the other party's modification to its Software, the combination or use of its software with any product, program or data not provided by it, if and to the extent such claim would not have arisen absent such modification or combination; or any claim would have been avoided by use of the most recent version of the party's Software then licensed for use and distribution by the other party 8. LIMITATION OF LIABILITY. EXCEPT WITH RESPECT TO THIRD PARTY CLAIMS INDEMNIFIED AGAINST PURSUANT TO SECTION 7 HEREOF. NEITHER PARTY SHALL BE LIABLE FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL OR TORT DAMAGES, INCLUDING, WITHOUT LIMITATION, DAMAGES RESULTING FROM A DELAY OR FROM LOSS OF PROFITS, BUSINESS OR GOODWILL, WHETHER OR NOT SUCH PARTY HAS BEEN ADVISED OR IS AWARE OF THE POSSIBILITY OF SUCH DAMAGES. 9. Term and Termination. (a) The initial term of this Agreement shall be two years, commencing on the date first above written. Thereafter, this Agreement shall automatically renew for successive one-year renewal terms, unless either party terminates the agreement by giving the other party written notice thereof at least ninety (90) days prior to the end of the then-current term. Such initial term and each such renewal term are referred to collectively herein as the "Term". (b) Either party may terminate this Agreement by giving written notice to the other party if such other party fails to perform or comply with this Agreement or any provision hereof. Such termination shall be effective thirty (30) days after written notice from the non-breaching party unless the occurrence giving rise to the right of termination and its adverse effects have been cured to the reasonable satisfaction of the non-breaching party prior to the expiration of such thirty (30) day period. (c) This Agreement shall terminate automatically if (i) a party files or has filed against it a petition under the U.S. Bankruptcy Code or any other law relating to insolvency or the protection of creditors, (ii) a party makes an assignment for the benefit of creditors or (iii) a receiver or similar official is appointed for all or a substantial portion of a party's assets. (d) Notwithstanding anything contained herein, the expiration or earlier termination of this Agreement shall have no effect on the licenses granted in this Agreement or rights of licensees who have purchased the right to use Instant! Host from Lotus prior to the effective date of such termination, subject to payment of any applicable license fees and to the other provisions of this Agreement. 7 8 10.6 (e) If, so long as Lotus is obligated to pay royalties to Interliant hereunder, Lotus incorporates all or substantially all of the Interliant Code in Lotus Domino or in another Lotus product at no additional charge to Lotus Domino licensees (excluding such beta, evaluation and promotional programs of limited duration, which, in the case of evaluation and promotional programs, shall not exceed three (3) months, as are customary in the software industry), this Agreement shall automatically terminate, provided that in such event Lotus agrees to pay Interliant an amount equal to ** multiplied by the royalty percentage (expressed as a decimal) set forth in Section 3 hereof, less the aggregate royalties paid to Interliant pursuant to Section 3 hereof through the effective date of such termination. For purposes of this provision, a promotional program shall not include bundling the Instant! Host product or licenses with another product or products at no additional charge. Should Lotus choose to bundle the Instant! Host product or licenses in such a manner, then Lotus shall pay Interliant royalties pursuant to Section 3(a) of this Agreement for each copy of Instant! Host or each license thereof so bundled following the end of any permitted three-month evaluation or promotional period, based on Lotus' then published rates or license fees. If, so long as Lotus is obligated to pay royalties to Interliant hereunder, Lotus releases one or more additional major versions of Instant! Host, Lotus agrees to pay an additional amount equal to ** multiplied by the royalty percentage (expressed as a decimal) applicable to each such additional major version less aggregate royalties paid by Lotus. In the event that Lotus elects to discontinue Instant! Host entirely, the provisions of the second sentence of Section 2(d) of this agreement shall no longer apply, and Lotus will notify Interliant and will offer to either license or assign the Lotus Code contained in Instant! Host to Interliant on terms and conditions to be negotiated in good faith, so that Interliant may continue to offer Instant! Host as an Interliant product following any such discontinuation. (f) Termination shall not limit or restrict any of the remedies otherwise available to the parties hereunder. 10. Survival. In addition to the survival of the licenses as described in Section 9(d) above, the provisions of Sections 2, 3 (but only so long as Instant! Host contains the Interliant Code), 7, 8, 9(e), and 11 hereof shall survive the expiration or earlier termination of this Agreement in accordance with their respective terms. 11. Miscellaneous. (a) Enforceability. It is the desire and intent of the parties hereto that the provisions of this Agreement shall be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision to this Agreement shall be adjudicated to be invalid or unenforceable, such provision shall be deemed amended to delete therefrom the portion thus adjudicated to be invalid or unenforceable and shall otherwise remain in full force and effect. (b) Parties Independent. In making and performing this Agreement, the parties act and shall act at all times as independent contractors and nothing contained in this Agreement shall be construed or implied to create an agency, partnership or employer and employee relationship 8 9 between Lotus and Interliant or between any party hereto and any officer or employee of the other party. (c) Publicity. Subject to any applicable public disclosure obligations imposed by securities laws, Lotus and Interliant agree that each of them shall not, without the prior written consent of the others, disclose the contents of this Agreement or make any public announcement concerning the subject matter hereof without the prior written consent of the other party. (d) Assignment. Except as otherwise expressly provided herein, neither this Agreement nor any of the rights, interests or obligations hereunder may be assigned, in whole or in part, by either party hereto without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld (e) Entire Agreement, Amendments. This Agreement and the Exhibits attached thereto contain the entire agreement among the parties hereto with respect to the subject matter hereof and supersede all prior agreements or understandings among the parties hereto with respect thereto. This Agreement may be amended only by an agreement in writing signed by the parties hereto. (f) Notices. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be personally delivered, delivered by next-day air courier or mailed by registered or certified mail, return receipt requested and postage prepaid or delivered by facsimile as follows: if to Lotus: Lotus Development Corporation 55 Cambridge Parkway Cambridge, MA 02142 Attention: Steven Brand with a copy to: Lotus Development Corporation 55 Cambridge Parkway Cambridge, MA 02142 Attention: General Counsel if to Interliant: Interliant, Inc. 1301 Fannin, Suite 700 Houston, Texas 77002 Attention: Jun Lidestri with a copy to: Interliant, Inc. 9 10 1301 Fannin, Suite 700 Houston, Texas 77002 Attention: General Counsel or to such other addresses as the party to whom notice is given may have furnished to the other parties hereto in writing, in accordance herewith. Any communication shall be deemed to have been given, in the case of personal delivery, on the date of delivery; in the case of delivery by air courier, on the business day after delivery to the applicable air-courier service; and in the case of mailing, on the third business day following the day on which the piece of mail containing such communication is posted. (g) Waiver. No terms or provisions hereof shall be deemed waived and no breach consented to or excused, unless such waiver, excuse or consent shall be in writing and signed by the party claimed to have waived or consented. The consent, waiver or excuse by either party of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any subsequent breach by such other party. (h) Governing Law. This Agreement will be governed by and construed in accordance with, the laws of The Commonwealth of Massachusetts, excluding its conflicts of laws rules. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. LOTUS DEVELOPMENT CORPORATION INTERLIANT By: /s/ Steve Brand By: /s/ James M. Lidestri ------------------------- ----------------------- Title: General Manager Title: President and C.E.O. ---------------------- -------------------- 10 11 Schedule 1 Interliant Code ** 12 Schedule 2 Lotus Code All files in the Instant! Host product excluding those listed in, added to, and to be added, in good faith, to Schedule 1. EX-21.1 7 LIST OF SUBSIDIARIES 1 Exhibit 21.1 Subsidiaries Jurisdiction - -------------------------------------------------------------------------------- 1. B.N. Technology, Inc. dba ICOM. California - -------------------------------------------------------------------------------- 2. Digiweb, Inc. Maryland - -------------------------------------------------------------------------------- 3. Interliant of Texas, Inc. Delaware - -------------------------------------------------------------------------------- 4. Net Daemons Associates, Inc. Massachusetts - -------------------------------------------------------------------------------- 5. Sage NDA Acquisition Corp. Massachusetts - -------------------------------------------------------------------------------- 6. Sage Networks Acquisition Corp. Delaware - -------------------------------------------------------------------------------- 7. Telephonetics, Inc. Delaware - -------------------------------------------------------------------------------- EX-23.1 8 CONSENT OF ERNST & YOUNG LLP RE SAGE NETWORKS, INC 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Consolidated Financial Data" and to the use of our report dated February 15, 1999, except for the last paragraph of Note 12, as to which the date is March 10, 1999, in Amendment No. 2 to the Registration Statement (Form S-1 No. 333-74403) and related Prospectus of Interliant, Inc. (formerly known as Sage Networks, Inc.) for the registration of shares of its common stock. /s/ ERNST & YOUNG LLP Boston, Massachusetts May 12, 1999 EX-23.2 9 CONSENT OF ERNST & YOUNG LLP RE INTERLIANT, INC. 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Consolidated Financial Data" and to the use of our report dated February 26, 1999, except for Note 11, as to which the date is March 10, 1999, with respect to the financial statements of Interliant, Inc., included in the Registration Statement on Form S-1 and related Prospectus of Interliant, Inc. (formerly known as Sage Networks, Inc.) for the registration of shares of its common stock. ERNEST & YOUNG LLP Houston, Texas May 12, 1999 EX-23.3 10 CONSENT OF URBACH KAHN & WERLIN PC 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated July 13, 1998, relating to the financial statements of Tri Star Web Creations, Inc.; our report dated September 4, 1998 relating to the consolidated financial statements of GEN International, Inc. and Subsidiaries, and our report dated January 24, 1999 relating to the financial statements of Digiweb, Inc., which reports appear in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ URBACH KAHN & WERLIN PC -------------------------------------- New York, New York May 12, 1999 EX-23.4 11 CONSENT OF BSC&E 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated March 19, 1998, relating to the financial statements of Clever Computers, Inc., which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. BSC & E Atlanta, Georgia May 13, 1999 EX-23.5 12 CONSENT OF PRICEWATERHOUSECOOPERS LLC 1 EXHIBIT 23.5 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report, which includes an explanatory paragraph regarding basis of presentation, dated August 18, 1998, relating to the financial statements of HostAmerica, a division of HomeCom Communications, Inc., which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. /s/ PRICEWATERHOUSECOOPERS LLC -------------------------------------- Atlanta, Georgia May 13, 1999 EX-23.6 13 CONSENT OF FRANKEL, LODGEN, LOCHER, GOLDITCH ET AL 1 EXHIBIT 23.6 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated September 11, 1998, relating to the financial statements of B.N. Technology, Inc. dba Internet Communications, which appears in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. FRANKEL, LOGDEN, LOCHER, GOLDITCH SARDI & HOWARD Encino, California May 13, 1999 EX-23.7 14 CONSENT OF BDO SIDMAN, LLP 1 EXHIBIT 23.7 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated January 15, 1999, relating to the combined financial statements of Telephonetics International, Inc. and Affiliate, which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. BDO SEIDMAN, LLP Miami, Florida May 12, 1999 EX-23.8 15 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.8 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the use in this Amendment No. 2 to Registration Statement No. 333-74403 of Interliant, Inc. of our report dated February 2, 1999 (February 17, 1999 as to Note 10) relating to the financial statements of Net Daemons Associates, Inc. appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the heading "Experts" in such Prospectus. Deloitte & Touche LLP Boston, Massachusetts May 13, 1999 -----END PRIVACY-ENHANCED MESSAGE-----